Chapter - 03 B2B

B2B
Business Market Management, 3rd edition

BOOKS
▪ James C. Anderson (2009).
Business Market management:
Understanding, Creating and
Delivering Value, 3rd edition.
Prentice Hall.
▪ Ten Deadly Marketing Sins:
Signs and Solutions. John Wiley
& Sons.
▪ Philip Kotler (2003). Marketing
insights from A to Z: 80
concepts every manager needs
to know. John Wiley & Sons,
Inc.

Section II:
Understanding Value
Chapter 3-3 Business Market Management,

3rd edition
Chapter 3: Understanding Firms as
Customers
Overview
I. Understanding Purchasing Orientation
II. Understanding How Purchasing Works with Other
Functions and Firms
III. Understanding the Purchase Decision Process
IV. Summary
Chapter 3-4 Business Market Management, 3rd edition

Overview
▪ Understanding firms as customers: the process
of learning how companies rely on a network of
suppliers to
▪ add value to their offerings
▪ integrate purchasing activities with those of other functional
areas and outside the firms
▪ make purchase decision

3rd edition
Understanding How Purchasing Works
with Other Functions and Firms
Adding Value to the

Value Purchasing Process
Management Through Buying Teams
as a
Understanding Cooperative Working with Suppliers
Purchasing Framework and Across Functions
Orientation:
Understanding
•Buying Value for
•Procurement Present and
•Supply Prospective
Management Customer Firms
Understanding the Purchase Decision Process
Understanding
Learning the
Customer Evaluating
Customer’s
Requirements and Supplier
Purchase
Preferences Performance
Process

Understanding Purchasing
Orientation
▪ Purchasing: process of acquiring resources and
capabilities for the firm from outside providers
▪ Purchasing Orientation: philosophy that guides

managers who make purchasing-related decisions and
delineates their domain and span of influence

Value Network Defined
▪ Set of organizations that perform portions of
business processes designed to create:
▪ Economic and Technical Benefits
▪ Service and Social Benefits
▪ The organizations equitably share in resulting

benefits

Source: Adapted from a chart by Professor Sunil Chopra, J. L. Kellogg Graduate School of Management, Northwestern
University, 1999.
Understanding Purchasing
Orientation
▪ When the business market manager
understands his or her client’s purchasing
orientation, the manager can better decide:
▪ whether to serve the account
▪ how to adapt the market offering to better meet the
customer’s requirements and preferences
▪ how to craft a persuasive sales presentation

Buying Orientation
Central Pursuits
➢ Obtain the best combination deal: price, quality, and supplier availability
➢ Maximize power over suppliers
➢ Avoid risk wherever possible
Buying: executing discrete Buyer’s prime objective: reduce its

transactions with suppliers, often annual total spend of
for a single item acquisitions in a given year
Chapter 3-11
Obtaining the Best Deal
▪ Buyer treats quality and availability as “order
qualifiers”
▪ Price band: range of acceptable prices around
the average price paid for product or service
± 3% of average
▪ Distributive negotiation: customer and supplier

assume that “value pie” is fixed
▪ Win-lose with one gaining more pie at the expense of
the other
Supplier Cost Analysis
Supplier Cost Analysis: review of actual
and estimated cost data for a potential vendor
1. Buyer obtains all information possible on supplier costs

directly from supplier
2. Industrial engineers estimate remaining supplier costs

(materials, labor rates, equipment utilization)
3. “Reasonable” profit margin added to arrive at “fair”

price

Maximizing Power Over Suppliers
Commoditization
▪Buyers eliminate or downplay any points of difference between value elements of competing
offerings
▪Attempt to equalize and remove Valuef and Valuea from the fundamental value equation
Multisourcing
▪Customer firm requests price quotations from and places order with a number of suppliers
▪Plays one supplier against another
▪Suppliers cut prices to secure more business
Sole-Sourcing
One supplier produces a needed product or service (e.g. rare raw materials, patented products,
new technologies)
Single-Sourcing
Buyer purchases the firm’s total requirement from one vendor even though alternatives exist
Chapter 3-14
Avoiding Risk
Tactics for risk avoidance:

1. Follow established procedures and rely on
proven vendors
2. Seek quotes from at least 3 competing vendors

and divide an order among several suppliers

Developments in Buying
▪Through market research, buyers determine the target price for their product
or service among firm’s customers
Target ▪Estimates what portion of product price should come from each system
Pricing
▪Product is divided into subsystems and then parts
▪Buyer negotiates with supplier knowing the price they need to attain
Breakthroughs in communication and transportation allow buyers to take
advantage of the international markets
Global
Advantages: reduced prices, increased quality, and new technologies
Sourcing
Disadvantages: Added risks such as materials contamination, suspect
product quality, and unreliable deliveries
Online purchasing allows customer firms to simultaneously reap price
E-Sourcing reduction benefits from multi-sourcing and global sourcing
Tools: comparison agents, online reverse auctions, and eRFQs
Defeaturing
Customer and supplier managers work together to identify superfluous
or
product features, attributes, and performance specification that can be
Cooperative
eliminated or relaxed in exchange for a lower price
Pricing
Chapter 3-16
The Procurement Orientation
▪ Procurement: broadening the domain and span of

influence of purchasing
▪ Firm seeks to increase productivity through:
▪ Improving quality
▪ Reduced total cost of ownership
▪ Cooperating with suppliers
For a typical firm, the cost of goods and services purchased

account for about 60% of net sales.
A reduction of $1 in total sales costs has the same impact
as $6 increase in revenues.

Improving Quality
▪ Quality: Conformance to
Functional
specifications that result in a
product that meets customers’
expectations
Technical or
Performance Specifications
▪ Specification: the Material
offering that the firm is

seeking
▪ Underspecified Process
▪ Overspecified
Chapter 3-18
Total Quality Management (TQM)
TQM: a management
approach to an organization
centered on quality, based
on the participation of all its
members and aiming at
long-term success through
customer satisfaction
Chapter 3-19 Business Market Management, 3rd

edition
3rd edition
Reducing Total Cost of Ownership
Product or
Service’s Salvage or
Purchase
TCO = Price + Lifetime - Resale
Price
Expenses
Chapter 3-21
Total Cost of Ownership
Costs associated with securing an offering
Acquisition ❖Search costs
Costs ❖Processing orders
❖Delivery costs
Costs when using an offering

❖Installation, maintenance &
❖Warehousing and handling repair
Conversion
❖Inventory storage ❖Operating supply costs
Costs
❖Material processing
❖Cost of poor quality
Encompasses:
❖Recycling
Disposal Costs ❖Environmental protection
❖Waste management expenses
Chapter 3-22
TCO Analysis
TCO Analysis: applies activity-based costing (ABC)
concepts and methods to quantify all expenses related to the
use of a product or service apart from price
▪ Focuses on the firm’s interfaces with suppliers
▪ Focuses on expenditures
▪ Identifies the firm’s major cost drivers
▪ Often reveals opportunities to eliminate costs
▪ Corporate purchasing cards
▪ Long-term benefits from e-sourcing comes from cost savings rather
than price savings

Cooperating with Suppliers
▪Cooperative relationships with suppliers,

and customer firms attempt to expand the
“value pie” for both firms
▪Integrative negotiation: resources can be
expanded to benefit both parties
▪ Identify shared interests and goals
▪ Freely exchange information with emphasis on
commonalities
▪ Seek creative solutions that meet both side’s goals

3rd edition
Improving Quality
Standardization Requirements: Quality Assurance: methods

establishing agreement on uniform
identification for definite and procedures for production
characteristics of: ▪ Statistical process control
▪ Quality
▪ Product testing
▪ Design
▪ Defect prevention
▪ Performance
▪ Process inspections
▪ Quantity
▪ Service

Improving Quality
Target Costing: The focus is on reducing TCO. Require customer

and supplier to work together, sharing technical, process, and cost
information
1. Customer managers set a target price for the product
2. Determine a target cost for marketplace profitability
3. Evaluate the TCO of various systems, subsystems, and
components
4. Customer managers determine the TCO the firm can incur on the
part
5. Request supplier provide a solution that does not exceed the
determined amount
6. Supplier alternatives
▪ Lower price of part to meet target cost
▪ Propose creative cost reduction program to achieve target price

3rd edition
The Supply Management Orientation
▪ Supply Management: entails the integration
and coordination of purchasing with other
functions. Considered a series of “value-adding
activities.”
▪ Within the organization
▪ With other firms in the value network
▪ Customers
▪ Customers’ customers
▪ Resellers
▪ Suppliers’ suppliers

3rd edition
The Supply Management Orientation
Four Central Tenants
1. Focus all firm’s efforts on 2. Craft a sourcing strategy

delivering value to end around the firm’s core
users competencies and resources
3. Build a supply network

4. Sustain highly
that efficiently completes
collaborative relationships
required business
with select supplier and sub-
processes
supplier firms

3rd edition
The Strategic
Sourcing Process
Source: Ravi Venkatesan,

“Strategic Outsourcing:
To Make or Not to Make,”
Harvard Business Review
(Nov.-Dec. 1992): 103.
edition
Focus on End-Users
Supply Management proactively directs the entire
supply network to meet the requirement of end-users
through the following:
▪ Managers participate in:
▪ Market research projects
▪ Customer advisory councils
▪ Personnel exchange programs
▪ Managers relay value assessment results of products and
services to the development group
▪ Managers use market research findings to reengineer
business processes

Craft a Sourcing Strategy
Sourcing Strategy:
1. Identify core competencies
2. Divide the firm’s product and services into
systems, subsystems, and components
3. Categorize systems, or subsystems if systems too
broad (strategic, nonstrategic)
4. Firm outsources or produces itself the remaining
strategic systems and subsystems
3rd edition
Build a Supply Network
Lean Enterprise: a group of individuals, functions,

and legally separate but operationally synchronized
companies
▪ Mission: collectively analyze and focus a value stream so
that it does everything involved in supplying a good or
service (from development and production to sales and
maintenance) in a way that provides maximum value to the
customer

3rd edition
Build a Supply Network
▪ Under lean enterprise concept:

▪ Purchasing becomes a center of expertise
▪ Purchasing becomes a repository for knowledge of best
practices
▪ Supply managers disseminate research findings and
experiences to colleagues across the company
▪ Rely on a network of direct suppliers and a larger number
of 2nd and 3rd tier suppliers

3rd edition
Types of Supply Models
Traces the value-adding step needed to produce an
Supply Network
Model
offering from the customer backward through the variety of
1st, 2nd, and 3rd tier suppliers
▪Common design model for securing predictable quantities

of MRO items
Make to Stock ▪Manufacturers that produce standardized products to
Model demand forecast, lengthy distribution channels, and local
dealers that provide one-stop shopping, local delivery, and
credit services
Chapter 3-34
Types of Supply Models
▪For example, used in acquiring Personal Computers
(PCs) in a large one-time transaction
Build-to-Order
Model ▪Utilizes mass customization and flexible manufacturing,
rapid delivery, and encourages substitution of new
technology in product design
Continuous ▪Model used for essential spare parts

Replenishment ▪A single vendor manages a customer’s entire plant
Model or ECR inventories, immediately replacing out-of-stock items
System through EDI based logics network
▪To obtain access to next-generation technology
Design-to-Build
Model ▪Customer and supplier R&D personnel jointly develop a
new product. Supplier produces the one-of-a kind
product in a single batch.
Chapter 3-35
Sustain High Collaborative
Relationship with Select Suppliers
Value-in-Use: difference in value minus the difference in price that
a supplier’s offering provides a customer firm relative to a competitive
offering
VIUfa = (Valuef - Valuea) - (Pricef - Pricea)
Value-in-Use Price: monetary amount at which the customer

has no preference between the supplier’s offering and the next-best
alternative offering
VIU
= Pricea + (Valuef - Valuea)
Pricef
Chapter 3-36
Apply Purchasing
Portfolio Management
▪Firms purchase a wide variety of products
and services
▪Companies may have to adopt multiple
sourcing strategies
▪Build a unique supply network
▪Sustain diverse relationships with suppliers
as a function of the supply situations it faces

Purchasing Portfolio Matrix
High
CUSTOMER
Leverage Items Criticals
(raw materials) (new technology)
VALUE
Low
Bottleneck
Generics
(MRO items)
Items
(essential spare parts)
Low CUSTOMER RISK High

3rd edition
Purchasing Portfolio Goals
1. Add value through 2. Reduce risk through
▪ Functionality-cost ▪ Quality
management ▪ Availability
▪ Service ▪ Assurance
▪ Effective ▪ Agile responsiveness
administration ▪ Sourcing activities
▪ Sourcing and
integration of
innovation

3rd edition
Value Management as a Cooperative
Framework
▪ Value Management (VM): systematic use of
value techniques as a general problem-solving
method in:
▪ Business
▪ Research
▪ Administration
▪ Value Analysis: method of value assessment
that customer firms use to evaluate supplier
offerings

edition
Value Management
▪Strategic level: Executives
learn to “manage by value”
▪Tactical level: Personnel

focus on “management of value”

Value Management
Value Management: allows a firm to better focus

and efficiently sustain its operations, gain a clearer
understanding of the needs and priorities of its customers,
and deliver optimal value to the customer with trade-offs
between performance and cost

Adding Value to the Purchasing Process:
Buying Teams
▪ Buying Teams or Buying Centers: all those
members of an organization who become
involved in the buying process for a particular
product or service
▪ Member roles
▪ Buying situations
▪ Tasks

3rd edition
Buying Situations
The company has considerable buying

Straight
experience and requires little or no new
Rebuy
information about the offering
Customer firm has had experience securing the

Modified
product or service, but managers need to
Rebuy
reevaluation of alternatives
Unknown what the functional or technical

New task specification of the offering should be
Chapter 3-44
Buying Team Tasks
▪ Commodity Procurement Strategy (CPS) teams
▪ Supplier Certification Teams
▪ Specification Teams
▪ Supplier Performance
Evaluation Teams

3rd edition
Working with Suppliers & Across
Functions
▪ Develop Supply Resources
▪ Seek internal and external expertise to find and qualify new suppliers
worldwide
▪ Managers in diverse functional areas
▪ Technical staff from operations and R&D
▪ Technical service personnel provide consulting and training
▪ Improve Existing Offerings

▪ Progressive customer firms collaborate with suppliers
▪ Conduct joint Value / TCO assessment to find process improvements and material
substitutions
▪ Determine most economic lot-sizing for supplier production
▪ Establish long-term contracts for dedicated production lines
▪ Rethink and reallocate task from supplier firm to customer Business
Chapter 3-46 firm orMarket
viceManagement,
versa 3rd edition
Working with Suppliers & Across
Functions
▪ Contribute to New Offering Realization
▪ Early supplier involvement programs (ESI)
▪ Early purchasing Involvement programs (EPI)
▪ Purchasing managers: technology “matchmakers”
▪ Purchasing managers: serve as “reality check”
▪ Cost-Effective Product Introduction (CEPI)
▪ Purchasing managers scrutinize the process
▪ Alert engineers when they are about to specify high-cost, long lead-time, and overly
customized parts, and recommend standard parts as alternative
▪ Identify and advocate suppliers with proven records for reliability, delivery, quality, and
capacity utilization
▪ Purchasing managers serve as watchdogs for expensive and over engineered
parts, and provide detailed cost estimates that help designers better forecast the
total cost and profitability of new products

3rd edition
Understanding Customer
Requirements and Preferences
Three sources of uncertainty that make it difficult for customers to

understand their own requirements and preferences
Difficulties customers have in interpreting the exact nature and

Needs
importance of goods and services that firms require
Uncertainty
(Example: How often will a piece of machinery fail and what is
the severity of the consequences?)
Market Buyer’s inability to predict how many alternative suppliers will be
Uncertainty available and the quality of goods and services forthcoming
Transaction Inversely related to the customer’s confidence that suppliers

have easy-to-use procedures for doing business, processing
Uncertainty orders accurately, and providing reliable and timely deliveries
Chapter 3-48
Business Market Management, 3rd
edition
Microsoft Customer Support Requirements Matrix
Known Customer Satisfaction

Surveys On-Site Training
Microsoft’s Service Usage Patterns Online Services
Understanding of Activity-Based Costing Microsoft Magazines
Customer Activity-Based Planning
Requirements
Usability Testing
Supportability Testing Joint
Beta Testing Development
Unknown Off-Line Plus Projects
WISH Lines
Known Customer's Unknown

Understanding of
Their Own
Requirements
Map Customer Activity and Value Cycle
Activity Cycle is the Value Cycle captures the
steps required to: changes in the worth
▪ produce, across the Activity Cycle
▪ productively use, steps
▪ recycle, and
▪ dispose an offering

Learning the Customer’s Purchase
Process
BuyGrid Framework
➢ Rebuy: Customer has track record of purchasing a given product from
a given vendor and can avoid many steps
➢ New Task: Customer has no experience purchasing good or service.

Hence the customer must go through the entire process
➢ Ongoing Relationship: Customer may be able to eliminate

some of the steps from the process.
Chapter 3-51
Evaluating Supplier Performance
▪Best Practices:
▪Balanced scorecards
▪ Review Price, Quality, and Availability
▪ Subjective questionnaires
▪ Summarize category result in a single subjective index
▪ Operational measures
▪ Scrutinizing Total Costs
▪ Review costs associated with supplier
nonperformance
▪ Tracking Supplier Value

Scrutinizing Total Costs
Supplier Extended purchase price + nonperformance

Performance costs
Index, Extended purchase price
SPI (item) =

Tracking Supplier Value
▪ Supply managers conduct thorough and
demanding evaluations of suppliers
▪ Estimate the benefits,
▪ Total costs, and
▪ Prices paid to each vendor
▪ Supplement direct vendor evaluations with own

customer satisfaction studies
▪ Goal: assess the impact of supplier
contributions on end-user satisfaction

3rd edition
Summary
▪ Examined how firms secure resources from the external environment and
integrate them with their internal operations
▪ Understanding firms as customers is the process of learning how:

▪ Companies rely on a network of suppliers to add value to their offerings,
▪ Integrate purchasing activities with those of other functional areas and outside firms, and
▪ Make purchase decisions
▪ By understanding firms as customers, the market manager can better craft

responsive market strategies
▪ Three purchasing orientations used in business markets:

▪ Buying orientation
▪ Procurement orientation
▪ Value-based supply management orientation

edition
EXERCISES

Chapter - 03 B2B

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B2B

Business Market Management, 3rd edition

Business Market Management, 3rd edition

Chapter 3-3 Business Market Management,

II. Understanding How Purchasing Works with Other

Functions and Firms

III. Understanding the Purchase Decision Process

Chapter 3-4 Business Market Management, 3rd edition

Chapter 3-5 Business Market Management,

Adding Value to the

Chapter 3-6 Business Market Management, 3rd edition

▪ Purchasing Orientation: philosophy that guides

Chapter 3-7 Business Market Management, 3rd edition

▪ The organizations equitably share in resulting

Chapter 3-8 Business Market Management, 3rd edition

Chapter 3-10 Business Market Management, 3rd edition

➢ Maximize power over suppliers

➢ Avoid risk wherever possible

Buying: executing discrete Buyer’s prime objective: reduce its

▪ Distributive negotiation: customer and supplier

1. Buyer obtains all information possible on supplier costs

2. Industrial engineers estimate remaining supplier costs

3. “Reasonable” profit margin added to arrive at “fair”

Chapter 3-13 Business Market Management, 3rd edition

Tactics for risk avoidance:

2. Seek quotes from at least 3 competing vendors

Chapter 3-15 Business Market Management, 3rd edition

▪ Procurement: broadening the domain and span of

For a typical firm, the cost of goods and services purchased

Chapter 3-17 Business Market Management, 3rd edition

offering that the firm is

Chapter 3-19 Business Market Management, 3rd

Costs when using an offering

Chapter 3-23 Business Market Management, 3rd edition

▪Cooperative relationships with suppliers,

Chapter 3-24 Business Market Management,

Standardization Requirements: Quality Assurance: methods

Chapter 3-25 Business Market Management, 3rd edition

Target Costing: The focus is on reducing TCO. Require customer

Chapter 3-26 Business Market Management,

Chapter 3-27 Business Market Management,

1. Focus all firm’s efforts on 2. Craft a sourcing strategy

3. Build a supply network

Chapter 3-28 Business Market Management,

Source: Ravi Venkatesan,

Chapter 3-30 Business Market Management, 3rd edition

Lean Enterprise: a group of individuals, functions,

Chapter 3-32 Business Market Management,

▪ Under lean enterprise concept:

Chapter 3-33 Business Market Management,

▪Common design model for securing predictable quantities

Continuous ▪Model used for essential spare parts

VIUfa = (Valuef - Valuea) - (Pricef - Pricea)

Value-in-Use Price: monetary amount at which the customer

Chapter 3-37 Business Market Management, 3rd edition

Low CUSTOMER RISK High

Chapter 3-39 Business Market Management,

Chapter 3-40 Business Market Management, 3rd

▪Tactical level: Personnel

Chapter 3-41 Business Market Management, 3rd edition

Value Management: allows a firm to better focus

Chapter 3-42 Business Market Management, 3rd edition