Lesson Topic

 What is Organizational Buying?

Webster and Wind define organizational buying as the decision-making
process by which formal organizations establish the need for purchased
products and services and identify, evaluate, and choose among
alternative brands and suppliers
 The Business Market Versus the Consumer Market
The business market consists of all the organizations that acquire goods
and services used in the production of other products or services that are
sold, rented, or supplied to others. The major industries making up the
business market are agriculture, forestry, and fisheries; mining;
manufacturing; construction; transportation; communication; public
utilities; banking, finance, and insurance; distribution; and services.
 Organizational buying is the decision-making process by which formal organizations
establish the need for purchased products and services, and then identify, evaluate, and
choose among alternative brands and suppliers. The business market consists of all of the
organizations that acquire goods and services used in the production of other products or
services that are sold, rented, or supplied to others: profit-seeking companies, institutions, and
government agencies.
 Compared to consumer markets, business markets generally have fewer and larger buyers, a
closer customer-supplier relationship, and more geographically concentrated buyers.
 Demand in the business market is derived from demand in the consumer market and
fluctuates with the business cycle. Nonetheless, the total demand for many business goods
and services is quite price-inelastic.
 Business marketers need to be aware of the role of professional purchasers and their
influencers, the need for multiple sales calls, and the importance of direct purchasing,
reciprocity, and leasing.
 Three types of buying situations are the straight rebuy, the modified rebuy, and the new
task. Systems buying is a practice in which the buyer wants to purchase a total solution to its
problem from one seller.
 The buying center is the decision-making unit of a buying organization. It consists of
initiators, users, influencers, deciders, approvers, buyers, and gatekeepers.
 Business markets have several characteristics that contrast sharply with those of
consumer markets:

 Fewer, larger buyers. The business marketer normally deals with far fewer,
much larger buyers than the consumer marketer does.
 Close supplier-customer relationship. Because of the smaller customer base
and the importance and power of the larger customers, suppliers are
frequently expected to customize their offerings to individual business
customer needs. Business buyers often select suppliers who also buy from
them. An example would be a paper manufacturer that buys chemicals from a
chemical company that buys a considerable amount of its paper.
 Professional purchasing. Business goods are often purchased by trained
purchasing agents, who must follow their organizations' purchasing policies,
constraints, and requirements.
 Several buying influences. More people typically influence business buying
decisions. Buying committees consisting of technical experts and even senior
management are common in the purchase of major goods. Business marketers
have to send well-trained sales representatives and sales teams to deal with
the well-trained buyers.
 Multiple sales calls. Because more people are involved in the
selling process, it takes multiple sales calls to win most business
orders, and some sales cycles can take years
 Derived demand. The demand for business goods is ultimately derived
from the demand for consumer goods. For this reason, the business
marketer must closely monitor the buying patterns of ultimate consumers.
 Inelastic demand. The total demand for many business goods and
services is inelastic— that is, not much affected by price changes.
 Fluctuating demand. The demand for business goods and services tends
to be more volatile than the demand for consumer goods and services
 Direct purchasing. Business buyers often buy directly from
manufacturers rather than through intermediaries, especially items that
are technically complex or expensive (such as mainframes or aircraft).
Specialized Organizational Markets

The overall business market includes institutional and government organizations in addition
to profit-seeking companies. However, the buying goals, needs, and methods of these
two specialized organizational markets are generally different from those of businesses,
something firms must keep in mind when planning their business marketing strategies.
The Institutional Market
The institutional market consists of schools, hospitals, nursing homes, prisons, and other
institutions that provide goods and services to people in their care. Many of these
organizations have low budgets and captive clienteles.
For example, hospitals have to decide what quality of food to buy for their patients. The
buying objective here is not profit, because the food is provided to the patients as part of
the total service package. Nor is cost minimization the sole objective, because poor food
will cause patients to complain and hurt the hospital’s reputation. The hospital
purchasing agent has to search for institutional food vendors whose quality meets or
exceeds a certain minimum standard and whose prices are low.
Knowing this, many food vendors set up a separate division to respond to the special needs
of institutional buyers.
The Government Market

In most countries, government organizations are a major buyer of goods and

services. Government organizations typically require suppliers to submit
bids. Normally, they award the contract to the lowest bidder, although they
sometimes take into account a supplier’s superior quality or reputation for
completing contracts on time. Because their spending decisions are subject
to public review, government organizations require considerable
documentation from suppliers, who often complain about excessive
paperwork, bureaucracy, regulations, decision-making delays, and shifts in
procurement personnel.
 Business Buying Situations
Business buyers in companies, institutions, and government organizations face many decisions in
the course of making a purchase. The number of decisions depends on the type of buying
situation. Robinson and others distinguish three types of buying situations: the straight rebuy,
the modified rebuy, and the new task.
➤ Straight rebuy: The straight rebuy is a buying situation in which the purchasing department
reorders on a routine basis (e.g., office supplies, bulk chemicals). The buyer chooses from
suppliers on an “approved list.” These suppliers make an effort to maintain product and service
quality. They often propose automatic reordering systems to help purchasing agents save time.
The “out-suppliers” attempt to offer something new or to exploit dissatisfaction with a current
supplier. Out-suppliers try to get a small order and then enlarge their purchase share over time.
➤ Modified rebuy: The modified rebuy is a situation in which the buyer wants to modify product
specifications, prices, delivery requirements, or other terms. The modified rebuy usually involves
additional decision participants on both sides. The in-suppliers become nervous and have to
protect the account; the out-suppliers see an opportunity to gain some business.
➤ New task: The new task is a buying situation in which a purchaser buys a product or service for
the first time (e.g., office building, new security system). The greater the cost or risk, the larger
the number of decision participants and the greater their information gathering—and therefore the
longer the time to decision completion. New-task buying passes through several stages:
awareness, interest, evaluation, trial, and adoption.
Participants in the Business Buying Process

 Who buys the trillions of dollars' worth of goods and services needed by
business organizations? Purchasing agents are influential in straight-rebuy
and modified-rebuy situations, whereas other department personnel are
more influential in new-buy situations. Engineering personnel usually
have a major influence in selecting product components, and purchasing
agents dominate in selecting suppliers.

 The Buying Center :

It is composed of "all those individuals and groups who participate in the
purchasing decision-making process, who share some common goals and
the risks arising from the decisions."The buying center includes all
members of the organization who play any of seven roles in the purchase
decision process
1. Initiators. Those who request that something be purchased. They may be users or others in the
organization.
2. Users. Those who will use the product or service. In many cases, the users initiate the buying
proposal and help define the product requirements.
3. Influencers. People who influence the buying decision. They often help define specifications
and also provide information for evaluating alternatives. Technical personnel are particularly
important influencers.
4. Deciders. People who decide on product requirements or on suppliers.
5. Approvers. People who authorize the proposed actions of deciders or buyers.
6. Buyers. People who have formal authority to select the supplier and arrange the purchase
terms. Buyers may help shape product specifications, but they play their major role in
selecting vendors and negotiating. In more complex purchases, the buyers might include
high-level managers.
7. Gatekeepers. People who have the power to prevent sellers or information from reaching
members of the buying center. For example, purchasing agents, receptionists, and telephone
operators may prevent salespersons from contacting users or deciders.
THE PURCHASING/PROCUREMENT PROCESS

Industrial buying passes through eight stages called buyphases, as identified by

Robinson and associates in the buygrid framework. In modified rebuy or
straight-rebuy situations, some of these stages are compressed or bypassed. For
example, in a straight-rebuy situation, the buyer normally has a favorite supplier
or a ranked list of suppliers. Thus, the supplier search and proposal solicitation
stages are skipped. In the sections that follow, we examine each of the eight
stages for a typical new-task buying situation.
1. Problem recognition
2. General need description
3. Product specification
4. Supplier search
5. Proposal solicitation
6. Supplier selection
7. Order-routine specification
8. Performance review
1. Problem recognition
 The buying process begins when someone in the company
recognizes a problem or a need that can be met by
acquiring a good or service.
 The recognition can be triggered by internal or external
stimuli.
 The internal stimuli might be a decision to develop a new
product that requires new equipment and materials.
 The external stimuli may be triggered when a buyer gets
new ideas at trade shows, sees an add, or receives a call from
a sales representative who offers a better product or a lower
price.
2. General need description
 Next, the buyer determines the needed item’s
general characteristics and required quantity.
 For standard items, this task is simple.
 For complex items, the buyer will work with
others-engineers, users- to define characteristics
such as reliability, durability, or price.
 Business marketers can help by describing how
their products meet or even exceed the buyer’s
needs.
3. Product Specification
 With a general need description in hand, the buying
organization can develop the item’s technical
specifications.
 Often, the company will assign a product value
analysis (PVA) engineering team to the project.
 Product value analysis is an approach to cost
reduction in which components are carefully studied
to determine if they can be redesigned or standardized
or made by cheaper methods of production.
4. Supplier search
 The buyer next tries to identify the most
appropriate suppliers through:
- Trade directories
- Contacts with other companies.
- Trade advertisement
- Trade shows
- The Internet
5. Proposal solicitation
 The buyer next invites qualified suppliers to
submit proposals.
 If the item is complex or expensive, the proposal
will be written and detailed.
 After evaluating the proposals, the buyer will
invite a few suppliers to make formal presentations.
6. Supplier selection
 Before selecting a supplier, the buying center will
specify and rank desired supplier attributes, often
using supplier-evaluation models.
 To develop compelling value propositions,
business marketers need to better understand how a
business buyers arrive at their valuations.
 Companies are increasingly reducing the number of
their suppliers.
 There is even a trend toward single sourcing.
7. Order-routine specification
 After selecting the suppliers, the buyer negotiates the final
order, listing the technical specifications, the quantity needed,
the expected time of delivery, return policies, warranties and so
on.
 Many industrial buyers lease heavy equipment such as

machinery and trucks.

 The lessee gains a number of advantages:

- The latest products

- Better service
- The conservation of capital
- Some tax advantages
8. Performance review
 The buyer periodically reviews the performance of
the chosen supplier(s) using on of three methods:
1. The buyer may contact end users and ask for their
evaluations.
2. The buyer may rate the supplier on several criteria
using a weighted-score method
3. The buyer may aggregate the cost of poor
performance to come up with adjusted costs of
purchase, including price.
Buygrid Framework: Major Stages (Buyphases) of the Industrial
& Buying Process in Relation to Major Buying Situations
(Buyclasses)

Buy Classes ( Situations )

Major Stages New Task Modified Straight

Rebuy Rebuy

Problem recognition Yes Maybe No

General need description Yes Maybe No
Product specification Yes Yes Yes
Supplier search Yes Maybe No
Buy
Phases Proposal solicitation Yes Maybe No
Supplier Selection Yes Maybe No
Order-routine specification Yes Maybe No
Performance review yes Yes Yes
ESTABLISHING CORPORATE TRUST AND
CREDIBILITY
Strong bonds and relationships between firms depend on their perceived credibility.
Corporate credibility refers to the extent to which customers believe that a firm
can design and deliver products and services that satisfy their needs and wants.
Corporate credibility relates to the reputation that a firm has achieved in the
marketplace and is the foundation for a strong relationship. It is difficult for a firm
to develop strong ties with another firm unless it is seen as highly credible.
Corporate credibility, in turn, depends on three factors:
1. Corporate expertise—the extent to which a company is seen as able to make and
sell products or conduct services.
2. A Corporate trustworthiness—the extent to which a company is seen as motivated
to be honest, dependable, and sensitive to customer needs.
3. Corporate likability—the extent to which a company is seen as likable, attractive,
prestigious, dynamic, and so on.
In other words, a credible firm is seen as being good at what it does; it keeps its
customers' best interests in mind and is enjoyable to work with.
Trust is a particularly important determinant of credibility and a firm's relationships
with other firms. Trust is reflected in the willingness and confidence of a firm to
rely on a business partner. A number of interpersonal and interorganizational
factors affect trust in a business-to-business relationship, such as the perceived
competence, integrity, honesty, and benevolence of the firm. Trust will be
affected by personal interactions between employees of a firm as well as opinions
about the company as a whole, and perceptions of trust will evolve with more
experience with a company.
Trust can be especially tricky in online settings, and firms often impose more stringent
requirements on their online business partners. Business buyers worry that they
won't get products of the right quality delivered to the right place at the right time.
Sellers worry about getting paid on time—or at all—and how much credit they
should extend. Some firms, such as transportation and supply chain management
company Ryder System, are using tools such as automated credit-checking
applications and online trust services to help determine the credibility of trading
partners.
Managing Business-to-Business Customer
Relationships
To improve effectiveness and efficiency, business suppliers and customers are exploring
different ways to manage their relationships. Closer relationships are driven in part by
trends related to supply chain management, early supplier involvement, purchasing
alliances, and so on.
The Benefits of Vertical Coordination
Much research has advocated greater vertical coordination between buying partners and sellers
so that they transcend mere transactions to engage in activities that create more value for
both parties. Building trust between parties is often seen as one prerequisite to healthy long-
term relationships.
Some firms find that their needs can be satisfied with fairly basic supplier performance. They
do not want or require a close relationship with a supplier. Alternatively some suppliers
may not find it worth their while to invest in customers with limited growth potential. One
study found that the closest relationships between customers and suppliers arose when the
supply was important to the customer and when there were procurement obstacles such as
complex purchase requirements and few alternative suppliers. Another study suggested that
greater vertical coordination between buyer and seller through information exchange and
planning is usually necessary only when high environmental uncertainty exists and specific
investments are modest.
Business Relationships: Risks and Opportunism

While establishing a customer-supplier relationship, there is tension between

safeguarding and adaptation. Vertical coordination can facilitate stronger
customer-seller ties but at the same time may increase the risk to the customer's
and supplier's specific investments. Specific investments are those expenditures
tailored to a particular company and value chain partner (e.g., investments in
company-specific training, equipment, and operating procedures or systems).
When buyers cannot easily monitor supplier performance, the supplier might shirk
or cheat and not deliver the expected value. Opportunism can be thought of as
"some form of cheating or undersupply relative to an implicit or explicit
contract." It may involve blatant self-interest and deliberate misrepresentation
that violates contractual agreements.
The presence of a significant future time horizon and/or strong solidarity norms
so that customers and suppliers are willing to strive for joint benefits can
cause a shift in the effect of specific investments, from expropriation
(increased opportunism on the receiver's part) to bonding (reduced
opportunism)