Chapter 7: Analyzing Business Markets ● What Is Organizational Buying? ○ Frederick E. Webster Jr. and Yoram 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 Don't forget about the age old question of arona corporation manufactures canoes
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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. ■ More dollars and items change hands in sales to business buyers than to consumers. Consider the process of producing and selling a simple pair of shoes.Hide dealers must sell hides to tanners, who sell leather to shoe manufacturers, who sell shoes to wholesalers, who sell shoes to retailers, who finally sell them to consumers. Each party in the supply chain also buys many other goods and services to support its operations. ■ Given the highly competitive nature of business-to-business markets,the biggest enemy to marketers here is commoditization. Commoditization eats away margins and weakens customer loyalty. It can be overcome only if target customers are convinced that meaningful differences exist in the marketplace, and that the unique benefits of the firm’s offerings are worth the added expense. Thus, a critical step in business-to-business marketing is to create and communicate relevant differentiation from competitors. ■ Business marketers face many of the same challenges as consumer marketers. In particular, understanding their customers and what they value is of paramount importance to both. A survey of top business-to-business firms identified the following as challenges they faced: ● Understanding deep customer needs in new ways ● Identifying new opportunities for organic business growth ● Improving value management techniques and tools ● Calculating better marketing performance and accountability metrics ● Competing and growing in global markets,particularly China ● Countering the threat of product and service commoditization by bringing innovative offerings to market faster and moving to more competitive business models ● Convincing C-level executives to embrace the marketing concept and support robust marketing programs. ■ Business marketers contrast sharply with consumer markets in some ways, however: ● Fewer, larger buyers. The business marketer normally deals with far fewer, much larger buyers than the consumer marketer does, particularly in such industries as aircraft engines and defense weapons. The fortunes of Goodyear tires, Cummins engines, Delphi control systems,and other automotive part suppliers depends on getting big contracts from just a handful of major automakers. ● 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. Through its Supplier Added Value Effort ($AVE) program, Pittsburgh-based PPG industries challenges its suppliers of maintenance, repair, and operating (MRO) goods and services to deliver on annual value-added/cost-savings proposals equaling at least 5 percent of their total annual sales to PPG.One preferred supplier submitted a suggestion to $AVE that reduced costs for a lighting project by $160,000 by negotiating discounted prices for new fixtures andfluorescent bulbs. Business buyers often select suppliers that also buy from them. A paper manufacturer might buy 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.Many of the buying instruments—for example, requests for quotations, proposals, and purchase contracts— are not typically found in consumer buying. Professional buyers spend their careers learning how to buy better.Many belong to the Institute for Supply Management, which seeks to improve professional buyers’ effectiveness and status. This means business marketers must provide greater technical data about their product and its advantages over competitors’ products. ● Multiple 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 need to send well-trained sales representatives and sales teams to deal with the well-trained buyers. ● Multiple sales calls. A study by McGraw-Hill found that it took four to four and a half calls to close an average industrial sale.In the case of capital equipment sales for large projects, it may take many attempts to fund a project,and the sales cycle—between quoting a job and delivering the product—is often measured in 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. Pittsburgh-based Consol Energy’s coal business largely depends on orders from utilities and steel companies, which, in turn, depend on broader economic demand from consumers for electricity and steel-based products such as automobiles, machines, and appliances. Business buyers must also pay close attention to current and expected economic factors, such as the level of production, investment, and consumer spending and the interest rate. In a recession, they reduce their investment in plant, equipment, and inventories. Business marketers can do little to stimulate total demand in this environment. They can only fight harder to increase or maintain their share of the demand. ● Inelastic demand. The total demand for many business goods and services is inelastic—that is, not much affected by price changes. Shoe manufacturers are not going to buy much more leather if the price of leather falls, nor will they buy much less leather if the price rises unless they can find satisfactory substitutes. Demand is especially inelastic in the short run because producers cannot make quick changes in production methods. Demand is also inelastic for business goods that represent a small percentage of the item’s total cost, such as shoelaces. ● Fluctuating demand. The demand for business goods and services tends to be more volatile than the demand for consumer goods and services. A given percentage increase in consumer demand can lead to a much larger percentage increase in the demand for plant and equipment necessary to produce the additional output. Economists refer to this as the acceleration effect. Sometimes a rise of only 10 percent in consumer demand can cause as much as a 200 percent rise in business demand for products in the next period; a 10 percent fall in consumer demand may cause a complete collapse in business demand. ● Geographically concentrated buyers. For years, more than half of U.S. business buyers have been concentrated in seven states: New York, California, Pennsylvania, Illinois, Ohio, New Jersey, and Michigan. The geographical concentration of producers helps toreduce selling costs. At the same time, business marketers need to monitor regional shifts of certain industries. ● 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. ○ Buying Situations ■ The business buyer faces many decisions in making a purchase. How many depends on the complexity of the problem being solved, newness of the buying requirement, number of people involved,and time required. Three types of buying situations are the straight rebuy, modified rebuy, and new task. ● Straight rebuy. In a straight rebuy,the purchasing department reorders supplies such as office supplies and bulk chemicals on a routine basis and chooses from suppliers on an approved list. The suppliers make an effort to maintain product and service quality and often propose automatic reordering systems to save time. “Out-suppliers” attempt to offer something new or exploit dissatisfaction with a current supplier. Their goal is to get a small order and then enlarge their purchase share over time. ● Modified rebuy. The buyer in a modified rebuy wants to change product specifications,prices, delivery requirements, or other terms. This usually requires additional participants on both sides. The in-suppliers become nervous and want to protect the account. The out-suppliers see an opportunity to propose a better offer to gain some business. ● New task. A new-task purchaser buys a product or service for the first time (an office building,a new security system). The greater the cost or risk,the larger the number of participants, and the greater their information gathering—the longer the time to a decision. ■ The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situation. Over time, new-buy situations become straight rebuys and routine purchase behavior. ■ New-task buying is the marketer’s greatest opportunity and challenge. The process passes through several stages: awareness, interest, evaluation, trial, and adoption. Mass media can be most important during the initial awareness stage; salespeople often have their greatest impact at the interest stage; and technical sources can be most important during the evaluation stage.Online selling efforts may be useful at all stages. ■ In the new-task situation, the buyer must determine product specifications, price limits, delivery terms and times, service terms, payment terms, order quantities, acceptable suppliers, and the selected supplier. Different participants influence each decision,and the order in which these decisions are made varies. ■ Because of the complicated selling required, many companies use a missionary sales force consisting of their most effective salespeople. The brand promise and the manufacturer’s brand name recognition will be important in establishing trust and the customer’s willingness to consider change. The marketer also tries to reach as many key participants as possible and provide helpful information and assistance. ■ Once a customer has been acquired, in-suppliers are continually seeking ways to add value to their market offer to facilitate rebuys. Data storage leader EMC successfully acquired a series of computer software leaders to reposition the company to manage—and not just store—information, often by giving customers customized information. ■ Customers considering dropping six or seven figures on one transaction for big-ticket goods and services want all the information they can get.One way to entice new buyers is to create acustomer reference program in which satisfied existing customers act in concert with the company’s sales and marketing department by agreeing to serve as references. Technology companies such as HP, Lucent, and Unisys have all employed such programs. ■ Business marketers are also recognizing the importance of their brand and how they must execute well in a number of areas to gain marketplace success. Boeing, which makes everything from commercial airplanes to satellites, implemented the “One Company”brand strategy to unify all its different operations with a one-brand culture.The strategy was based in part on a triple helix representation: (1) enterprising spirit (why Boeing does what it does), (2) precision performance (how Boeing gets things done), and (3) defining the future (what Boeing achieves as a company). ○ Systems Buying and Selling ■ Many business buyers prefer to buy a total problem solution from one seller.Called systems buying, this practice originated with government purchases of major weapons and communications systems. The government solicited bids from prime contractors that,if awarded the contract, would be responsible for bidding out and assembling the system’s subcomponents from second-tier contractors. The prime contractor thus provided a turnkey solution, so-called because the buyer simply had to turn one key to get the job done. ■ Sellers have increasingly recognized that buyers like to purchase in this way, and many have adopted systems selling as a marketing tool. One variant of systems selling is systems contracting, in which a single supplier provides the buyer with its entire requirement of MRO supplies. During the contract period, the supplier also manages the customer’s inventory. Shell Oil manages the oil inventories of many of its business customers and knows when they require replenishment. The customer benefits from reduced procurement and management costs and from price protection over the term of the contract. The seller benefits from lower operating costs thanks to steady demand and reduced paperwork. ■ Systems selling is a key industrial marketing strategy in bidding to build large-scale industrial projects such as dams, steel factories, irrigation systems, sanitation systems, pipelines, utilities, and even new towns. Customers present potential suppliers with a list of project specifications and requirements. Project engineering firms must compete on price, quality, reliability, and other attributes to win contracts. Suppliers, however, are not just at the mercy of customer demands. Ideally, they’re active with customers early in the process to influence the actual development of the specifications. Or they can go beyond the specifications to offer additional value in various ways, as the following example shows. ● 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 ■ Webster and Wind call the decision-making unit of a buying organization the buying center. It consists 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 the following seven roles in the purchase decision process. ● Initiators—Users or others in the organization who request that something be purchased. ● Users—Those who will use the product or service.In many cases,the users initiate the buying proposal and help define the product requirements.● Influencers—People who influence the buying decision,often by helping define specifications and providing information for evaluating alternatives. Technical personnel are particularly important influencers. ● Deciders—People who decide on product requirements or on suppliers. ● Approvers—People who authorize the proposed actions of deciders or buyers. ● 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, buyers might include high-level managers. ● 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. ■ Several people can occupy a given role such as user or influencer, and one person may play multiple roles. A purchasing manager,for example,often occupies the roles of buyer, influencer, and gatekeeper simultaneously: She can determine which sales reps can call on other people in the organization; what budget and other constraints to place on the purchase; and which firm will actually get the business,even though others (deciders) might select two or more potential vendors that can meet the company’s requirements. ■ The typical buying center has a minimum of five or six members and often has dozens. Some may be outside the organization, such as government officials, consultants, technical advisors, and other members of the marketing channel. One study found that 3.5 more people on average were engaged in making a business purchase decision in 2005 than in 2001. ○ Buying Center Influences ■ Buying centers usually include several participants with differing interests, authority, status, and persuasiveness, and sometimes very different decision criteria. Engineers may want to maximize the performance of the product; production people may want ease of use and reliability of supply; financial staff focus on the economics of the purchase; purchasing may be concerned with operating and replacement costs; union officials may emphasize safety issues. ■ Business buyers also have personal motivations, perceptions, and preferences influenced by their age, income, education, job position, personality, attitudes toward risk, and culture. Buyers definitely exhibit different buying styles.There are “keep-it-simple” buyers, “own-expert” buyers, “want-the-best” buyers, and “want-everything-done” buyers. Some younger, highly educated buyers are computer experts who conduct rigorous analyses of competitive proposals before choosing a supplier. Other buyers are “toughies” from the old school who pit competing sellers against one another, and in some companies, the purchasing powers-that-be are legendary. ■ Webster cautions that ultimately individuals, not organizations, make purchasing decisions. Individuals are motivated by their own needs and perceptions in attempting to maximize the rewards (pay, advancement, recognition, and feelings of achievement) offered by the organization. Personal needs motivate their behavior, but organizational needs legitimate the buying process and its outcomes.Thus,businesspeople are not buying “products.”They are buying solutions to two problems: the organization’s economic and strategic problem, and their own personal need for individual achievement and reward. In this sense, industrial buying decisions are both “rational”and “emotional”—they serve both the organization’s and the individual’s needs. ■ Research by one industrial component manufacturer found that although top executives at its small- and medium-size customers were comfortable buying from other companies, they appeared to harbor subconscious insecurities about buying the manufacturer’s product. Constant changes in technology had left them concerned about internal effects within the company.Recognizing this unease, the manufacturer retooled its selling approach to emphasize more emotional appeals and how its product line actually enabled the customer’s employees to improve their performance, relieving management of the complications and stress of using components. ■ Recognizing these extrinsic, interpersonal influences, more industrial firms have put greater emphasis on strengthening their corporate brand. At one time, Emerson Electric, a global provider of power tools, compressors, electrical equipment, and engineering solutions, was a conglomerate of 60 autonomous—and sometimes anonymous—companies. A new CMO aligned the brands under a new global brand architecture and identity, allowing Emerson to achieve a broader presence so it could sell locally while leveraging its global brand name.Record sales and stock price highs soon followed. SAS is another firm that recognized the importance of its corporate brand. ○ Targeting Firms and Buying Centers ■ Successful business-to-business marketing requires that business marketers know which types of companies to focus on in their selling efforts, as well as who to concentrate on within the buying centers in those organizations. ● Targeting Firms ○ As we will discuss in detail in Chapter 8, business marketers may divide the marketplace in many different ways to decide on the types of firms to which they will sell. Finding those business sectors with the greatest growth prospects, most profitable customers, and most promising opportunities for the firm is crucial, as Timken found out. ○ It’s also true, however, that as a slowing economy has put a stranglehold on large corporations’ purchasing departments,the small and midsize business markets are offering new opportunities for suppliers. See “Marketing Insight: Big Sales to Small Businesses,” for more on this important B2B market. ○ In developing selling efforts, business marketers can also consider their customers’ customers, or end users, if these are appropriate. Many business-to-business transactions are to firms using the products they purchase as components or ingredients in products they sell to the ultimate end users. A sharper focus on end users helped propel Thomson Reuters to greater financial heights. ● Targeting Within the Business Center ○ Once it has identified the type of businesses on which to focus marketing efforts,the firm must then decide how best to sell to them. To target their efforts properly, business marketers need to figure out: Who are the major decision participants? What decisions do they influence? What is their level of influence? What evaluation criteria do they use? Consider the following example: ■ A company sells nonwoven disposable surgical gowns to hospitals. The hospital staff who participate in this buying decision include the vice president of purchasing, the operating-room administrator, and the surgeons. The vice president of purchasing analyzes whether the hospital should buy disposable gowns or reusable gowns. If the findings favor disposable gowns, then the operating-room administrator compares various competitors’ products and prices and makes a choice. This administrator considers absorbency, antiseptic quality, design, and cost and normally buys the brand that meets functional requirements at the lowest cost. Surgeons influence the decision retroactively by reporting their satisfaction with the particular brand.■ The business marketer is not likely to know exactly what kind of group dynamics take place during the decision process, although whatever information he or she can obtain about personalities and interpersonal factors is useful. ■ Small sellers concentrate on reaching the key buying influencers. Larger sellers go for multilevel in-depth selling to reach as many participants as possible. Their salespeople virtually “live with” high-volume customers.Companies must rely more heavily on their communications programs to reach hidden buying influences and keep current customers informed. ■ Business marketers must periodically review their assumptions about buying center participants. For years Kodak sold X-ray film to hospital lab technicians,but research indicated that professional administrators were increasingly making purchasing decisions.Kodak revised its marketing strategy and developed new advertising to reach out to these decision makers. ● The Purchasing/Procurement Process ○ In principle,business buyers seek to obtain the highest benefit package (economic, technical, service, and social) in relation to a market offering’s costs. To make comparisons, they will try to translate all costs and benefits into monetary terms. A business buyer’s incentive to purchase will be a function of the difference between perceived benefits and perceived costs. The marketer’s task is to construct a profitable offering that delivers superior customer value to the target buyers. ○ Business marketers must therefore ensure that customers fully appreciate how the firm’s offerings are different and better. Framing occurs when customers are given a perspective or point of view that allows the firm to “put its best foot forward.” Framing can be as simple as making sure customers realize all the benefits or cost savings afforded by the firm’s offerings, or becoming more involved and influential in the thought process behind how customers view the economics of purchasing, owning, using, and disposing product offerings. Framing requires understanding how business customers currently think of and choose among products and services, and then determining how they should ideally think and choose. ○ Supplier diversity is a benefit that may not have a price tag but that business buyers overlook at their risk. As the CEOs of many of the country’s largest companies see it, a diverse supplier base is a business imperative. Minority suppliers are the fastest-growing segment of today’s business landscape. ○ In the past,purchasing departments occupied a low position in the management hierarchy,in spite of often managing more than half the company’s costs. Recent competitive pressures have led many companies to upgrade their purchasing departments and elevate administrators to vice presidential rank.These new,more strategically oriented purchasing departments have a mission to seek the best value from fewer and better suppliers.Some multinationals have even elevated them to “strategic supply departments” with responsibility for global sourcing and partnering. At Caterpillar, purchasing, inventory control,production scheduling,and traffic have been combined into one department.Here are other companies that have benefited from improving their business buying practices. ■ Rio Tinto is a world leader in finding, mining, and processing the earth’s mineral resources with a significant presence in North America and Australia. Coordinating with its suppliers was time consuming,so Rio Tinto embarked on an electronic commerce strategy with one key supplier. Both parties have reaped significant benefits from this new arrangement. In many cases, orders are being filled in the suppliers’ warehouse within minutes of being transmitted, and the supplier is now able to take part in a pay-on-receipt program that has shortened Rio Tinto’s payment cycle to around 10 days.■ Mitsui & Co. Ltd is a leading Japanese trading firm that owns more than 850 companies and subsidiaries.When the firm took its purchase orders and payments transactions for one group online, it reduced the cost of purchase transactions by 50 percent and increased customer satisfaction due to greater process efficiencies. ■ Medline Industries, the largest privately owned manufacturer and distributor of health care products in the United States, used software to integrate its view of customer activity across online and direct sales channels. The results? The firm enhanced its product margin by 3 percent,improved customer retention by 10 percent, reduced revenue lost to pricing errors by 10 percent, and enhanced the productivity of its sales representatives by 20 percent. ○ The upgrading of purchasing means business marketers must upgrade their sales staff to match the higher caliber of today’s business buyers. ● Stages in the Buying Process ○ We’re ready to describe the general stages in the business buying-decision process. Patrick J. Robinson and his associates identified eight stages and called them buyphases. The model in Table 7.1 is the buygrid framework. ○ In modified-rebuy or straight-rebuy situations, some stages are compressed or bypassed. For example, the buyer normally has a favorite supplier or a ranked list of suppliers and can skip the search and proposal solicitation stages. Here are some important considerations in each of the eight stages. ○ Problem Recognition ■ The buying process begins when someone in the company recognizes a problem or need that can be met by acquiring a good or service. The recognition can be triggered by internal or external stimuli. The internal stimulus might be a decision to develop a new product that requires new equipment and materials, or a machine that breaks down and requires new parts. Or purchased material turns out to be unsatisfactory and the company searches for another supplier, or lower prices or better quality. Externally, the buyer may get new ideas at a trade show, see an ad, or receive a call from a sales representative who offers a better product or a lower price. Business marketers can stimulate problem recognition by direct mail,telemarketing,and calling on prospects. ○ General Need Description and Product Specification ■ Next, the buyer determines the needed item’s general characteristics and required quantity. For standard items, this 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. ■ The buying organization now develops the item’s technical specifications. Often, the company will assign a product-value-analysis engineering team to the project.Product value analysis (PVA)is an approach to cost reduction that studies whether components can be redesigned or standardized or made by cheaper methods of production without adversely impacting product performance. The PVA team will identify overdesigned components, for instance, that last longer than the product itself. Tightly written specifications allow the buyer to refuse components that are too expensive or that fail to meet specified standards. When HP won ISRI’s first Design for Recycling Award through an application of PVA methods,it received this accolade: ● HP has worked for many years to design products that are easier to recycle. The firm operates several recycling facilities, which allows it to determine the most effective design features to facilitate product recycling. HP has developed standards that integrate clear design guidelines and checklists into every product’s design process to assess and improve recyclability. Hewlett-Packard’s design process includes: Using modular design to allow components to be removed, upgraded, or replaced; eliminating glues and adhesives by using,for example,snap-in features;marking plastic parts weighing morethan 25g according to ISO 11469 international standards,to speed up materials identification during recycling; reducing the number and types of materials used;using single plastic polymers;using recycled plastic; using moulded-in colours and finishes instead of paint, coatings, or plating. ■ Suppliers can use product value analysis as a tool for positioning themselves to win an account. Regardless, it is important to eliminate excessive costs. Mexican cement giant Cemex is famed for “The Cemex Way,” which uses high-tech methods to squeeze out inefficiencies. ○ Supplier Search ■ The buyer next tries to identify the most appropriate suppliers through trade directories, contacts with other companies,trade advertisements,trade shows,and the Internet. The move to Internet purchasing has far-reaching implications for suppliers and will change the shape of purchasing for years to come. Companies that purchase over the Internet are utilizing electronic marketplaces in several forms: ● Catalog sites. Companies can order thousands of items through electronic catalogs distributed by e-procurement software,such as Grainger’s. ● Vertical markets. Companies buying industrial products such as plastics,steel,or chemicals or services such as logistics or media can go to specialized Web sites (called e-hubs). Plastics.com allows plastics buyers to search the best prices among thousands of plastics sellers. ● “Pure Play”auction sites. Ritchie Bros.Auctioneers is the world’s largest industrial auctioneer, with more than 40 auction sites worldwide. It sold $3.5 billion of used and unused equipment at more than 300 unreserved auctions in 2009, including a wide range of heavy equipment, trucks, and other assets for the construction, transportation, agricultural, material handling, mining, forestry, petroleum, and marine industries. While most people prefer to bid in person at Ritchie Bros. auctions, they are also able to bid online in real time at rbauction.com—the Company’s multilingual Web site. In 2009, 33 percent of the bidders at Ritchie Bros. auctions bid over the Internet; online bidders purchased $830 million of equipment. ● Spot (or exchange) markets. On spot electronic markets, prices change by the minute. ChemConnect.com is an online exchange for buyers and sellers of bulk chemicals such as benzene, and it’s a B2B success in an arena littered with failed sites. First to market, it is now the biggest online exchange for chemical trading, with 1 million barrels traded daily. Customers such as Vanguard Petroleum Corp. in Houston conduct about 15 percent of their spot purchases and sales of natural gas liquids on ChemConnect’s commodities trading site. ● Private exchanges. Hewlett-Packard, IBM, and Walmart operate private exchanges to link with specially invited groups of suppliers and partners over the Web. ● Barter markets. In barter markets,participants offer to trade goods or services. ● Buying alliances. Several companies buying the same goods can join together to form purchasing consortia to gain deeper discounts on volume purchases. TopSource is an alliance of firms in the retail and wholesale food-related businesses. ■ Online business buying offers several advantages:It shaves transaction costs for both buyers and suppliers, reduces time between order and delivery, consolidates purchasing systems, and forges more direct relationships between partners and buyers. On the downside, it may help to erode supplier–buyer loyalty and create potential security problems. ■ E-Procurement ● Web sites are organized around two types of e-hubs: vertical hubs centered on industries (plastics, steel, chemicals, paper) and functional hubs (logistics, mediabuying,advertising,energy management).In addition to using these Web sites,companies can use e-procurement in other ways: ○ Set up direct extranet links to major suppliers. A company can set up a direct e-procurement account at Dell or Office Depot,for instance,and its employees can make their purchases this way. ○ Form buying alliances. A number of major retailers and manufacturers such as Acosta, Ahold, Best Buy, Carrefour, Family Dollar Stores, Lowe’s, Safeway, Sears, SUPERVALU, Target, Walgreens, Walmart, and Wegmans Food Markets are part of a data-sharing alliance called 1SYNC. Several auto companies (GM, Ford, Chrysler) formed Covisint for the same reason. Covisint is the leading provider of services that can integrate crucial business information and processes between partners, customers, and suppliers. The company has now also targeted health care to provide similar services. ○ Set up company buying sites. General Electric formed the Trading Process Network (TPN), where it posts requests for proposals (RFPs), negotiates terms,and places orders. ● Moving into e-procurement means more than acquiring software;it requires changing purchasing strategy and structure. However,the benefits are many: Aggregating purchasing across multiple departments yields larger, centrally negotiated volume discounts, a smaller purchasing staff, and less buying of substandard goods from outside the approved list of suppliers. ■ Lead Generation ● The supplier’s task is to ensure it is considered when customers are— or could be—in the market and searching for a supplier. Identifying good leads and converting them to sales requires the marketing and sales organizations to take a coordinated, multichannel approach to the role of trusted advisor to prospective customers. Marketing must work together with sales to define what makes a “sales ready” prospect and cooperate to send the right messages via sales calls, trade shows, online activities, PR, events, direct mail, and referrals. ● Marketing must find the right balance between the quantity and quality of leads. Too many leads, even of high quality, and the sales force may be overwhelmed and allow promising opportunities to fall through the cracks; too few or low-quality leads and the sales force may become frustrated or demoralized. To proactively generate leads, suppliers need to know about their customers. They can obtain background information from vendors such as Dun & Bradstreet and InfoUSA or information-sharing Web sites such as Jigsaw and LinkedIn. ● Suppliers that lack the required production capacity or suffer from a poor reputation will be rejected. Those that qualify may be visited by the buyer’s agents, who will examine the suppliers’ manufacturing facilities and meet their staff. After evaluating each company, the buyer will end up with a short list of qualified suppliers. Many professional buyers have forced suppliers to change their marketing to increase their likelihood of making the cut. ○ 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. ■ Business marketers must be skilled in researching, writing, and presenting proposals. Written proposals should be marketing documents that describe value and benefits in customer terms.Oral presentations must inspire confidence and position the company’s capabilities and resources so they stand out from the competition. Proposals and selling are often team efforts. Pittsburgh-based Cutler-Hammer developed “pods”of salespeople focused on a particular geographic region, industry, or market concentration. Salespeople can leverage the knowledge and expertise of coworkers instead of working in isolation. ○ Supplier Selection ■ Before selecting a supplier,the buying center will specify and rank desired supplier attributes,often using a supplier-evaluation model such as the one in Table 7.2. ■ To develop compelling value propositions, business marketers need to better understand how business buyers arrive at their valuations. Researchers studying how business marketers assess customer value found eight different customer value assessment (CVA) methods. Companies tended to use the simpler methods, although the more sophisticated ones promise to produce a more accurate picture of CPV (see “Marketing Memo: Developing Compelling Customer Value Propositions”). ■ The choice of attributes and their relative importance varies with the buying situation. Delivery reliability, price, and supplier reputation are important for routine-order products. For procedural-problem products, such as a copying machine, the three most important attributes are technical service, supplier flexibility, and product reliability. For political-problem products that stir rivalries in the organization (such as the choice of a computer system), the most important attributes are price, supplier reputation, product reliability, service reliability, and supplier flexibility. ■ Overcoming Price Pressures ● The buying center may attempt to negotiate with preferred suppliers for better prices and terms before making the final selection. Despite moves toward strategic sourcing, partnering, and participation in cross-functional teams, buyers still spend a large chunk of their time haggling with suppliers on price. The number of price-oriented buyers can vary by country,depending on customer preferences for different service configurations and characteristics of the customer’s organization. ● Marketers can counter requests for a lower price in a number of ways.They may be able to show evidence that the total cost of ownership, that is, the life-cycle cost of using their product, is lower than for competitors’ products.They can cite the value of the services the buyer now receives, especially if they are superior to those offered by competitors. Research shows that service support and personal interactions, as well as a supplier’s know-how and ability to improve customers’ time to market,can be useful differentiators in achieving key-supplier status. ● Improving productivity helps alleviate price pressures. Burlington Northern Santa Fe Railway has tied 30 percent of employee bonuses to improvements in the number of railcars shipped per mile. Some firms are using technology to devise novel customer solutions.With Web technology and tools, Vistaprint printers can offer professional printing to small businesses that previously could not afford it. ● Some companies handle price-oriented buyers by setting a lower price but establishing restrictive conditions: (1) limited quantities, (2) no refunds, (3) no adjustments, and (4) no services. ○ Cardinal Health set up a bonus-dollars plan and gave points according to how much the customer purchased. The points could be turned in for extra goods or free consulting. ○ GE is installing diagnostic sensors in its airline engines and railroad engines.It is now compensated for hours of flight or railroad travel.○ IBM is now more of a “service company aided by products”than a “product company aided by services.” It can sell computer power on demand (like video on demand) as an alternative to selling computers. ● Solution selling can also alleviate price pressure and comes in different forms. Here are three examples. ○ Solutions to Enhance Customer Revenues. Hendrix UTD has used its sales consultants to help farmers deliver an incremental animal weight gain of 5 percent to 10 percent over competitors. ○ Solutions to Decrease Customer Risks. ICI Explosives formulated a safer way to ship explosives for quarries. ○ Solutions to Reduce Customer Costs. W.W.Grainger employees work at large customer facilities to reduce materials-management costs. ● More firms are seeking solutions that increase benefits and reduce costs enough to overcome any low-price concerns.Consider the following example. ● Risk and gain sharing can offset price reductions that customers request. Suppose Medline, a hospital supplier, signs an agreement with Highland Park Hospital promising $350,000 in savings over the first 18 months in exchange for getting a tenfold increase in the hospital’s share of supplies. If Medline achieves less than this promised savings, it will make up the difference. If Medline achieves substantially more than promised, it participates in the extra savings. To make such arrangements work, the supplier must be willing to help the customer build a historical database, reach an agreement for measuring benefits and costs, and devise a dispute resolution mechanism. ■ Number of Suppliers ● Companies are increasingly reducing the number of their suppliers. Ford, Motorola, and Honeywell have cut their number of suppliers 20 percent to 80 percent. These companies want their chosen suppliers to be responsible for a larger component system, they want them to achieve continuous quality and performance improvement, and at the same time they want them to lower prices each year by a given percentage. They expect their suppliers to work closely with them during product development, and they value their suggestions. ● There is even a trend toward single sourcing,though companies that use multiple sources often cite the threat of a labor strike as the biggest deterrent to single sourcing. Companies may also fear single suppliers will become too comfortable in the relationship and lose their competitive edge. ○ Order-Routine Specification ■ After selecting 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, and some tax advantages. The lessor often ends up with a larger net income and the chance to sell to customers that could not afford outright purchase. ■ In the case of maintenance, repair, and operating items, buyers are moving toward blanket contracts rather than periodic purchase orders. A blanket contract establishes a long-term relationship in which the supplier promises to resupply the buyer as needed,at agreed-upon prices,over a specified period of time. Because the seller holds the stock, blanket contracts are sometimes called stockless purchase plans. The buyer’s computer automatically sends an order to the seller when stock is needed. This system locks suppliers in tighter with the buyer and makes itdifficult for out-suppliers to break in unless the buyer becomes dissatisfied with prices,quality,or service. ■ Companies that fear a shortage of key materials are willing to buy and hold large inventories. They will sign long-term contracts with suppliers to ensure a steady flow of materials. DuPont, Ford,and several other major companies regard long-term supply planning as a major responsibility of their purchasing managers. For example, General Motors wants to buy from fewer suppliers, who must be willing to locate close to its plants and produce high-quality components. Business marketers are also setting up extranets with important customers to facilitate and lower the cost of transactions. Customers enter orders that are automatically transmitted to the supplier. ■ Some companies go further and shift the ordering responsibility to their suppliers in systems called vendor-managed inventory (VMI). These suppliers are privy to the customer’s inventory levels and take responsibility for replenishing automatically through continuous replenishment programs. Plexco International AG supplies audio, lighting, and vision systems to the world’s leading automakers. Its VMI program with its 40 suppliers resulted in significant time and cost savings and allowed the company to use former warehouse space for productive manufacturing activities. ○ Performance Review ■ The buyer periodically reviews the performance of the chosen supplier(s) using one of three methods. The buyer may contact end users and ask for their evaluations, rate the supplier on several criteria using a weighted-score method, or aggregate the cost of poor performance to come up with adjusted costs of purchase,including price. The performance review may lead the buyer to continue,modify,or end a supplier relationship. ■ Many companies have set up incentive systems to reward purchasing managers for good buying performance,in much the same way sales personnel receive bonuses for good selling performance. These systems lead purchasing managers to increase pressure on sellers for the best terms. ● 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 supply chain management,early supplier involvement, and purchasing alliances. Cultivating the right relationships with business is paramount for any holistic marketing program. ○ Business-to-business marketers are avoiding “spray and pray” approaches to attracting and retaining customers in favor of honing in on their targets and developing one-to-one marketing approaches. They are increasingly using online social media in the form of company blogs, online press releases, and forums or discussion groups to communicate with existing as well as prospective customers. ○ The Benefits of Vertical Coordination ■ Much research has advocated greater vertical coordination between buying partners and sellers, so they can transcend merely transacting and instead engage in activities that create more value for both parties. Building trust is one prerequisite to healthy long-term relationships. “Marketing Insight: Establishing Corporate Trust, Credibility, and Reputation” identifies some key dimensions of such trust. Knowledge that is specific and relevant to a relationship partner is also an important factor in the strength of interfirm ties. A number of forces influence the development of a relationship between business partners. Four relevant factors are availability of alternatives, importance of supply, complexity of supply, and supply market dynamism. Based on these we can classify buyer–supplier relationships into eight categories: ● Basic buying and selling—These are simple, routine exchanges with moderate levels of cooperation and information exchange.● Bare bones—These relationships require more adaptation by the seller and less cooperation and information exchange. ● Contractual transaction—These exchanges are defined by formal contract and generally have low levels of trust, cooperation, and interaction. ● Customer supply—In this traditional custom supply situation, competition rather than cooperation is the dominant form of governance. ● Cooperative systems—The partners in cooperative systems are united in operational ways, but neither demonstrates structural commitment through legal means or adaptation. ● Collaborative—In collaborative exchanges, much trust and commitment lead to true partnership. ● Mutually adaptive—Buyers and sellers make many relationship-specific adaptations, but without necessarily achieving strong trust or cooperation. ● Customer is king—In this close, cooperative relationship, the seller adapts to meet the customer’s needs without expecting much adaptation or change in exchange. ■ Over time,however,relationship roles may shift or be activated under different circumstances. Some needs can be satisfied with fairly basic supplier performance. Buyers then neither want nor require a close relationship with a supplier. Likewise, some suppliers may not find it worth their while to invest in customers with limited growth potential. ■ One study found the closest relationships between customers and suppliers arose when the supply was important to the customer and there were procurement obstacles, such as complex purchase requirements and few alternate 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 (described next) are modest. ○ Business Relationships: Risks and Opportunism ■ Researchers have noted that establishing a customer–supplier relationship creates tension between safeguarding (ensuring predictable solutions) and adaptation (allowing for flexibility for unanticipated events). 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 (investments in company-specific training, equipment, and operating procedures or systems). They help firms grow profits and achieve their positioning. Xerox worked closely with its suppliers to develop customized processes and components that reduced its copier manufacturing costs by 30 percent to 40 percent. In return, suppliers received sales and volume guarantees, an enhanced understanding of their customer’s needs, and a strong position with Xerox for future sales. ■ Specific investments, however, also entail considerable risk to both customer and supplier. Transaction theory from economics maintains that because these investments are partially sunk, they lock firms into a particular relationship. Sensitive cost and process information may need to be exchanged. A buyer may be vulnerable to holdup because of switching costs; a supplier may be more vulnerable because it has dedicated assets and/or technology/knowledge at stake. ■ When buyers cannot easily monitor supplier performance, the supplier might shirk or cheat and not deliver the expected value. Opportunism is “some form of cheating or undersupply relative to an implicit or explicit contract.” It may entail blatant self-serving and deliberate misrepresentation that violates contractual agreements. In creating the 1996 version of the Ford Taurus, Ford Corporation chose to outsource the whole process to one supplier,Lear Corporation. Lear committed to a contract that, for various reasons, it knew it was unable to fulfill. According to Ford, Lear missed deadlines, failed to meet weight and price objectives, and furnished parts thatdid not work. A more passive form of opportunism might be a refusal or unwillingness to adapt to changing circumstances. ■ Opportunism is a concern because firms must devote resources to control and monitoring that they could otherwise allocate to more productive purposes. Contracts may become inadequate to govern supplier transactions when supplier opportunism becomes difficult to detect, when firms make specific investments in assets they cannot use elsewhere, and when contingencies are harder to anticipate.Customers and suppliers are more likely to form a joint venture (instead of signing a simple contract) when the supplier’s degree of asset specificity is high, monitoring the supplier’s behavior is difficult, and the supplier has a poor reputation. When a supplier has a good reputation, it is more likely to avoid opportunism to protect this valuable intangible asset. ■ The presence of a significant future time horizon and/or strong solidarity norms typically causes customers and suppliers to strive for joint benefits. Their specific investments shift from expropriation (increased opportunism on the receiver’s part) to bonding (reduced opportunism). ○ New Technology and Business Customers ■ Top firms are comfortable using technology to improve the way they do business with their business-to-business customers. Here are some examples of how they are redesigning Web sites, improving search results, leveraging e-mails, engaging in social media, and launching Webinars and podcasts to improve their business performance. ● Chapman Kelly provides audit and other cost containment products to help firms reduce their health care and insurance costs. The company originally tried to acquire new customers through traditional cold calling and outbound selling techniques. After it redesigned its Web site and optimized the site’s search engine so the company’s name moved close to the top of relevant online searches,revenue nearly doubled. ● Hewlett-Packard launched a “Technology at Work” e-mail newsletter to focus on retention of its current customers. The newsletter’s content and format were based on in-depth research to find out what customers wanted. Hewlett-Packard measures the effects of the newsletter carefully and found that e-mailing product updates helped avoid inbound service calls, saving millions of dollars. ● Emerson Process Management makes automation systems for chemical plants, oil refineries, and other types of factories.The company blog about factory automation is visited by thousand of readers who like to hear and swap factory war stories. It attracts 35,000 to 40,000 regular visitors each month,generating five to seven leads a week. Given that the systems sell for up to millions, ROI on the blog investment is immense. ● Machinery manufacturer Makino builds relationships with end-user customers by hosting an ongoing series of industry-specific Webinars, producing an average of three a month. The company uses highly specialized content, such as how to get the most out of machine tools and how metal-cutting processes work, to appeal to different industries and different styles of manufacturing. Makino’s database created from Webinar participants has allowed the firm to cut marketing costs and improve its effectiveness and efficiency. ● Acquired by IBM in January 2008, Cognos provides business intelligence and performance management software and services to help companies manage their financial and operational performance. To increase their visibility and improve customer relations, Cognos launched BI radio, an RSS-enabled series of 30-minute podcasts released every six weeks addressing a range of topics such as marketing, leadership, business management, and “killer apps.” Attracting 60,000 subscribers, the podcasts are thought to have directly or indirectly led to $7 million in deals. ● Institutional and Government Markets○ Our discussion has concentrated largely on the buying behavior of profit-seeking companies.Much of what we have said also applies to the buying practices of institutional and government organizations. However,we want to highlight certain special features of these markets. ○ The institutional market consists of schools,hospitals,nursing homes,prisons,and other institutions that must provide goods and services to people in their care. Many of these organizations are characterized by low budgets and captive clienteles. For example, hospitals must decide what quality of food to buy for patients.The buying objective here is not profit,because the food is provided 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 must search for institutional-food vendors whose quality meets or exceeds a certain minimum standard and whose prices are low.In fact,many food vendors set up a separate sales division to cater to institutional buyers’ special needs and characteristics. Heinz produces, packages, and prices its ketchup differently to meet the requirements of hospitals, colleges, and prisons. ARAMARK, which provides food services for stadiums, arenas, campuses, businesses, and schools, also has a competitive advantage in providing food for the nation’s prisons, a direct result of refining its purchasing practices and supply chain management. ○ In most countries,government organizations are a major buyer of goods and services.They typically require suppliers to submit bids and often award the contract to the lowest bidder. In some cases, they will make allowance for superior quality or a reputation for completing contracts on time.Governments will also buy on a negotiated contract basis,primarily in complex projects with major R&D costs and risks and those where there is little competition. ○ A major complaint of multinationals operating in Europe is that each country shows favoritism toward its nationals despite superior offers from foreign firms. Although such practices are fairly entrenched,the European Union is attempting to remove this bias. ○ Because their spending decisions are subject to public review, government organizations require considerable paperwork from suppliers, who often complain about bureaucracy, regulations, decision-making delays, and frequent shifts in procurement staff. But the fact remains that the U.S. government bought goods and services valued at $220 billion in fiscal year 2009, making it the largest and therefore most potentially attractive customer in the world. ○ It is not just the dollar figure that is large, but the number of individual acquisitions. According to the General Services Administration Procurement Data Center, over 20 million individual contract actions are processed every year. Although most items purchased cost between $2,500 and $25,000, the government also makes purchases in the billions, many in technology. ○ Government decision makers often think vendors have not done their homework. Different types of agencies—defense, civilian, intelligence—have different needs, priorities, purchasing styles, and time frames. In addition, vendors do not pay enough attention to cost justification, a major activity for government procurement professionals. Companies hoping to be government contractors need to help government agencies see the bottom-line impact of products. Demonstrating useful experience and successful past performance through case studies, especially with other government organizations,can be influential. ○ Just as companies provide government agencies with guidelines about how best to purchase and use their products, governments provide would-be suppliers with detailed guidelines describing how to sell to the government. Failure to follow the guidelines or to fill out forms and contracts correctly can create a legal nightmare. ○ Fortunately for businesses of all sizes, the federal government has been trying to simplify the contracting procedure and make bidding more attractive.Reforms place more emphasis on buying off-the-shelf items instead of items built to the government’s specs, communicating with vendors online to eliminate the massive paperwork,and giving vendors who lose a bid a “debriefing”from the appropriate government agency to increase their chances of winning the next time around. More purchasing is being done onlinevia Web-based forms, digital signatures, and electronic procurement cards (P-cards). Several federal agencies that act as purchasing agents for the rest of the government have launched Web-based catalogs that allow authorized defense and civilian agencies to buy everything from medical and office supplies to clothing online. The General Services Administration, for example, not only sells stocked merchandise through its Web site but also creates direct links between buyers and contract suppliers. A good starting point for any work with the U.S. government is to make sure the company is in the Central Contractor Registration (CCR) database (www.ccr.gov), which collects, validates, stores, and disseminates data in support of agency acquisitions. ○ In spite of these reforms, for a number of reasons many companies that sell to the government have not used a marketing orientation. Some, though, have pursued government business by establishing separate government marketing departments. Companies such as Gateway, Rockwell, Kodak, and Goodyear anticipate government needs and projects, participate in the product specification phase, gather competitive intelligence, prepare bids carefully, and produce strong communications to describe and enhance their companies’ reputations. ● Summary ○ Organizational buying is the decision-making process by which formal organizations establish the need for purchased products and services, then identify, evaluate, and choose among alternative brands and suppliers. 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. ○ 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. ○ The buying center is the decision-making unit of a buying organization. It consists of initiators, users, influencers, deciders, approvers, buyers, and gatekeepers. To influence these parties, marketers must be aware of environmental, organizational, interpersonal, and individual factors. ○ The buying process consists of eight stages called buyphases: (1) problem recognition, (2) general need description, (3) product specification, (4) supplier search, (5) proposal solicitation, (6) supplier selection, (7) order-routine specification, and (8) performance review. ○ Business marketers must form strong bonds and relationships with their customers and provide them added value. Some customers, however, may prefer a transactional relationship. Technology is aiding the development of strong business relationships. ○ The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that provide goods and services to people in their care. Buyers for government organizations tend to require a great deal of paperwork from their vendors and to favor open bidding and domestic companies. Suppliers must be prepared to adapt their offers to the special needs and procedures found in institutional and government markets.