Chapter 8 - Analyzing Business Markets PDF

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Name: Princess Joy S. Gariando Subject: Marketing Management Professor: Jose L. Pena DM-HRM, Ph Schedule: Block 1 Saturday 7:30-12:00PMAnalyzing Business MarketsA. What is Organizational Buying? The decision-making process by which formal organizations establish the need for purchased products and s...

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Name: Princess Joy S. Gariando Subject: Marketing Management Professor: Jose L. Pena DM-HRM, Ph.D Schedule: Block 1 Saturday 7:30-12:00PM

Analyzing Business Markets

A. What is Organizational Buying? 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. 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. Characteristics of Business Markets •

Fewer, larger buyers-the business market normally deals with fewer, much larger buyers than the consumer market

•

Close supplier-customer relationship-customer relationship-because of smaller customer bases and the importance and power of larger customers, suppliers are frequently expected to customize their offerings to individual business customer needs.

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Professional purchasing-business goods are often purchased by trained purchasing agents who must follow their organizations’ purchasing policies, constraints, and requirements.

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Multiple buying influences-more people typically influence business buying decisions.

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Multiple sales calls- it takes four to five calls to close an industrial sale.

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Derived demand- this demand for business goods is ultimately derived from the demand for consumer goods.

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Inelastic demand-the total demand for many business goods and services is inelastic that is not much affected by price changes.

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Fluctuating demand-the demand for business goods and services tends to be more volatile than the demand for consumer goods and services.

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Direct purchasing- business buyers often buy directly from manufacturers rather than through intermediaries.

B. Business Market versus Consumer Market Similarities to the consumer market ● ● ● ● ● ● ●

Understanding deep customer needs Identifying areas for growth Improving value management techniques Calculating better marketing metrics Completing and growing in global markets Countering product commoditization Gain support for the marketing concept

Difference to the consumer market ● ● ● ● ● ● ●

Professional buyers Fewer, larger buyers Personal relationships Multiple sales calls Derived demand Inelastic demand Fluctuating demand

C. Buying Situations Types of Buying Situations 1. Straight re-buy-purchasing department reorders supplies on s routing basis, choosing from suppliers on an approved list. “Out-suppliers” attempt to offer something new or take advantage of dissatisfaction with current supplier. 2. Modified re-buy-buyer wants to modify product specifications, prices, delivery requirements or other terms. • The in-suppliers become nervous and wants to protect the account. • The out-suppliers sees an opportunity to propose a better offer to gain some business. 3. New task-purchaser buys a product or service for the first time. • The greater the cost or risk, the larger the number of participants, and the greater their information gathering-the longer the time to make a decision. • The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situation. D. Systems buying & selling Many business buyers prefer to buy a total solution to a problem from one seller and it is called systems buying. You have the Buyer that would solicit bids from the Prime Contractor who would enter into a contract with the buyer and assume full responsibilities for its completion. The Second Tier Contractor is hired by the Prime Contractor to perform specific tasks. Seller has increasingly recognized that Buyers like to purchase in this way & many have adopted systems selling as a marketing tool.

E. Participants in the business buying process 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. F. The buying center The decision unit of a buying organization is called the buying center. 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 to be purchased

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User-those who will use the product or service.

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Influencer-people who influence the buying decision, often by helping define specification.

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Decider-people who decide on product requirements or on suppliers.

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Approver-people who authorized the product actions of deciders or buyers

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Gatekeeper-people who have the power to prevent seller or information from reaching members of the buying centers.

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Buyers-people who have the authority to select the supplier and arranged the purchase terms.

G. Buying Center Influences Buying center influences how are they influenced the use of consumer behavior influences in this particular case their influences are deferred but they have interest they have various interest in the organization, so different groups of people. Example engineering personnel want to maximize the performance of the product; production personnel may want ease of use and reliability of supply; financial personnel focus on the economics of the purchase; purchasing maybe concerned with operating and replacement costs; union officials may emphasize safety issues they are all examining the proposal from their eyes to ultimately see the organization overall benefits from the relationship the authority is something in terms of who is going to have the authority to move ahead or to own it and what is the status of the decision criteria and the persuasiveness that is going to be involved to be able to manage & work ahead with those different business to business contacts that has been made by the organization.

H. Targeting Firms and Buying Process

The target market is obviously not the consumer but the target market are corporates or institutions who are going to be use their product or services to ultimately manufacture the final good or service which is then going to be reaching out to the end user or consumer or customer as the case maybe. Example the company sells disposable gown to hospital. The hospital personnel participate the buying decision. The purchasing personnel analyses whether the hospital to buy disposable or not. The operating room administrator compares various competitors’ products and prices. Administrator personnel considers absorbency, antiseptic and the quality design cost. The surgeon their decision retroactively by reporting their satisfactory with the particular brand. I. The Purchasing/procurement process When the purchases are made and the procurement process happens you are going to look another two components on which the evaluations are happening one is the Technical Component and the Cost. The technical aspects are evaluated by the functional and the other users whereas the procurement benefits or the cost benefits are examined by the procurement team in this particular case what is extremely relevant is you all parties involved must have a satisfactory opinion about the supplier to be able to get into a relationship so that all functions all aspects within different functions are able to work towards a common goal with the involvement in that decision with the involvement in partnership in this particular case of business to business partnership. Purchasing Department Perceptions In the past, purchasing department 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 department and elevate administration to vice presidential rank. These new, more strategically oriented purchasing departments have a mission to seek the best value from fewer and better supplier. The upgrading of purchasing means that business markets must upgrade their sales personnel to match the higher caliber of the business buyers. Purchasing Organization and Administration Most purchasing professionals describe their jobs as more strategic, technical, team oriented and involving more responsibility than ever before. Purchasing is doing more cross-functional work than it did in the past. Some companies have started to centralize purchasing. Headquarters identifies materials purchased by several divisions and buys them centrally, gaining more purchasing clout. For the business marketer, this development means dealing with fewer and higher-level buyers and using a national account sales group to deal with large corporate buyers. At the same time companies are decentralizing some purchasing operations by empowering employees to purchase small-ticket items through corporate purchasing card issued by credit card organizations. J. Stages in the Buying Process

In Modified rebuy or straight rebuy situations some stages are compressed or bypassed. Example the buyer normally has a favorite supplier or ranked list of suppliers and skip the search and proposal solicitation stages. Below are some important considerations in each of the eight stages. ● Problem Recognition Problem recognition like a consumer process had both internal stimuli as well as external stimuli. ✔ Internal stimuli-company decides to develop a new product and needs new equipment and materials. ✔ Eternal stimuli- the buyer may get new ideas at a trade show, see an ad or receive s call from a sales representative who offers a better product or a lower price. ● General need Description and product specification The buyer determines the needed items general characteristics and required quantity. For standard items this is simple. For complex items the buyer will work with other to define characteristics such as reliability, durability or price. Business marketers can help by describing how their products meet or exceed the buyers need. Product Value Analysis- is an approach to cost reduction that studies components to determine whether they can be redesigned, standardized or made by cheaper methods of production. ● Supplier Search The buyer tries to identify the most appropriate suppliers through trade directories, contacts with other companies, trade advertisements, trade shows and the internet. Companies that purchase over the Internet are utilizing electronic marketplaces in several forms. ✔ Catalogue sites- companies can order thousands of items through electronic catalogues distributed by eprocurement software. ✔ Vertical markets- companies buying industrial products such as plastics, steel, chemicals or services. Example plastics.com allows plastics buyers to search for the best prices among thousands of plastics sellers. ✔ Pure play auction sites- online marketplaces such as eBay and Freemarkets,com could not have been realized without the Internet. They can provide online auctions for buyers and sellers. ✔ Spot markets- a market where commodities and cash are bought and sold immediately, with no time between trades. ✔ Private exchanges- Hewlett-packard and IBM operate private exchanges to link with specially invented groups of suppliers and partners over the Web. ✔ Barter Markets-participants offer to trade goods or services.

✔ Buying alliances- several companies buy the same goods, they join together to form purchasing consortia to gain deeper discounts on volume purchase. E Procurement Websites organized around two types of ehubs: Vertical Hubs- centered on industries (plastics, steel, chemicals and papers) Functional Hubs-(logistics, media buying, advertising, energy management) Companies can use eprocurement in other ways: ✔ Set up direct extranet links to major suppliers- an extranet is a private computer network using Internet technology to which access is provided to select groups of vendors, suppliers or customers who need to access selected database and processes. ✔ Form buying alliances- a number of major retailers and manufacturers are part of a data sharing alliances called ISYNC. Several car companies formed convisint for the same reason. Convisint is the leading provider of services that can integrate crucial business information and processes between partners and suppliers. ✔ Set up company buying sites- general electric formed the trading process network (TPN) where it posts request for proposals, negotiates terms and place order. ● Proposal Solicitation You obtain proposals many times when you obtain proposals you obtain proposals from five anyone to shortlist two or top two or top three you might ask the three to submit all five but the top three to come and to make a formal presentation to the concerned audiences to the concerned stakeholders who can ask whatever questions they want to ask to the team of the supplier before they can make a final decision a formal presentation is usually done with organizations that are shortlisted to be able to understand their capabilities see clarifications on their submissions get more confidence in terms of the work that they have done before you can actually make a decision whether to engage them whether to recommend them first then to engage them. ● Supplier Selection Before selecting a supplier, the buying center will specify desired supplier attributes and indicate their relative importance. To rate and identify they use a Supplier- Evaluation Model. Attributes

Rating Scale Importance weights

Price

0.30

Supplier reputation

0.20

Poor

Fair

Good

Excellent

(1)

(2)

(3)

(4) x

X

Product reliability

0.30

Service reliability

0.10

Supplier flexibility

0.10

Total Score:

0.30(4) + 0.30(4) + 0.10(3)=3.5

x x X 0.20(3) 0.10(2)

+ +

Choice and importance of different attributes varies. Importance in routine order products •

Delivery reliability

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Price

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Supplier reputation

Procedural problem products-customer is uncertain to their ability to learn to use product. The three attributes are technical service , supplier flexibility & product reliability. Political problem products- that stir rivals in the organizations. The most important attributes are price, supplier reputation , product reliability, service reliability and supplier flexibility Overcoming price pressures and improving productivity The buying centre may attempt to negotiate with preferred suppliers for better prices and terms before making the final selection. The number of price-oriented buyers can vary by country depending on customer preferences for different service configurations and characteristics of the customers 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. While marketers may also improve their productivity to be able to deal with request for better prices, such improvements may lead to other advantages as well.

Number of Suppliers Buying centers must decide how many suppliers to use. Companies are increasingly reducing the number of suppliers. Ford and Motorola cut their supplier to 20-80%. They want their chosen supplier to be responsible , they want them to achieve continues quality and performance improvement at the same time they want a them to lower their prices each year.

These companies expect their supplier to work closely with them during product development, and value their suggestions. Companies that use multiple sources often cite the threat of labour strike as the biggest deterrent to single sourcing. ● Order routine specification After selecting suppliers, the buyer negotiates the final order, listing the technical specifications, the quality needed, the expected time of delivery, return policies, warranties and so on. In case of maintenance, repair and operating items, buyers are moving towards blanket contracts rather than periodic purchase order. A blanket contract establishes a long term relationship in which the supplier promises to resupply the buyer as needed. ● Performance Review The buyer periodically reviews the performance of the chosen supplier using one of three methods: ✔ The buyer may contact the end user and ask for evaluations ✔ The buyer may rate the supplier on several criteria using weighted-score method ✔ The buyer might aggregate the cost of poor performance to come up with adjusted costs of purchase, including the price Buygrid Framework Buyclasses New task

Modified rebuy

Straight rebuy

Problem recognition

Yes

Maybe

No

General need description

Yes

Maybe

No

Product specification

Yes

Yes

Yes

Supplier search

Yes

Maybe

No

Proposal solicitation

Yes

Maybe

No

Supplier selection

Yes

Maybe

No

Yes

Maybe

No

Yes

Yes

Yes

Order specification

routine

Performance review

K. Managing business to Business Relationship

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The need for managing business to business relationships

To improve effectiveness and efficiency, business suppliers and consumers are exploring different ways to manage their relationships. Closer relationships are driven in part by supply chain management, early supplier involvement and purchasing alliances. ● The role of uncertainty in business relationships Uncertainty refers to situations where the information available for decision making is too vague or too imprecise, to calculate the probabilities of different outcomes of the decision. Uncertainty can come in many forms and may relate to both institutional aspects and transactional aspects. Therefore, uncertainty has also to do with trust among business partners or in an industry. It highly damaging for efficiency of business relations and should therefore be reduced. Uncertainty leads to ✔ Unpredictable outcomes ✔ Irrational decisions ✔ Collective irrational outcomes ● Transaction Cost Economics Transaction cost economics there could be limitations with what the buyer and the seller have information on or know. Because of this there is a possibility for the well informed party to exploit unforeseen circumstance to increase their party’s self-interest gains even if it deals damage to the other party. Uncertainty in the business relationship arises as a result. This opportunism is a concern because it can cause market failure; in addition to that, firms are forced to allocate resources for control or monitor which could have been used for other more productive purposes. Opportunism are less likely to occur with suppliers that have established reputation because they have a valuable intangible asset tied with their name. Developing a significant time horizon and/or solidarity norm would be beneficial to reduce the opportunism. Companies are likely to act towards their self-interest whenever possible. However, people will only act opportunistically some of the time and not all people are opportunists. The prudent way of thinking now is to identify who is would be the...