Chapter 6 Business Markets and Business Buyer Behavior

Learning Objectives 1. Define the business market and explain how business markets differ from consumer markets. 2. Identify the major factors that influence business buyer behavior. 3. List and define the steps in the business buying decision process. 4. Compare the institutional and government markets and explain how institutional and government buyers make their buying decisions. Chapter Overview This chapter examines business customersthose that buy goods and services for use in producing their own products and services or for resale to others. As with firms selling to final buyers, firms marketing to business customers must build profitable relationships with business customers by creating superior customer value. Chapter Outline 1.0 INTRODUCTION After discovering confidential records of hospital patients on a used PC, a Finnish student came up with a radical idea to provide a solution for data erasure and end-of-cycle issues. This led to the creation of Blancco which now has affiliates and business partners in over 20 countries around the world. Amongst their customers are governments, banks and defense organizations. They also count Dell, NASA, the Royal Airforce, the US Army, Hewlett-Packard and Toyota as their customers. Blancco and its potential customers recognize the fact that the data erasure needs to be absolutely fool-proof, international recommendations, certificates and endorsements from existing customers has helped to establish the quality and reliability of the service being offered. The vast majority of the Blancco services and products are developed in-house, global standards based solutions are being developed with key partners. Blancco has become one of the global leaders in data erasure arising out of a unusual situation that occurred back in 1997. Opening Vignette Questions 1. What are Blanccos customers looking for when buying product or service such as this? Does Blancco range fit the bill? 2. Who are Blanccos major customers in terms of decision-makers? What are the key criteria for the purchasing decisions? 3. How does the Blancco story relate to the major concepts of chapter 6 on business buyer behavior? Most large companies sell to other organizations. Business buyer behavior refers to the buying behavior of the organizations that buy goods and services for use in the production of other products and services that are sold, rented, or supplied to others. In the business buying process, buyers determine which products and services their organizations need to purchase and then find, evaluate, and choose among alternative suppliers and brands. Therefore, business-to-business (B-to-B) marketers must do their best to understand

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business markets and business-buyer behavior. Furthermore, they must build profitable relationships with their customers by creating superior customer value. 2.0 BUSINESS MARKETS The business market is huge. In fact, business markets involve far more dollars and items than do consumer markets. The main differences between consumer and business markets are in market structure and demand, the nature of the buying unit, and the types of decisions and the decision process involved (see Table 6.1, p. 191 in the textbook). 2.1 Market Structure and Demand The business marketer normally deals with far fewer but far larger buyers than the consumer marketer does. Even in large business markets, a few buyers often account for most of the purchasing. Furthermore, business demand is derived demandit ultimately derives from the demand of consumer goods. Many business markets have inelastic demand; that is, total demand for many business products is not affected much by price changes, especially in the short run. Finally, business markets have more fluctuating demand. The demand for many business goods and services tends to change moreand more quicklythan the demand for consumer goods and services does. 2.2 Nature of the Buying Unit Compared with consumer purchases, a business purchase usually involves more decision participants and a more professional purchasing effort. Often, trained purchasing agents handle business buying. The more complex the purchase, the more likely it is that several people will participate in the decision-making process. 2.3 Types of Decisions and the Decision Process Business buyers usually face more complex buying decisions than consumers do. Purchases often involve large sums of money, complex technical and economic considerations, and interactions among many people at many levels of the buyers organization. The business buying process also tends to be more formalized than the consumer buying process. In the business buying process, buyer and seller are often much more dependent on each other. In the long run, business-to-business marketers keep a customers sales and create customer value by meeting current needs and partnering with customers to help them solve their problems. Many customer companies are now practicing supplier development, systematically developing networks of supplier-partners to ensure an appropriate and dependable supply of products and materials that they will use in making their own products or reselling to others. 3.0 BUSINESS BUYER BEHAVIOR At the most basic level, marketers want to know how business buyers will respond to various marketing stimuli. Within the organization, buying activity consists of two major parts: the buying center and the buying decision process. 3.1 Major Types of Buying Situations

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There are three major types of buying situations. In a straight rebuy, the buyer reorders something without any modifications. It is usually handled on a routine basis by the purchasing department. In a modified rebuy, the buyer wants to modify the product specifications, prices, terms, or suppliers. A company buying a product or service for the first time faces a new task situation. Increased costs or risks in new situations will require more participation in decision-making and more information. Many business buyers prefer to buy a packaged solution to a problem from a single seller. Instead of buying and assembling the components, the buyer may ask sellers to supply the components and assemble the package or system. Thus, systems selling (solution selling) is often a key business marketing strategy for winning and holding accounts. 3.2 Participants in the Business Buying Process The decision-making unit of a buying organization is called its buying center: all the individuals and units that participate in the business decision-making process. The buying center includes all members of the organization who play any of five roles in the purchase decision process. Users are members of the organization who will use the product or service. Influencers often help define specifications and provide information for evaluating alternatives. Buyers have formal authority to select the supplier and arrange terms of purchase. Deciders have formal or informal power to select or approve the final suppliers. Gatekeepers control the flow of information to others. The buying center is not a fixed and formally identified unit within the buying organization. It is a set of buying roles assumed by different people for different purchases. Within the organization, the size and makeup of the buying center will vary for different products and for different buying situations. The buying center concept presents a major marketing challenge. The business marketer must learn who participates in the decision, each participants relative influence, and what evaluation criteria each decision participant uses. The buying center usually includes some obvious participants who are involved formally in the buying process. It may also involve less obvious, informal participants, some of whom may actually make or strongly affect the buying decision. Sometimes, even the people in the buying center are not aware of all the buying participants. 3.3 Major Influencers on Business Buyers Both reason and emotion affect the decision-making process of business buyers. When suppliers offers are very similar, business buyers have little basis for strictly rational choices; therefore, personal factors can play a larger role in their decisions. However, when competing products differ greatly, business buyers are more accountable for their choices and tend to pay more attention to economic factors. 3.3.1 Environmental Factors

Business buyers are heavily influenced by factors in the current and expected economic environment, such as the level of primary demand, the economic outlook, and the cost of money. Another environmental factor is the supply of key materials. Business buyers also react to technological, political, and competitive developments in the environment. Culture and customs can strongly influence business buyer reactions to the marketers behavior and strategies, especially in the international marketing environment.

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3.3.2

Organizational Factors

Each buying organization has its own objectives, policies, procedures, structure, and systems, and the business marketer must understand those factors as well. 3.3.3 Interpersonal Factors

The buying center usually includes many participants who influence each other; so interpersonal factors also influence the business buying process. It is often difficult to assess such interpersonal factors and group dynamics. Whenever possible, business marketers must consider these factors when designing strategies. 3.3.4 Individual Factors

Each participant in the business buying-decision process brings in personal motives, perceptions, and preferences. These individual factors are affected by personal characteristics such as age, income, education, professional identification, personality, and attitudes toward risk. Buyers also have different styles. Some may be technical types, while others may be intuitive negotiators. 3.4 The Business Buying Process Figure 6.3 lists the eight stages of the business-buying process (see p. 200 in your textbook). Buyers who face a new-task buying situation usually go through all stages of the buying process. Buyers making modified or straight rebuys may skip some of the stages. This section examines the steps for a typical new task buying situation. 3.4.1 Problem Recognition

Problem recognition can result from internal or external stimuli. Internally, the company may decide to launch a new product that requires new production equipment and materials. Externally, the buyer may get some new ideas at a trade show, see an ad, or receive a call from a salesperson who offers a better product or a lower price.

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3.4.2

General Need Description

The buyer next prepares a general need description that describes the characteristics and quantity of the needed item. For standard items, this process presents few problems. For complex items, however, the buyer may have to work with othersengineers, users, consultantsto define the item. 3.4.3 Product Specification

The buying organization next develops the items technical product specifications, often with the help of a value analysis engineering team. Product value analysis is an approach to cost reduction in which components are studied carefully to determine if they can be redesigned, standardized, or made by less costly methods of production. The team decides on the best product characteristics and specifies them accordingly. 3.4.4 Supplier Search

The buyer now conducts a supplier search to find the best vendors. The buyer can compile a small list of qualified suppliers by reviewing trade directories, doing a computer search, or phoning other companies for recommendations. The newer the buying task, the more complex and costly the item, and the greater the amount of time the buyer will spend searching for suppliers. 3.4.5 Proposal Solicitation

In the proposal solicitation stage of the business buying process, the buyer invites qualified suppliers to submit proposals. When the item is complex or expensive, the buyer will usually require detailed written proposals or formal presentations from each potential supplier. 3.4.6 Supplier Selection

During supplier selection, the buying center often will draw up a list of the desired supplier attributes and their relative importance. Buyers may attempt to negotiate with preferred suppliers for better prices and terms before making the final selections. In the end, they may select a single supplier or a few suppliers. 3.4.7 Order-Routine Specification

The buyer now prepares an order-routine specification. It includes the final order with the chosen supplier or suppliers and lists items such as technical specifications, quantity needed, expected time of delivery, return policies, and warranties. Many large buyers now practice vendor-managed inventory, in which they turn over ordering and inventory responsibilities to their suppliers.

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3.4.8

Performance Review

The performance review may lead the buyer to continue, modify, or drop the arrangement. The eight-stage model provides a simple view of the business buyingdecision process. The actual process is usually much more complex. Overall, the eight-stage buying-process model provides a simple view of business buying as it might occur in a new task buying situation. However, the actual process is usually much more complex. Therefore, the seller must manage the total customer relationship, not just the individual purchases. 3.6 E-Procurement: Buying on the Internet Electronic purchasing, or e-procurement, gives buyers access to new suppliers, lowers purchasing costs, and hastens order processing and delivery. In turn, business marketers can connect with customers online to share marketing information, sell products and services, provide support services, and maintain ongoing relationships. E-procurement can be conducted in several ways. Companies can conduct reverse auctions or engage in online trading exchanges. Companies can also conduct e-procurement by setting up their own company buying sites, or by setting up extranet links with key suppliers. B-to-B marketers can support e-procurement by creating well-designed, easy-to-use Web sites. Business-to-business e-procurement offers many benefits. First, it shaves transaction costs and results by promoting more efficient purchasing for both buyers and suppliers. Eprocurement reduces the time between order and delivery. Moreover, a web-powered purchasing program minimizes paperwork and tracks all purchases. Finally, eprocurement allows purchasing personnel to focus on strategic issues, such as finding better supply sources and working with suppliers to reduce costs. E-procurement is not without problems, however. Using the web to conduct business can erode decades-old customer-supplier relationships, and make it easy for buyers to pit suppliers against one another. E-procurement can also cause security problems, so companies are spending millions on defensive strategies to keep hackers at bay. 4.0 INSTITUTIONAL AND GOVERNMENT MARKETS Much of this discussion also applies to the buying practices of institutional and government organizations. However, these two nonbusiness markets have additional characteristics and needs. 4.1 Institutional Markets The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that provide goods and services to people in their care. Institutions differ from one another in their sponsors and in their objectives. Therefore, each institution has different buying needs and resources. Institutional markets can be huge, such as the massive and expanding system of U.S. prisons. Furthermore, many institutional markets, such as hospitals, have low budgets and captive patrons. In response to such circumstances, many marketers set up separate divisions to meet the special characteristics and needs of institutional buyers. 4.2 Government Market

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The government market offers large opportunities for many companies, both big and small. With all the red tape, why would any firm want to do business with the U.S. government? The reasons are simple. In the United States alone, federal, state, and local governments contain more than 82,000 buying units that purchase more than $1 trillion in goods and services each year. Government buying and business buying are similar in many ways, but there are also significant differences. For example, government organizations typically require suppliers to submit bids, and normally they award the contract to the lowest bidder. In addition, government buyers are affected by environmental, organizational, interpersonal, and individual factors. For one thing, outside publics, ranging from Congress to advocacy groups, watch how the government spends taxpayers money. Noneconomic criteria also play a growing role in government buying, such as preferences for small or minorityowned businesses. Sellers must understand such factors when deciding to seek government business. Most governments provide would-be suppliers with detailed guides describing how to sell to the government. In several major cities, the General Services Administration operates Business Service Centers with staffs to provide a complete education on the way government agencies buy, the steps that suppliers should follow, and the procurement opportunities that are available. Still, suppliers have to master the system and find ways to cut through the red tape, especially for large government purchases. Companies that sell to the government have not been very marketing oriented for a number of reasons. For one thing, total government spending is determined by elected officials, and government buying has emphasized price rather than product differentiation. However, some companies such as GE, Kodak, and Goodyear have established separate government marketing departments. Other companies, such as Dell, have established customized marketing programs for government buyers. During the past decade, a great deal of the governments buying has gone online. For instance, The Federal Business Opportunities website provides a single point of entry for commercial vendors and government buyers. Student Exercises 1. Key Term: B-to-B Marketers

In essence, B-to-B marketers are those organizations that sell to other organizations. This includes companies as diverse as Caterpillar, General Mills, and Procter & Gamble. Take a look at the Folgers Coffee (a product of the J.M. Smucker Company) website (www.folgers.com). From this review, why would you say Folgers (and J.M. Smucker Company) operates as a B-to-B marketer? 2. Key Term: Derived Demand

Derived demand is demand that originates from the consumer and their purchase of consumer goods. In the past, HP, Dell, and other computer manufacturers were buying Intel chips (www.intel.com) because consumers were buying PCs. However, the proliferation of smartphones and tablet computers (using competitors chips) has slowed the demand for personal computers, and along with it, the demand for Intels computer

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chips. Browse the Internet to discover Intels efforts to boost demand for its products and stop further erosion in its profits. 3. Key Term: Supplier Development

Supplier development involves a systematic approach to developing networks of supplierpartners to ensure that an organization will have appropriate and dependable supplies of the products and materials used in making their own products or in reselling to others. This is the result of shifts in the relationship between customers and suppliers from somewhat adversarial to close alliances. Visit IKEA, the worlds largest furniture retailer online at www.ikea.com/us/en/. What kinds of supplier partnerships must IKEA develop and maintain to continue offering simple, trendy furniture at affordable prices? 4. Key Term: Straight Rebuy

There are only three major types of buying situations, one of which is the straight rebuy. A straight rebuy occurs when a buyer reorders something without any modification. Think about your favorite restaurant. What would be some examples of straight rebuy transactions at the restaurant? 5. Key Term: Systems Selling

Systems selling occurs when a vendor provides a packaged solution to a problem, thus alleviating a company from having to make all of the separate decisions involved in a complex buying situation. Browse the Internet to locate advertisements for two companies that offer system-selling solutions. What are the similarities and differences in how the two companies represent their products or services? 6. Key Term: Buying Center

The buying center of an organization consists of all the individuals and units that play a role in the purchase decision-making process. To bring the buying center to a more personal level, consider a situation in which your family will be buying a big-screen TV. Describe the roles your family members would play in buying center terms. 7. Key Term: Environmental Factors

Business buyers are heavily influenced by factors in the current and expected economic environment. The 2011 Great East Japan Earthquake triggered a massive tsunami, which crippled the Fukushima I Nuclear Plant. General Electric designed all six reactors at the Fukushima facility. How will business buyers at GE respond to environmental factors resulting from this catastrophe? 8. Key Term: Proposal Solicitation

The typical business buying process includes eight stages. At the proposal solicitation stage, an organization invites qualified suppliers to submit proposals based on a need that was identified in the problem recognition stage. Visit the Federal Business Opportunities website (www.fbo.gov) where anyone can search for active federal opportunities. Enter the keyword proposal and click the search button to see the results. Identify several types of proposals that are being solicited and the government agencies that are requesting them.

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Key Term: E-Procurement

Online purchasing is growing at a very rapid pace, thanks to advances in information technology. B-to-B marketers help business customers to purchase online by providing them with easy-to-use websites. Check out the e-procurement site for the Business Solutions Division at Office Depot (https://bsd.officedepot.com/). What kinds of business solutions are being offered? What kinds of industry solutions are being offered? 10. Key Term: Institutional Markets

The buying behavior of businesses and the buying behavior of nonbusiness institutions and government organizations share many similarities. However, the nonbusiness markets have additional characteristics and needs. Since 1934, the Educational & Institutional Cooperative Purchasing Organization (E&I) has been satisfying the demands for greater purchasing efficiency at colleges, universities, prep schools, hospitals, healthcare, and K12 institutions. Pay a visit to E&I at www.eandi.org. Based on what you see there, how is E&I helping to address the needs and concerns of its members? Marketing ADventure Exercises 1. Ad Interpretation Challenge: Derived Demand Ad: FabricsGore-Tex

Derived demand is business demand that ultimately comes from the demand for consumer goods or services. Review the advertisement for Gore-Tex on p. 192 in your textbook. How does Gore-Tex provide an example of derived demand?

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2.

Ad Interpretation Challenge: Inelastic Demand Ad: TiresGoodyear

Many business markets have inelastic demandmeaning that total demand for many business products is affected very little by price changes, at least in the short run. Visit Goodyear online at (www.goodyear.com) and review the companys product line. What business products, used by Goodyear, may display inelastic demand? 3. Ad Interpretation Challenge: Straight Rebuy Ad: Home FurnishingsIKEA

In a straight rebuy, a buyer reorders something without any modification. Review the ad for IKEA on p. 194 in your textbook. Out of the thousands of items it stocks, think of some items that IKEA would acquire in a straight rebuy. 4. Ad Interpretation Challenge: Systems Selling Ad: ServicesUnited Parcel Service (UPS)

Many business buyers prefer to purchase a packaged solution to a problem from a single supplier. This keeps the company from having to buy the separate components and create the package solution themselves. This is systems selling. Review the advertisement for UPS on p. 196 in the textbook. How is UPS engaging in systems selling? 5. Ad Interpretation Challenge: Major Influences on Business Buyers Ad: TrucksPeterbilt

Business buyers are subject to many influences when they make buying decisions. Some marketers assume that the major influences are economic. They think buyers will favor the supplier who offers the lowest price, the best product, or the most service. Today, however, most B-to-B marketers recognize that emotion also plays an important role in business buying decisions. Consider the Peterbilt advertisement on p. 197 in your textbook. Identify the economic and emotional components of that advertisement. 6. Ad Interpretation Challenge: Environmental Factors Ad: International MarketingReal Marketing 6.2

Factors in the current and anticipated economic environment affect business buyers. In addition to technological, political, and competitive developments, culture and customs influence the reactions of business buyers to the behavior and strategies of marketers. This is especially true in the international marketing environment. Suppose that your next marketing assignment required you to do business overseas (say in China, Japan, Saudi Arabia, Italy, Thailand, Germany, Britain, or France). After you have picked a country, browse the Internet to learn how that countrys culture differs from the culture of the United States (you can also get some ideas from the Real Marketing 6.2 feature on pp. 199200 in the textbook). Based on what you have learned, how could you prepare for doing business in that country? 7. Ad Interpretation Challenge: Problem Recognition Ad: Engineering ServicesMakino

The first stage of the business buying process is when someone in the company recognizes a problem, or a need that can be met by acquiring a good or a service. Review

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the ad for Makino on p. 201 in your textbook. How could this advertisement be useful in helping a member of the buying center realize that a problem exists and that Makino can provide the solution to that problem? 8. Ad Interpretation Challenge: E-Procurement Ad: Computing ServicesCisco

Advances in information technology have changed the face of the B-to-B marketing process. Review Ciscos ad on p. 203 in your textbook, and then go to Ciscos website at (www.cisco.com). Once you are there, look for the Solutions For section, and click on Small Business to go to Ciscos resource page for small businesses. How does this resource give small businesses access to new suppliers, lower purchasing costs, and expedite order processing and delivery? 9. Ad Interpretation Challenge: Institutional Markets Ad: Health CareCardinal Health

The institutional market includes hospitals and other institutions that provide goods and services to people in their care. Cardinal Health, Inc. (www.cardinal.com) is a Fortune 17 company that improves the cost-effectiveness of healthcare. What products and services does Cardinal Health provide that will help pharmacies, hospitals, and ambulatory care sites focus on patient care while reducing costs, improving efficiency and quality, and increasing profitability? 10. Ad Interpretation Challenge: Government Markets Ad: E-ProcurementGovernment Services Administration

In the United States alone, federal, state, and local governments contain more than 82,000 buying units that purchase more than $1 trillion in goods and services each year. The U.S. General Services Administration controls more than one-quarter of the federal governments procurement dollars. Its website (www.gsaadvantage.gov) supports online government purchasing activity. What are some of the products and services that may be obtained via this website?

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