Analyzing business markets

and business buying behavior

By: Agung Utama
What is organizational buying?
Organizational buying: decision making
process by which formal organizations
establish the need for purchased products
and services, identify, evaluate, and choose
among alternative brands and suppliers.
The characteristics of business
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,
supplied to others.
• The major industries making up business
markets are: agriculture, transportation,
manufacturing, mining, construction,
communication, banking, finance,
insurance, public utilities, distribution and
services.
Several characteristics of business markets:
 Fewer buyer: the business markets normally
deals with far fewer buyers than the consumer
marketer does.
 Larger buyer : a few large buyers do most of the
purchasing in such industries as aircraft engines
and defense weapons.
 Close supplier-customer relationship : because
of the smaller customer base and importance of
and the power of the larger customers, supplier
are frequently expected to customize their
offerings to individual business customer needs.
 Geographically concentrated buyers: the
geographical concentration of producers helps
to reduce selling cost.
 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 consumer.
 In elastic demand : the total demand for many
business goods and services is in elastic
demand, that is not much affected by price
changes. Demand is especially in elastic in the
short run because producers can not make
quick changes in production methods.
Fluctuating demand : the demand for many
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. It is called the acceleration
effect.
 Professional purchasing : business goods are
purchased by trained purchasing agents, who
must follow their organization’s purchasing
policies, constraints, and requirements.
 Several buying influences: more people
typically influence business buying decisions.
Buying committees consisting of technical
experts and even senior management are
common in the purchase of major goods.
 Multiple sale calls: because more people are
involved in the selling process, it takes
multiple sales calls to win most business order
and some sales cycles can take years.
 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).
 Reciprocity: business buyers often select
suppliers who also buy from them.
 Leasing: many industrial buyers lease instead
of buy heavy equipment like machinery and
trucks. The lessee gain a number of
advantages: conserving capital, getting the
latest products, receiving better services, and
gaining some tax advantages.
 Buying situations
• There are three types of buying situations
(Patrick Robinson and others):
– Straight rebuy: a buying situation in which the
purchasing department reorders on a routine
basis (eg., office supplies).
– Modified rebuy: a buying situation in which the
buyer wants to modify product specifications,
prices, delivery requirements or other terms.
– New task: a buying situation in which purchaser
buys a product or service for the first time (eg.,
office building). The greater the cost or risk, the
larger the number of decision participants and
the greater their information gathering, and
therefore the longer the time to decision
Systems buying and selling
Many business buyers prefer to buy a total
solution to their problem from one seller.
Called system buying.
This practice originated with government
purchases of major weapons and
communication systems.
Participants in the business buying
process
Who does the buying of goods and services
needed by business organizations?
Webster and Wind call the Buying Centre,
which consists of all those individuals and
groups who participate in the purchasing
decisions making process, who share some
common goals and the risk arising from the
decisions.
• Seven roles which playing by the all members in
the buying center:
– Initiator: those who request that something to be
purchased
– Users: those who will use the product or service
– Influencers: people who influence the buying
decisions.
– 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.
– Gatekeepers: people who have power to prevent
sellers or information from reaching members of the
buying centre. For example, purchasing agents,
 Major influences on industrial
buying behavior
ENVIRONMENT
AL
• Level of
demand
• Economic
outlook
INDIVIDUAL
• Interest rate
ORGANIZATION INTERPERSON • Age
• Rate of
AL AL • Income
technologica
• Objectives • Interests • Education
l change Busine
• Policies • Authority • Job position
• Political and ss
• Procedures • Status • Personality
regulatory Buyer
• Organization • Emphaty • Risk
developmen
al structures • persuasiven attitudes
t
• Systems ess • culture
• Competitive
developmen
ts
• Social
responsibilit
yu concerns
Environmental factors
Business buyers pay close attention to current
and expected economic factors: level of
production, investment, consumer spending,
and the interest rate.
In a recession, business reduce their investment
in plant, equipment, and inventories.
Business buyers actively monitor technological,
political regulatory, and competitive
developments.
Organizational factors
Every organization has specific purchasing
objectives, policies, procedures, organizational
structures and systems.
Interpersonal and individual factors
Buying centers usually include several
participants with differing interest, authority,
status, empathy, and persuasiveness.
Each buyer caries personal motivations,
perceptions, and preferences, which are
influenced by the buyers age, income,
education, job position, personality, attitudes
toward risk, and culture.
 Cultural factors
Here are some rules of social and business etiquette
that marketers should understand when doing
business in other countries:
 France: if you do not speak french, apologize for your lack of
knowledge. The french are quite proud of their language and
believe that everyone should feel privileged to speak it.
 Germany: Germans are sticklers for titles. Try to introduce
people using their full, correct title, no matter how long it is.
 Japan: Most Japanese businesspeople know what will be
discussed at a meeting, how everyone feels about it, and how
it will affect their business before they even get there
 Korea: Korean do not like foreigners to assume that their
culture is the same as Japan.
Types of Purchasing Process
 Peter Krajic distinguished four product related
purchasing process:
1. Routine product: these product have low
value and cost to the customer and involve
little risk (office supplies)
2. Leverage product: these products have high
value and cost to the customer but involve
little risk of supply because many companies
make them (engines pistons)
3. Strategic products : these products have high
value and cost to the customer, and also
involve high risk (main frame computers)
4. Bottleneck products: the products have low
value and cost to the customer but they
The purchasing/procurement
process
• Stages in the buying process
– Problem recognition
– General needs description and product
specification
– Supplier search
– Proposal solicitations
– Supplier selection
– Order routine specification
– Performance review
Problem Recognition

Someone recognizes a problem or need

that can be met by acquiring a good or
service.
General Need Description
and Product Specification

Buyer determines the needed item’s

general characteristics and required
quantity.

Product value analysis (PVA)—a cost-

reduction approach in which components
are studied to determine if they can be
redesigned, standardized, or made by
cheaper production methods.
Supplier Search

Buyer now tries to identify the most

appropriate suppliers.

Purchasing Web sites:

Vertical hubs—centered on industries.
Functional hubs—centered on functions.
Proposal Solicitation

Buyer invites qualified suppliers to submit

proposals.
Supplier Selection
Buying center specifies desired supplier
attributes and indicates their relative
importance.
Suppliers are rated in these attributes.
Potential suppliers must:
Develop a compelling value proposition.
Overcome price pressures.
Buying centers must decide how many
suppliers to use.
Order-Routine Specification
 Buyer negotiates the final order, listing the
technical specifications, the quantity needed, the
delivery schedule, and so on.
 Blanket contracts establish a long-term relationship.
 Also called stockless purchase plans because the seller
holds the stock.
 Vendor-managed inventory—suppliers are privy to
the customer’s inventory levels and are responsible
for replenishing it automatically through continuous
replenishment programs.
Performance Review
Buyer periodically reviews the performance
of the chosen supplier using one of three
methods:

Contact the end users and ask for their

evaluations.
Rate the supplier on several criteria using a
weighted score method.
Aggregate the cost of poor supplier
performance to come up with adjusted costs
of purchase, including price.
Building Business
Relationships
Corporate credibility and trust
Expertise
Trustworthiness
Likeability
Risks
Specific investments—helps firms grow
profits and achieve their positioning, but
entail risk.
Opportunism—some form of cheating or
undersupply relative to an implicit or
explicit contract.
What Is Organizational Buying?
Organization 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—organizations that
acquire goods and services used in the
production of other products or services
that are sold, rented, or supplied to other
customers.