BUSINESS MARKETS BUYING PROCESS

Business organizations do not only sell, they also buy vast quantities of new materials, manufactures components, plant and equipment, supplies and business services. In U.S. there are over 13 million buying organizations where sellers need to understand these organizations needs, resources, policies and buying procedures. What is Organizational Buying ? Organizational buying is 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. Organizational buying is a complex process of decision making and communication, which takes place over time, involving several organizational members and relationship with other firms and institutions. Business Market v/s Consumer Market The business market consists of all the organizations that acquire goods & services used in the production of other products or services that are sold, rented or supplied to others. The main industries business market are agriculture, forestry, fisheries, mining, manufacturing, construction, transportation, communication, banking, finance, insurance, distribution and services etc.

A) Who is in the Business Market ? Business markets have several characteristics: Multi-personal buying activity Formal activity to follow the procedure Longer time lag between efforts & results Rational but also emotional activity Uniqueness of an organization no two organizations are similar in their buying behavior & decision due to objectives, resources & so on. Characteristics according to P. Kotler : Fewer buyers Larger buyers Close supplier-customer relationship to customize their offerings, maintain relationships between customers & suppliers. Geographical Concentrated buyers - around the main industrial belts. Derived Demand the demand for business goods is ultimately derived from the demand for consumer goods. Inelastic demand 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 items total cost.

Fluctuating Demand it is due to acceleration effect i.e. demand for new plants & equipment. Professional purchasing by trained purchasing agents to follow purchasing policies, constraints and requirements. Several buying influences buying committees consisting technical experts, senior management officials. Multiple sales calls as more people are involved in the selling process, it takes multiple sales calls to win most business orders, & the sales cycle can take years. Direct purchasing often buy directly from manufacturers rather than through intermediaries, especially items that are technically complex or expensive. Reciprocity business buyers often select suppliers who also buy from them - a paper manufacturer that buys chemicals from a chemical company that buys a considerable amount of its paper. Leasing many industrial buyer lease instead of buying heavy equipment - machinery & trucks - thus saving capital, receiving better services etc.

B) What Buying Decisions ? The business buyers faces many decisions in making a purchase. The number of decisions depends on the type of buying situations complexity of the problem being solved, newness of the buying requirement, number of people involved, and time required. The three types of buying situations are Straight Rebuy : The straight rebuy is a buying situation in which the purchasing department reorders on a routine basis e.g. office supplies bulk chemicals etc. The buyer chooses from suppliers on an approved list. The supplier 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 to exploit dissatisfaction with a current supplier. Their goal is to get a small order and then enlarge their purchase share over time.

Modified Rebuy : Is a situation, in which the buyer wants to modify product specifications, prices, delivery requirements or other terms which involves additional decision 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 : Is a buying situation in which a purchaser buys a product/service for the first time e.g. a building, new security system etc. The greater the cost/risk, the larger the number of decision participants & greater their information gathering & longer the time to decision completion. New task buying process through several stages awareness, interest, evaluation, trial adoption. The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new task situation. The new task situation is the marketers greatest opportunity and challenge.

System 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 Govt. purchases of major weapons and communication systems. The prime contractor would thus provide 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. 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. C) The Buying Centre who participates in buying process The buying centre is composed of all those individuals and groups who participate in the purchasing decision making process, who share some common goals and the risks arising from the decisions . The buying centre includes all members of the organization who play any of seven roles in the purchase decision process.

Initiators who request for purchase, may be users or others. Users who will use the product. Influencers who influence the buying decision- who help define specification, provide information for evaluation alternatives. Technical personnel are particularly important influencers. Deciders who decide on the product requirements or on suppliers. Approvers who authorize the proposed action of deciders or buyers. Buyers who have formal authority to select the supplier & arrange the purchase terms play major role in selecting vendors & negotiating. Gatekeepers who have the power to prevent sellers or information from reaching members of the buying center e.g. purchasing agents, receptionists, telephone operator etc.

To target their efforts properly, business marketers have 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 ?

When a buying center includes many participants, the business marketers will not have the time or resources to reach all of them. Small sellers concentrate on reaching the key buying influencers. Large sellers go for multi-level in-depth selling to reach as many participants as possible.

D) Major Influencers on industrial buying Business buyers respond to many influences when they make their decisions. When supplier offerings are similar, business buyers can satisfy the purchasing requirements with any supplier, and they place more weight on the personal treatment they receive. When supplier offering differ substantially, business buyers are more accountable for their choices & pay more attention to economic factors. Business buyers respond to four main influences :Environmental, Organizational, Interpersonal, & Individual.
Environmental influences : includes - Level of demand, Economic outlook, Interest rate, Rate of technological change, Political & regulatory developments, Social responsibility concerns.

Business buyers pay close attention to current and expected economic factors level of production, investment, consumer spending & the interest rate. Business buyers actively monitor technological, political-regulatory and competitive developments. Organization influences : includes Objectives, Policies, Procedures, Organizational structure, and Systems. Business marketers need to be aware of the following organizational trends in the purchasing area : Purchasing department upgrading Cross-functional roles (is now less clerical and more strategic, technical, team oriented & involving more responsibility) Centralized purchasing thereby gaining more purchasing clout Decentralized purchasing of small ticket items Internet purchasing - the main implications are : save transaction costs for both buyers/suppliers, reduce time between orders & delivery, consolidate purchasing systems, cut jobs of clerks & order processors, force more intimate relationships between partners & buyers, erode supplier-buyer loyalty, level playing for large & small suppliers, create potential security disasters, long term contracts, purchasing performance evaluation and buyers professional development, lean production JIT Japanese companies in which zero inventory with 100% quality.

Interpersonal Influences : includes Interests, Authority, Status,

Empathy, Persuasiveness, and buying centers usually include several participants with these interests. The business marketer is not likely to know what kind of group dynamics take place during the buying decision process, although whatever information he or she can discover about personalities and inter-personal factors would be useful.

Individual Influences : includes Age, Income, Education, Job Position,

Personality, Risk Attitudes, and Culture. Each buyer carries personal motivations, perceptions, and preferences as influenced by the buyers these characteristics. Buying factors vary from one country to another & marketers should understand when doing business in a particular country.

E) The Purchase/Procurement Process :

We can distinguish between three company purchasing orientations - Buying - Procurement & - Supply Management

BUYING means executing discrete transactions with suppliers where relationships are usually at arms length. The focus is short term, tactical & to obtain the lowest price for a given quality. Buyers use two tactics commoditization where price is very crucial and multi-sourcing with several sources to procure to reduce risk & these buyers follow established procedures and rely on proven vendors. Many firms have moved to a Procurement Orientation, in which they simultaneously seek quality improvements and cost reductions wherein they seek savings through better management by developing more collaborative relationships with a smaller number of suppliers. They work closely with their suppliers in early supplier involvement programs on materials handling, inventory levels, JIT management and even product co-design. Procurement buyers focus their efforts on negotiating long term contracts with major suppliers to ensure the timely flow of materials to achieve win-win situation for both. Within the firm, the procurement people work closely with the manufacturing people on materials requirement planning (MRP) to make sure that supplies arrive on time.

The SUPPLY management orientation involves a further broadening of purchasing role where it is less of a department and more of a strategic valueadding operation. The firm focuses on how to improve the whole value chain from raw material to end users. It operates as a lean enterprise responding to demand pull rather than supply push. The supply managers determine which supplies to source internally and which to outsource. They work with a smaller group of suppliers who participate more actively in product design as well as in cost saving programs. Stages in the buying process how do buyers make their buying decision ? Problem Recognition : it begins when someone in the company recognizes a problem or need that can be met by acquiring a good/service. It can be triggered by internal or external stimuli. General Need Description : buyer determines the needed items general characteristics and required quantity. For standard items, it is not a very involved process, but for complex items, buyer will work with engineers, users etc. to define the characteristics which may include reliability, durability, price or other attributes.

Product Specification : the buyer now develops the items technical specifications often the engineering team through product-value-analysis (PVA) will decide it. PVA is an approach to cost reduction in which components are carefully studied to determine if they can be redesigned or standardized or made by cheaper methods of production.

Supplier Search : to identify the most appropriate suppliers through trade directories, internet & advertisement. The suppliers task is to get listed in major on-line catalogs or services, develop a strong advertisement &
promotion programs and build a good reputation in the market place.

Proposal Solicitation : the buyer invites qualified suppliers to submit proposals. Business marketers must thus be skilled in researching, writing, & presenting proposals. Supplier Selection : before selecting a supplier, the buying center will specify desired suppliers attributes & indicate their relative importance. It will then rate suppliers on these attributes & identify the most attractive suppliers.

The attributes could be : Price, Supplier reputation, Product reliability, Service reliability, Supplier flexibility. As part of the buyer selection process, buying centers must decide how many suppliers to use. Increasingly, however, companies are reducing the number of suppliers. Companies who use multiple sources often cite the threat of labor strike as the biggest deterrent to single sourcing and also single source tendency to become complacent. Order Routine specification Order placement : after selecting the suppliers, the buyer negotiates the final order, listing the technical specifications, the quantity needed, expected time of delivery, return policies, warranties and so on. In case of maintenance, then its related issues also need to be clarified. Feedback & Evaluation Performance Review : the buyer periodically reviews the performance of the chosen suppliers : - The buyer may contact the end uses and ask for their evaluation. - The buyer may rate the supplier on several criteria using a weighted score.

The buyer might aggregate the cost of poor supplier performance to come up with adjusted costs of purchase, including price. Organizational Buying Trends : - Purchasing department upgrading - Centralized purchasing - Long term contracts - Purchasing performance evaluation - Thus business marketing is becoming more complex, professionally managed, with long term perspective to achieve cost benefits, keeping in mind quality, reliability, adherence to delivery schedule and many more parameters like this to create win-win situation for both buyer as well as seller. 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. Companies are moving rapidly towards efficient supply-management systems through closer integration of inventory levels with the suppliers. Institutional and Government Markets : The institutional market consists of schools, college and university hostels, hospitals and nursing homes, and other institutions that provide goods and services to people in their care. Many of these organizations are characterized by low budgets and captive clienteles. In most countries, government organizations are a major buyer of goods and services. 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 personnel. The government follows a set of well laid out procedure for buying. In India (DGS&D) is the central purchasing organization of the government. This organization has the responsibility of procuring and purchasing the

Supplies required by various departments including defense and railways. The criteria to qualify as a supplier of specific items are pre-specified by the DGS&D and they enter into rate contract with suppliers for materials, stores, and equipments. The procedure followed by the government to buy products and services is very elaborate and these procedures have to meet legal requirements. Large projects by the governments sometimes float global tenders inviting bids from companies from abroad as well. For a number of reasons, many companies that sell to the government have not used a marketing orientation approach, though some companies have established separate departments to deal exclusively with government departments purchases. Many companies marketing their products and services to the government markets 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. -- END --