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LEARNING OBJECTIVES After reading this chapter, students should:

ANALYZING BUSINESS MARKETS

Know what is the business market, and how it differs from the consumer market Know what buying situations do organizational buyers face Know who participates in the business-to-business buying process Know how business buyers make their decisions Know how companies can build strong relationships with business customers Know how institutional buyers and government agencies do their buying

CHAPTER 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.

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Business marketers must form strong bonds and relationships with their customers and provide them added value. Some customers, however, may prefer more of a transactional relationship. 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 governmental 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. OPENING THOUGHT Students unfamiliar with business and business operations will have a difficult time understanding the concept of organizational buying. The major differences between the consumer market and the B2B market lie: in the complexity of the decision process and the amount of people involved in the final purchasing decision. Instructors can best serve their student audiences by incorporating guest speakers from the business community who are responsible for purchasing products and/or services to help students understand the complexity in the buying process for businesses. Salespeople, who sell to businesses, are also good resources to have as guest speakers when covering this chapter. Instructors can also use university situations or other common business examples to get across the concept of organizational buying to their students. TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 1. At this point in the semester-long marketing project, no presentations are necessary unless the instructor has approved a business-to-business product or service. 2. Students should compare and contrast the complexity of that buying process to the ones noted in Chapter 6Analyzing Consumer Markets. How and where are the major points of differences between the two markets in their purchase intensions? Can a firm market its products to both the industrial and consumer markets with one strategy? Are there sufficient differences between markets for different products and strategies to be developed? 3. Sonic PDA Marketing Plan Business-to-business marketers have to understand their markets and the behavior of members of the buying center in order to develop appropriate marketing plans. Jane Melody has defined the business market at Sonic as mid- to large-sized corporations that need to help their workforces stay in touch and input or access important data from any location. She has asked you to find out:

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What specific types of businesses appear to fit the business market definition used at Sonic? What needs could Sonics PDA address for these businesses? Who would participate in and influence the purchase of PDAs for use in these businesses? Which environmental, interpersonal, and individual influences are likely to be most important to business buyers of PDA productsand why? Report your findings and conclusions in a written marketing plan or type them into the Market Demographics and Target Markets sections of Marketing Plan Pro. ASSIGNMENTS In the journal Marketplace, Winter 2006, the Institute for the Study of Business Markets listed the Top Business Marketing Challenges for the years 2005 2007 (Table 7.1). In small groups or individually, ask the students to interview local business managers/owners to see: a) These challenges have migrated to this year b) How well they faired against these challenges or c) There are more challenges ahead for business in the years ahead. Have each of the students read Bob Donaths Emotions Play Key Role in Biz Brand Appeal, Marketing News, June 1, 2006, p.7 and comment on their perception of how effective biz is in their lives and in their purchasing of products. Contact your local Prentice-Hall sales representative and ask him / her to make a presentation to the class on how he / she sells to your college or university. In small groups (five students suggested as the maximum), have the students visit your college or universitys Central Purchasing or Procurement department (you may have to clear this with your administration before assigning). Have the students conduct interviews with purchasing personnel on how they buy, who is involved in a purchase decision, and what characteristics do the best salespeople who call on them share. Students should format their questions to the key concepts contained in this chapter. Student reports should also characterize the differences found between government or institutional buying, business-tobusiness buying, and consumer purchasing. To improve effectiveness and efficiency, business suppliers and customers are exploring different ways to manage their relationships. Have the students visit each of the companys Web sites mentioned throughout the chapter. Which one(s) do the students feel most effectively and efficiently addresses the needs of the corporate buyer? Which Web sites do not? Why and what in their opinion is missing from the least effective Web sites? How can the firm do better in its execution? Have the students visit GEs Medical Systems Web site (www.gehealthcare.com/). In context to the major points of this chapter, have the students define how GE is addressing the needs of their hospital customers by the design of this Web site? Where and what is GE doing right, what is GE doing wrong, and where can GE improve?

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Small businesses have been described as the lifeblood of the economy. Students, who have after school jobs in small business, should be assigned to interview their employers, managers, or purchasing departments to understand how small businesses purchase goods and services. How many of the concepts of this chapter small business owners actually employ (for example, is the purchasing habits of the students small business owner organized, how many decision makers are involved in purchasing, how important is the customer-supplier relationship to them, is their purchasing just transactional, etc.)? Students should prepare to present their findings to the class in either an oral or a written report. Students not employed should be prepared to question the presenting students as to their understanding of the whys for such actions. END-OF-CHAPTER SUPPORT MARKETING DEBATEHow Different Is Business-to-Business Marketing? Many business-to-business marketing executives lament the challenges of business-tobusiness marketing, maintaining that many traditional marketing concepts and principles do not apply. For a number of reasons, they assert that selling products and services to a company is fundamentally different from selling to individuals. Others disagree, claiming that marketing theory is still valid and only involves some adaptation in the marketing tactics. Take a position: Business-to-business marketing requires a special, unique set of marketing concepts and principles versus business-to-business marketing is really not that different and the basic marketing concepts and principles apply. Pro: Business-to business marketing requires a unique set of marketing concepts and principles versus consumer marketing. The special set of concepts and skills needed in business-to-business marketing include professional salespeople; products that meet specific and sometimes specially engineered needs of a set of a few customers; marketing promotional aspects that deemphasize price in exchange for services; delivery terms; special financing arrangements; and other traditional non-marketing considerations. Finally, the other major difference between consumer and business-to-business marketing usually involves the amount of people involved in the sale: from both the sellers firm and the purchasing firm. In consumer selling, the user is generally the purchaser. In the business-to-business, marketing both the selling firm and the buying firm includes members of other disciplines (engineering, transportation, warehousing, finance, and others) from the beginning of the process to the time of actual purchase. The addition of these people fosters strong ties between the two firms but also lengthens the time and complexity of the sale. Con: Business-to-business marketing does not really differ from the consumer market in ones approach. The major differences between the two is not in delivering value to the consumer but in the implementation and time phase. Buyers still buy to solve problems and business-to-business marketing and consumer marketing still has to solve the buyers

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problems. Time and attention to detail may be extended for business-to-business marketers but the accepted marketing principles of price, place, promotion, and product still apply it is just their implementation and application(s) that differ.

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MARKETING DISCUSSION Consider some of the consumer behavior topics from Chapter 6. How might you apply them to business-to-business settings? For example, how might noncompensatory models of choice work? Suggested Response: From Chapter 6 we have learned that consumer behavior is influenced by cultural factors, social factors, and personal factors. These are individual considerations that apply to the business-to-business market as well as to the consumer market. The difference is that all of the members of the buying center will possess different sets of these considerations and that the business-to-business marketer must try to appeal to all of these simultaneously. In addition, there are four main psychological processes: motivation, perception, learning, and memory apply as well to the business-to-business market. Again, in business-tobusiness marketing, each member of the buying center will exhibit different degrees of each of these processes. Finally, in the business-to-business buying situation, problem recognition, information search, evaluation of alternatives, purchase decisions, and post-purchase behavior will differ from the consumer market. The difference(s) lie in the amount of time involved, the degree of research expended, the decision-makers role and the evaluation of the product or service. In the business-to-business market, more attention is paid to information search, purchase decisions, the evaluation of alternatives, and the fact that the user may not be the final decision maker. In the business-to-business market, there are seven roles demonstrated by people within the company (initiators, users, influencers, deciders, approvers, buyers, and gatekeepers), each of which must be considered as a factor in the selling process. In the consumer market, many of these roles are included in the single role as buyer. Noncompensatory choice models and other impartial decision-making tools receive a greater degree of importance as the business-to-business buying center tries to remove personal choice options from the equation. DETAILED CHAPTER OUTLINE Business organizations do not only sell, each buys vast quantities of raw materials, manufactured components, plant and equipment, suppliers, and business services. To create and capture value, seller need to understand the organizational buyer needs, resources, policies, and buying procedures. WHAT IS ORGANIZATIONAL BUYING? Webster and 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 alternative brands and suppliers.

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A) 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. B) More dollars and items are involved in sales to business buyers than to consumers. Business markets have several characteristics that contrast sharply with those of consumer markets: 1) Fewer, larger buyers 2) Close supplier-customer relationship 3) Professional purchasing 4) Several buying influences 5) Multiple sales call 6) Derived demand 7) Inelastic demand 8) Fluctuation demand 9) Geographically concentrated buyers 10) Direct purchasing Marketing Insight: Big sales to small business Illustrates how some very large companies (IBM, Microsoft, and others are reaching the small businesses in the US (defined as having fewer than 500 employees). Buying Situations The business buyer faces many decisions in making a purchase. The number of decisions depends on the buying situation: complexity of the problem being solved, newness of the buying requirement, number of people involved, and time required. There are three types of buying situations: the straight rebuy, modified rebuy, and new task. A) Straight rebuy is when the purchasing department reorders on a routine basis and chooses from suppliers on an approved lists. B) Modified rebuy is when the buyer wants to modify product specifications, prices, delivery requirements, or other items. C) New task is when the purchaser buys a product or service for the first time. 1) The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situation. 2) In the new-task situation, the buyer has to determine product specifications, price limits, delivery terms and times, service terms, payment terms, order quantities, acceptable suppliers, and the selected supplier. This situation is the marketers greatest opportunity and challenge. 3) Because of the complicated selling involved, many companies use a missionary sales force consisting of their most effective salespeople for new-task situations. 222

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Marketing Memo: Maximizing customer relations Lists the five common mistakes in developing customer reference stories and the seven keys to successfully developing customer reference stories. Systems Buying and Selling Many business buyers prefer to buy a total solution to a problem from one seller. Called systems buying, this practice originated with the government. It consists of: A) Prime contractors B) Second-tier contractors C) One variant of systems selling is systems contracting where a single supplier provides the buyer with his or her entire requirements of maintenance, repair, and operating (MRO) supplies. PARTICIPANTS IN THE BUSINESS BUYING PROCESS Purchasing agents are influential in straight-rebuy and modified-rebuy situations, where as 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 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. There are seven roles in the purchase decision process: A) Initiatorsrequests the product B) Userswill use the product C) Influencersinfluence the buying decision D) Decidersmakes the decision of what to purchase E) Approversauthorize the proposal F) Buyershave the formal authority to purchase G) Gatekeepershave the power to prevent seller information from reaching members of the buying center Buying Center Influences Buying centers usually include several participants with differing interests, authority, status, and persuasiveness. A) Each member of the buying center is likely to give priority to very different decision criteria. B) Business buyers also respond to many influences when they make their decisions.

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C) Each buyer has personal motivations, perceptions, and preferences that are influenced by the buyers: 1) Age 2) Income 3) Education 4) Job position 5) Personality 6) Attitudes toward risk 7) Culture D) Individuals are motivated by their own needs and perceptions in an attempt to maximize the rewards. E) F) G) 1) Personal needs motivate the behavior of individuals. Organizational needs legitimate the buying decision process and its outcomes. People are not buying products; they are buying solutions to two problems: The organizations economic and strategic problem 2) Their own personal problem of obtaining individual achievement and reward Buying Center Targeting 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? A) Small sellers concentrate on reaching the key buying influencers. B) Large sellers go for multilevel in-depth selling to reach as many participants as possible. THE PURCHASING/PROCUREMENT PROCESS Business buyers seek to obtain the highest benefit package (economic, technical, services, and social) in relation to a market offerings costs. A business buyers incentive to purchase will be greater in proportion to the ratio of perceived benefits to costs. The marketers task is to construct a profitable offering that delivers superior customer value to the target buyers. Purchase Department Perceptions Todays purchasing departments are more strategically orientated and have a mission to seek the best value from fewer and better suppliers. Purchasing Organization and Administration The upgrading of purchasing means that business marketers must upgrade their sales personnel to match the high caliber of the business buyer.

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A) Most purchasing professionals describe their jobs as more strategic, technical, teamorientated, and involving more responsibility than ever before. B) In multi-divisional companies, most purchasing is carried out by separate divisions STAGES IN THE BUYING PROCESS Robinson and Associates have identified eight stages and called them buyphases. A) Problem recognition B) C) D) E) F) G) H) General need description Product specification Supplier search Proposal solicitation Supplier selection Order-routine specification Performance review

Problem Recognition The buying process begins when someone in the company recognizes a problem or need. The recognition can be triggered by internal or external stimuli. General Need Description and Product Specification Next, the buyer determines the needed items general characteristics and requirements. Supplier Search The buyer next tries to identify the most appropriate suppliers through trade directories, contacts with other companies, trade advertisements, and trade shows. Companies that purchase over the Internet are utilizing electronic marketplaces in several forms: A) Catalog sites B) Vertical markets C) Pure Play auction sites D) Spot or (exchange ) markets E) Private exchanges F) Barter markets G) Buying alliances Online buying offers several advantages: A) Shaves transaction costs B) Reduces time between order and delivery C) Consolidates purchasing systems D) Forges closer relationships

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On the downside, online ordering may: A) Helps to erode supplier-buyer loyalty B) Create security issues E-Procurement Web sites are organized around two types of e-hubs: vertical hubs centered on industries and functional hubs. A) In addition to using these Web sites, companies can do e-procurement in other ways: 1) Direct extranet links to major suppliers 2) Buying alliances 3) Company buying sites B) Moving into e-procurement involves more than acquiring software; it requires changing purchasing strategy and structure. C) The suppliers task is to get listed in major online catalogs or services, develop a strong advertising and promotion program, and build a good reputation in the marketplace. D) This often means creating a well-designed and easy-to-use Web site. Lead Generation The suppliers task is to ensure it is considered when customers are in the market searching for a supplier. Proposal Solicitation The buyer invites qualified suppliers to submit proposals. If the item is complex, the buyer will require a detailed written proposal from each qualified supplier. A) Business marketers must be skilled in researching, writing, and presenting proposals. Supplier Selection Before selecting a supplier, the buying center will specify desired supplier attributes and indicate their relative importance. To rate and identify the most attractive suppliers, buying centers often use a supplier-evaluation model. Marketing Memo: Developing compelling customer value propositions States that to command price premiums in competitive B-to-B markets, firms must create compelling customer value propositions. Lists the top 8 ways to research the customer. Overcoming Price Pressures Business marketers need to do a better job of understanding how business buyers arrive at their valuations. A) Despite moves toward strategic sourcing, partnering, and participation in crossfunctional teams, buyers still spend a large chunk of their time haggling suppliers on price.

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1) Marketers can counter request for a lower price in a number of ways. i. ii. B) total cost of ownership life-cycle cost

Improving productivity helps alleviate price pressures

Number of Suppliers Buying centers must decide on how many suppliers to use. Companies are increasing decreasing the number of suppliers in order to cut costs. Order-Routine Specifications 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. Performance Review A) The buyer periodically reviews the performance of the chosen supplier(s) 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. The Benefits of Vertical Coordination Building trust between parties is often seen as one prerequisite to healthy long-term relationships. Knowledge that is specific and relevant to a relationship partner is also an important factor in the strength of interfirm ties between partners. Research has found that buyer-supplier relationships differ according to four factors: A) Availability of alternatives B) Importance of supply C) Complexity of supply D) Supply market dynamism Based in this research, they classify buyer-supplier relationships into 8 categories: A) Basic buying and selling B) Bare bones C) Contractual transactions D) Customer supply E) Cooperative systems F) Collaborative G) Mutually adaptive H) Customer is King 227

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Breakthrough Marketing: General Electric Relates the story how in 2003, GE faced a new challenge: how to promote its diversified brand globally with a unified message. Marketing Insight: Establishing corporate trust and credibility Defines the terms: corporate credibility, expertise, trustworthiness, and likability. Business Relationships: Risks and Opportunism Vertical coordination can facilitate stronger customer-seller ties but at the same time may increase the risk to the customer and suppliers specific investments. A) Specific investments are those expenditures tailored to a particular company and value chain partner. B) Specific investments also entail considerable risk to both customer and supplier. C) Opportunism is some form of cheating or undersupply relative to an implicit or explicit contract. D) A more passive form of opportunism might be a refusal or unwillingness to adapt to changing circumstances. E) Opportunism is a concern because firms must devote resources to control and monitoring F) There is a shift in specific investments from expropriation (increased opportunism on the receivers part) to bonding (reduced opportunism). INSTITUTIONAL AND GOVERNMENT 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. A) Many of these organizations are characterized by low budgets and captive clienteles. B) In most countries, government organizations are a major buyer of goods and services. Marketing Memo: Selling tech to the government Details some tips to selling IT to the U.S. Government via the General Services Administration (GSA).

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