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Lecture Week 2

Lecture Week 2. Organisational Buying and Buying Behaviour -Recommended Text: Chapter 3. Recap from Lecture 1. What is Business Marketing/Business Product? Business Vs. Consumer Marketing

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Lecture Week 2

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  1. Lecture Week 2 Organisational Buying and Buying Behaviour -Recommended Text: Chapter 3

  2. Recap from Lecture 1 • What is Business Marketing/Business Product? • Business Vs. Consumer Marketing • Derived Demand; Acceleration effect ; Joint Demand; Cross – Elasticity of Demand; Reverse Elasticity of Demand: Bull Wipe Effect • Types of Business Customers • Classification of Industrial product • E-procurement • Environment in Business Markets

  3. 0 A General Understanding of Buying as a Process • Buying is a process, not an event • There are various points in the process that are referred to as “Critical Decision Points” and “Evolving Information Requirements” • It starts with “Problem Recognition”

  4. 0 Understanding the Dynamics of Organizational Buying Market-driven firms sense market trends and work closely with their customers and vendors. This is crucial to: • Identify profitable market segments • Locate buying influences within segments • Reach organizational buyers efficiently and effectively with an offer Each decision goes through various steps. Skipping a step can be essential to the decision-making process.

  5. Stepwise Buying Process 0 1. Problem Recognition 2. General Description of Need 3. ProductSpecifications 4. Supplier Search Organizational Buying Process 5. Acquisitionand Analysisof Proposals 6. Supplier Selection 7. SelectionofOrder Routine 8. PerformanceReview

  6. Purchasing Objectives of Business Buyers • Purchasing objectives • Perfect delivery /ready availability • Superior quality of product / service • Lowest price • Services • Good long-term supplier relationship • Personal objectives • Higher status • Job security • Salary increments • Promotions • Social considerations

  7. Buying Process of Organisational Buyers 0 1. Problem Recognition 2.Decide Characteristics & Quantity needed 3. Specification Or product description 4. Search for potential suppliers 5. Obtain & analyze supplier proposals 6. Evaluate & select suppliers 7. Select an order routine 8.Performance feedback 8. Post-purchase evaluation

  8. Supplier/Vendor Analysis using Multi attribute model Performance rating scale : 1-10, ( 10 = excellent, 1 = poor )

  9. Figure 3.1 The Balanced Scorecard Framework Financial To succeed financially Company shld focus on financial objectives to satisfy shareholders Internal-Business Process To satisfy shareholders & customers, what business produces company must excel at? Customer Which customer value company should focus on, to achieve its mission? Mission & Strategy Learning and Growth How can company improve and change to achieve its mission?

  10. Types of Buying Situations (Buyclasses) • New Task / New purchase • More information, risk, decision time, people involved • Modified Rebuy / Change in Supplier • Due to existing suppliers’ poor performance, or change in specifications • Hence, search for alternate supplier • Straight Rebuy / Repeat Purchase • Due to existing suppliers’ good performance • Routine, low risk decision. Less information needed

  11. 0 Three Buying Situations1. New Task • New task – a perceived problem or need that is totally different from previous experiences. • To solve it, buyers need a significant amount of information. • Buyers & Influentials operate in a stage of decision- making known as “extensive problem solving” because they lack: • Well-defined criteria • A strong predisposition toward a particular solution

  12. 0 1. New Task There are 2 approaches to New Task purchasing: • Judgmental Situations • Strategic Decisions

  13. 0 New Task - Judgmental Situations • This is the greatest amount of uncertainty because there is little information or experience to support a decision. • To overcome this, decision-makers conduct outside research to analyze key aspects of the buying decision. • An example of key questions might include: • What kind and model of production equipment should we purchase? • Who are the available suppliers? • Will they provide the services we need?

  14. 0 New Task - Strategic Decisions • This level of New Task purchasing is the most important because it concerns long-range planning, larger investments and increased risk if they are wrong. • An example of strategic questioning might include: • Should we develop a new product line which demands us to buy new machinery, retool what we have, and maybe even hire a different type of employee? • What should we do?

  15. 0 Marketing Consideration for New Task Buys Marketers can gain an edge if they: • Initiate problem recognition • Get involved very early in the decision-making process • Get involved early in the procurement process • Understand the buying organization's behavior patterns

  16. 0 New Task Marketer’s Edge • If a marketer is already established with an account, often he or she can leverage that situation into further business. • This is why present suppliers continue to develop further business with their customers—they understand their prospects’ buying philosophy, developing situations and contacts. • They can also create need since the prospect trusts them.

  17. 0 Three Buying Situations2. Straight Rebuy Straight rebuy – a problem or need that is recurring or a continuing requirement. • Buyers have experience in the area • Require little or no new information • Buyers operate in routine problem-solving stage

  18. 0 Buying Decision Approaches Casual purchases: Involve no information search or analysis. Routine low priority: Decisions are more important and involve a moderate amount of analysis.

  19. 0 Straight Rebuy • Routine problem solving situations requiring routine solutions. • This is the repeat business situation that every major supplier desires. • MOR: Maintenance, Operation and Repair items fall into this category as do various services such as travel.

  20. 0 Straight Rebuy • Many companies review this area of business every now and then, but the edge usually goes to the supplying company. • Relationships become very important.

  21. 0 Marketing Challenges to Straight Rebuy • Purchasing departments handle this situation in most cases; the determinant is who is “IN” and who is “OUT”? • “IN” seller needs to constantly reinforce their services, meet buying expectations, continue developing relationships and be responsive to changing needs. • “OUT” sellers have a much more difficult task.

  22. 0 Three Buying Situations3. Modified Rebuy • Modified rebuy—Decision makers feel there is a benefits to reevaluating alternatives. • Internal Forces: • Search for quality improvement • Cost reductions

  23. 0 Modified Rebuy • Buyers feel they can make significant advances if they review their buying situations on a regular basis. • Often, changes in styles, materials or even alternative solutions facilitate this review. • Another reason for Modified Rebuy is dissatisfaction with present supplier. • New supplier was able to find the present supplier’s weaknesses and offered buyers new alternatives to “fix” their problem(s).

  24. 0 Modified Rebuy: Limited Problem Solving • When a company has to replace a broken part, they may bypass the manufacturer and go to a supplier of comparable upgrades. • Example: Your IBM printer breaks so you consider an HP printer instead.

  25. 0 Buying Decision Approaches • Simple Modified Rebuy: Involves narrow choices and minimal research. • The major area of consideration is supplier relationship. • Complex Modified Rebuy: Involves larger items, more research, extensive specification development, a competitive bidding process and long-term relationship development with new supplier(s).

  26. Buying Centre Members And Key Influentials • Buying centre, or purchase committee, consists of members who make buying decisions, share common objectives and risks • Key influentials are the few most influential members • Buying centre members are: • Top management persons • Technical persons: Key influentials for new task and modified rebuy situations and technical products • Buyers / purchasers: Key influentials for straight rebuy • Commercial persons: Finance & Marketing persons

  27. Break Time!

  28. 0 Forces Influencing Organizational Buying Behavior • Economic outlook: domestic & global • Pace of technological change • Global trade relations EnvironmentalForces A projected change in business conditions can alter buying plans drastically. • Goals, objectives and strategies • Organizational position of purchasing OrganizationalForces OrganizationalBuyingBehavior • Roles, relative influence and patterns of interaction of buyingdecision participants GroupForces IndividualForces • Job function, pastexperience, and buyingmotives of individualdecision participants

  29. 0 Environmental Forces - Economic Influences • Changes in the environment such as business conditions, technological advances or new legislation can affect buying plans. • Since much of business is driven by derived demand, business marketers must be sensitive to changes in the consumer market. • Also, the economy can determine a company’s ability or willingness to buy. If the economy is bad, companies often put off purchasing until they see a change.

  30. 0 Technological Influences • Technology is changing so quickly that yesterday’s technological advancement is today’s electronic commodity. Example: Computers • However, all companies need to stay alert to these changes. For example, Blockbuster is feeling the pinch of Netflix, Internet and satellite movies-on-demand. • Technological change—especially from the Internet—is drastically changing the way companies do business.

  31. 0 Organizational Forces & Growing Influence of Purchasing • As manufacturing has become less important, purchasing and procurement have become more important. • Companies are outsourcing many activities such as manufacturing, marketing, accounting, etc., yet procurement remains a strong influence resulting in a shift to more professional procurement positions.

  32. 0 Strategic Priorities in Purchasing • As the purchasing profession grows, so do its goals and priorities. • Purchasers are more ambitious, resulting in a more competitive environment. An effective marketing strategy develops stronger and deeper relationships with purchasers. • This is the impetus for Relationship Marketing.

  33. Strategic Priorities in Purchasing 0 Aligning Purchasing with Strategy, Not Just Buyers Shift from administrative role to value-creating function that serves internal stakeholders and provides competitive edge in market. Exploring New Value Frontiers: It’s Not Just About Price Focus on suppliers’ capabilities, emphasizing business outcomes, total ownership costs, and potential for long-term value creation. Source: Adapted from Marc Bourde, Charlie Hawker, and Theo Theocharides, “Taking Center Stage: The 2005 Chief Procurement Officer Survey,” (Somers NY: IBM Global Services, May 2005), pp. 1-14. Accessed at http://www.ibm.com/bcs on July 1, 2005.

  34. 0 Strategic Priorities in Purchasing • Putting Suppliers Inside: The Best Value Chain Wins • Develop fewer and deeper relationships with strategic suppliers and involve them in decision- making processes, ranging from new product development to cost-reduction initiatives. Overcome hurdles imposed by geographical differences and seek out cost-effective suppliers around globe. • Pursuing Low-Cost Sources: A World Worth Exploring

  35. 0 Centralized vs. Decentralized Purchasing • Purchasing is moving away from a transaction-based support role to a more strategic, executive level role • One result of this is to centralize purchasing • Centralized purchasing operates differently than decentralized purchasing

  36. 0 Decentralized Purchasing • Decentralized purchasing allows local branches to purchase what they need. This results in local control, and for many kinds of services this makes sense. • Example: Stop and Shop buys products from local farmers.

  37. 0 Disadvantages of Decentralized Purchasing • Difficult to take advantage of volume discounts • Doesn’t promote specialization • Makes room for corrupt activity • Takes power away from the purchasing group • Reduces options for large organizations

  38. 0 Centralized Purchasing • Forces specialization upon buyers who usually meet the challenge • Allows for better coordination of materials purchases • Results in better method of managing long-term supply • Takes advantage of volume savings • Offers better coordination between purchasing strategy and corporate strategy

  39. 0 Centralized & Decentralized Purchasing • Many companies combine the two depending upon what is being purchased. • The set budget limits at various levels; for larger repeat items, they’ll employ centralized buying. • For smaller, one time purchases, it may be done at the local level. (Example: Electrical repair services.)

  40. Models of Organisational Buying Behaviour • Most important factors influencing organisational buyers: • Organisational / Task – oriented • Personal / non-task oriented • Enviromental • Buying Centre • Most comprehensive models: • Webster and Wind • Sheth • Choffray and Lilien

  41. The Webster and Wind Model Environmental Variables: Technological, Economic, etc. OrganisationalVariables: Technology (for purchasing), Buying Centre structure, buying goals and tasks, buying centre members. Buying centre variables:Interpersonal interactions, Group functioning: Buying and non-buying tasks, external influences. Individual variables Buying Decision Process: Individual and Group. Buying Decision

  42. The Sheth Model Componet-1 Componet-2 Componet-3 • Differences in individual buyers’ expectations caused by factors: • Background • Information sources • Past purchases • Perceptual distortion • Variables that determine if buying decision is autonomous or joint : • Product specific • Company specific • Methods used for conflict resolution in joint decision making process • Problem solving • Persuasion • Bargaining • Politicking Situational Factors Supplier or Brand choice

  43. The Choffray and Lilien Model Obtain alternative offers from suppliers Organisational Constraints Environmental Constraints Likely alternative offers Source of information Evaluation criteria Individual preferences formed Negotiation Organisational preferences Group problem solving Organisational choice

  44. Contemporary Purchasing Activities • Just-in-time (JIT) Delivery • Out sourcing • World sourcing • Single sourcing • Value analysis / Value engineering • Supplier evaluation system/Multi attribute model • Buying committee/Buying centre

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