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C H A P T E R S E V E N ORGANIZATIONAL MARKETS AND BUYER BEHAVIOR Irwin/McGraw-Hill

AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: • Distinguish among industrial, reseller, and government markets. • Recognize key characteristics of organizational buying that make it different from consumer buying. • Understand how types of buying situations influence organizational purchasing. • Recognize similarities and differences in industrial and reseller purchase behavior.

PP7-AA Laser Technology is Bright at Honeywell • Gary Null believes Honeywell, MICRO SWITCH division, is poised to capture a significant share of the multi-billion dollar global market for laser technology and products. • However, successful commercialization of their innovative laser technology depends on a coordinated worldwide team of engineers and marketing and sales professionals. • The key is to show the advantages of VCSEL over existing technology to a diverse worldwide market.

PP7-BB Business Marketing Business marketing is the marketing of goods and services to: 1. commercial enterprises, 2. Governments, and 3. other profit and not for profit organizations, for use in the creation of goods and services that they then produce and market to other business customers, as well as individuals and ultimate consumers.

PP7-CC Organizational Buyers Organizational buyers are those manufacturers, wholesalers and retailers, and government agencies that buy goods and services for their own use or for resale. EXAMPLE: Buying computers and telephones for the firm’s own use.

PP7-1 Type and Number of Organizational Customers Type of Organization Number Kind of Market Manufacturers 387,000 Mining 28,000 Construction 672,000 Farms, forestry, and fisheries 955,000 Industrial (business) Service 8,594,000 markets --(11,552,000) Finance, insurance, and real estate 617,000 Transportation and public utilities 276,000 Not-for-profit associations 23,000 Wholesalers 512,000 Reseller markets -- Retailers 1,564,000 2,076,000 Government units 85,000 Government markets -- 85,000

PP7-DD North American Industry Classification System (NAICS) • NAICS provides common industry definitions for Canada, Mexico, and the U.S., which facilitate the measurement of economic activity in the three member countries of NAFTA. • NAICS replaced the Standard Industrial Classification system, a system which had been in place more than 50 years. • NAICS is consistent with the International Standard Industrial Classification of All Economic Activities, published by the United Nations, to facilitate measurement of global economic activity.

PP7-2 NAICS breakdown for broadcasting and telecommunications industries 3 DigitIndustry Group 4 DigitIndustry 5 DigitU.S. National Industry 2 DigitIndustry Subsector Broadcasting andtelecommunications Radio and televisionbroadcasting Wiretelecommunicationcarriers Paging Wirelesstelecommunicationcarriers, exceptsatellite paging Cable networks andprogram distribution Cellular and otherwirelesstelecommunications Telecommunications Telecommunicationsresellers Satellitetelecommunications Othertelecommunications

PP7-EE Concept Check 1. What are the three main types of organizational buyers? 2. What is the North American Industry Classification System (NAICS)?

PP7–3 Key characteristics of organizational buying behavior Market Characteristics • Demand for industrial products and servicesis derived. • Few customers typically exist, and their purchaseorders are large. Product or Service Characteristics • Products or services are technical in nature andpurchased on the basis of specifications. • There is a predominance of raw and semi-finishedgoods purchased. • Heavy emphasis is placed on delivery time, technical assistance, postal service, and financing assistance.

PP7–3 Key characteristics of organizational buying behavior -- continued Buying Process Characteristics • Technically qualified and professional buyers exist and follow established purchasing policies and procedures • Buying objectives and criteria are typically spelled out, as are procedures for evaluating sellers and products (services). • Multiple buying influences exist, and multiple parties participate in purchase decisions. • Reciprocal arrangements exist, and negotiation between buyers and sellers is commonplace.

PP7–3 Key characteristics of organizational buying behavior -- continued Other Marketing Mix Characteristics • Direct selling to organizational buyers is the rule, and physical distribution is very important • Advertising and other forms of promotion are technical in nature. • Price is often negotiated, evaluated as part of broader seller and product (service) qualities, typically inelastic owing to deriveddemand, and frequently affected by trade and quality discounts.

PP7-FF Other Organizational Buyer Terminology • Reverse Marketing involves the deliberate effort by organizational buyers to build relationships that shape suppliers’ products, services, and capabilities to fit a buyer’s needs and those of its customers. • Reciprocity is an industrial buying practice in which two organizations agree to purchase each other’s products and services. • A supply partnership exists when a buyer and its supplier adopt mutually beneficial objectives, policies, and procedures for the purpose of lowering the cost and/or increasing the value of products and services delivered to the ultimate consumer.

QualitySpecifications DeliverySchedules Price OrganizationalBuying Criteria TechnicalCapability PastPerformance Warranty/Claim Policies ProductionFacilities/Capacity PP7–A Key Organizational Buying Criteria

PP7-GG Four Questions to Provide Guidance in Understanding the Buying Center 1. Which individuals are in the buying center for the product or service? 2. What is the relative influence of each member of of the group. 3. What are the buying criteria of each member? 4. How does each member of the group perceive our firm, our products and services, and our salespeople?

PP7–B Five roles in the buying center User Initiator DecisionMaker Gatekeeper Influencer

PP7-4a Comparing the stages in consumer and organizational purchases Stage in the Buying Consumer Purchase: Portable Organizational Purchase: Decision Process CD Player for a student Headphones for CD player Problem recognition Student doesn’t like the sound Marketing research and sales of the stereo system now owned departments observe that and desires a portable CD competitors are including player. headphones on their models. The firm decides to include headphones on their own new models, which will be purchased from an outside supplier. (continued)

PP7-4b Comparing the stages in consumer and organizational purchases -- continued Stage in the Buying Consumer Purchase: Portable Organizational Purchase: Decision Process CD Player for a student Headphones for CD player Information search Student uses past experience, Design and production that of friends, ads, and engineers draft specifications Consumer Reports to collect for headphones. The information and uncover purchasing department alternatives. Identifies suppliers of CD player headphones. Alternative evaluation Alternative portable CD Purchasing and engineering players are evaluated on the personnel visit with suppliers basis of important attributes and assess (1) facilities, (2) desired in a CD player and capacity, (3) quality control, several stores are visited. (4) financial status. They drop any suppliers not satisfactory on these factors. (continued)

PP7-4c Comparing the stages in consumer and organizational purchases -- continued Stage in the Buying Consumer Purchase: Portable Organizational Purchase: Decision Process CD Player for a student Headphones for CD player Purchase decision A specific brand of portable CD They use (1) quality, (2) price, player is selected, the price is (3) delivery, and (4) technical paid, and the student leaves capability as key buying the store. criteria to select a supplier. Then they negotiate terms and award a contract. Postpurchase behavior Student reevaluates the They evaluate suppliers purchase decision, may return using a formal vendor rating the portable CD player to the system and notify supplier if store if it is unsatisfactory, and headphones do not meet its looks for supportive quality standard. If the information to justify the problem is not corrected, purchase. they drop the firm as a future supplier.

PP7-5 How the buying situation affects buying center behavior Buying-Class Situation Buying Center Dimension New Buy Straight/Modified Rebuy People involved Many Few Decision Time Long Short Problem definition Uncertain Well-defined Buying objective Good solution Low-price supplier Suppliers considered New/present Present Buying influence Technical/operating Purchasing Agent personnel

Long/ uncertain Newbuy Modifiedbuy Decision time and problem definition Straightrebuy Short/ well defined Many Few Number of people in buying centerand number of suppliers considered PP7-C Three Types of Buying Situations

PP7-HH Concept Check 1. What one department is almost always represented by a person in the buying center? 2. What are the three types of buying situations or buy classes?

PP7-IIa Stages in the Industrial Buying Process • Problem Recognition often involves a make-buy decision -- an evaluation of whether components and assemblies will be purchased from outside suppliers or built by the company itself. • Information Search often involves value analysis -- a systematic appraisal of the design, quality, and performance of a product to reduce purchasing costs. • Alternative Evaluation often involves the generation of a bidders list -- a list of firms believed to be qualified to supply a given item. (continued)

PP7-IIb Stages in the Industrial Buying Process • Purchase Decision -- The period from supplier selection to order placement to product delivery can take several weeks or even months, as negotiations regarding price, performance and delivery terms will continue. Additional negotiations may involve warranties, indemnities, and payment schedules. • Postpurchase Behavior -- Evaluation occurs in the industrial purchase decision process, but is formal and often sophisticated. The performance of the supplier is monitored and recorded.

PP7-JJ Concept Check 1. What is a make-buy decision? 2. What is a bidders list?

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