Chapter 5 Business-to-Business Markets and Buying Behavior

1. Chapter 5Business-to-Business Markets and Buying Behavior Jason C. H. Chen, Ph.D. Professor School of Business Administration Gonzaga University Spokane, WA 99223 chen@jepson.gonzaga.edu

2. After studying this chapter, you should be able to: • Define the nature of business-to-business buying behavior and markets. • Explain the differences between business-to-business buying and consumer purchase behavior. • Recognize the different types of buying decisions.

3. After studying this chapter, you should be able to: • Define the different stages of the business buying process. • Describe the buying-center concept and the determinants of influence within the buying center. • Understand the nature of government, reseller, and other institutional markets.

4. OPENING VIGNETTE WWW.HEINZ. COM • Heinz is happy with FreeMarkets. How happy do you suppose are their suppliers? • What benefits are offered by e-Commerce beyond low purchase prices?

5. Simplified Buyer Behavior Model Marketing Mixes All other stimuli Stimulus Person making decisions Black Box Response Person does or does not purchase

6. A Model of Buyer Behavior Marketing Mixes All other stimuli Psychological variables Motivation Perception Learning Attitude Personality/lifestyle Social Influences Family Social class Reference groups Culture Purchase Selection Purchase reason Time Surroundings Person making decision Problem-solving process Person does or does not purchase (response)

7. An Expanded Model of the Consumer Problem-Solving Process Marketing Mixes All other stimuli Psychological variables Motivation Perception Learning Attitude Personality/lifestyle Social influences Family Social class Reference groups Culture Purchase situation Purchase reason Time Surroundings Person making decisions Need-want awareness Routinized response Search for information Feedback of information as attitudes Set criteria and evaluate alternative solutions Decide on solution Postpone decision Purchase product Postpurchase evaluation Response

8. Examples of Different Types of Business and Organizational Customers

9. Business-to-Business buying behavior: Refers to decision making and other activities of organizations as buyers. Business-to-Business buying is the selection of suppliers, sources, or vendors. I. The Nature of Business-to-Business Buying

10. The Nature of Business-to-Business Buying • Organizations fall into four categories: • Business firms • Government markets • Reseller markets • Institutional markets

11. Focus on e-Business Applications Knowledge Management/Business Intelligence E-Commerce E-Customer Relationship Procurement Network Trading Network E-Channel Management Businesses & Consumers Businesses M:1 M:N 1:N E-Portal Management E-Services SCM/ERP/Legacy Appls

12. Enterprise Systems

13. Supply-Chain Management • Supply-Chain Management: • “The integration of business processes from end user through original suppliers that provides products, services, and information that add value for customers.”

14. Supply Management • Supply Management: • “The identification, acquisition, access, positioning, and management of resources the organization needs or potentially needs in the attainment of its strategic objectives.”

15. ENTERPRISE APPLICATIONS: Supply Chain Management Upstream Downstream

16. Organizational Buying Methodsand E-Commerce • Both B2B marketers and business customers are turning to the Internet to speed up the flow of market information and to make the “market matching” process more efficient. • Impact is across industries & vertical channel levels in the value adding process (producer, wholesaler, etc.) • Significant factor in opening up some markets to global competition • A variety of special types of websites have come on the scene • Examples: Procurement hubs, collaboration hubs, seller sites, exchanges, etc. • Competition among similar websites is still shaking out and in the process causing some uncertainty, inefficiency, and expense.

17. Consumers buy for their own use and for household consumption. Business buyers purchase for: Further production (raw materials, components) Use in their firm’s operations Resale to other customers Characteristics of Business-to-Business Buying Behavior

18. Characteristics of Business-to-Business Buying Behavior • Derived Demand: • Demand for business-to-business products is often dependent on demand in consumer markets.

19. Evaluating Business-to-Business Markets: NAICS

20. North American Industry Classification System Codes • NAICS—new system of number codes that groups firms in similar lines of business • Most government data is now being organized by NAICS codes • Replacing the older Standard Industrial Classification (SIC) codes • SIC codes are still prominent in most published government reports because of lag times in publication • Much detail is available • Two digit codes are the most general • Additional digits add more details (i.e., six digit codes are the most detailed)

21. II. The Importance of Business-to-Business Buying • Two Key Reasons: • The size of business markets offers many opportunities for marketers. • Many firms are trying to increase profits by improving purchasing practices.

22. 1. Electronic Commerce 2. Strategic Cost management 3. Strategic Sourcing 4. Supply-chain partner selection & contribution 5. Relationship management 6. Performance measurement 7. Global-supplier development 8. Third-party purchasing 9. Competitive bidding 10. Strategic supplier alliances 11. Win-win negotiation strategy 12. Complexity management III. Trends in Business-to-Business Buying Selected Purchasing Trends 1998-2008 (Exhibit 5-3; p.106)

23. Examples of Different B2B E-Commerce Sites Used by Organizational Buyers (and Sellers) All sellers and buyers at all levels Collaboration Hub Best search tool sites Exchanges “Vertical” depth across firms at different levels of production & distribution process Communities Procurement Hub Catalog site Best search tool sites One of two levels (a seller to a buyer) One specific industry Many industries One business “Horizontal” breadth of goods and services

24. Productivity Improvement • Outsourcing • Corporate downsizing often involves downsizing of the purchasing function • Reducing cycle time

25. Outsourcing • Since the 1970s, IT managers have turned to outsourcing as an important weapon in the battle to control costs. • Outsourcing means the purchase of a good or service that was previously provided internally – with IT outsourcing an outside vendor provides IT services traditionally provided by the internal MIS department. • Over the years, however, motives for outsourcing have changed.

26. Outsourcing in Retrospect • Early: computer service bureaus (mid 1960s) • Three major drivers for outsourcing • cost savings • avoidance of building in-house skills • access to specialized or occasionally needed computing power or skills • access to special functional capabilities N

27. Outsourcing As an Economic Strategy • Core competencies • Which sources are less expensive • How much control is needed

28. Is outsourcing the solution? Exhibit 5-4 Is outsourcing the solution? Key questions to help determine if outsourcing is appropriate: • Will outsourcing improve company profitability by lowing labor or procurement costs, reducing • the level of capital expenditures, increasing revenues, or enabling economies of scale? • Do potential suppliers provide a location or expertise that is hard to acquire? • Can potential suppliers provide a safety margin to reduce supply surpluses and/or shortages? • Is the function or activity under consideration a core competency for the firm? If not, • outsourcing may be appropriate. • Can the firm’s financial risk be reduced through outsourcing?

29. B2B Exchanges: Organizational buying via the Internet. Private Exchanges: Those that link invitation-only buyers and sellers. Use of Technology

30. What is Extranet? The term “extranet” comes from “extendedintranet.” It is a network that links business partners to one another over the Internet by tying together their corporate Intranets.

31. Electronic Commerce Applications in Purchasing Business buyers frequently use the Internet for these activities: • Requesting proposals and price quotes. • Posting bids. • Transmitting purchase orders. • Using Electronic Data Interchanges. • Ordering with electronic catalogs. • Seeking suppliers. • Tracking delivery schedules. • Managing contracts. • Managing inventory. • Paying invoices/making payments.

32. A Relationship Perspective Customer satisfaction/ profitability Loyalty Team work

33. Customer Value Considerations • Buyers are interested in suppliers that can add value to their business by: • Continually increasing quality • Lowering costs

34. Environmental Impact • Buyers emphasize an Ethics Perspectiveby: • Examining the costs associated with product disposal. • Looking for ways to recycle or reuse products.

35. IV. Types of Buying Decisions The Buying Decision Grid Type of Buying Newness of Information Consideration of Decision the Problem Requirements New Alternatives New task High Maximum Important Modified rebuy Medium Moderate Limited Straight rebuy Low Minimal None

36. Organizational Buying Processes Types of Processes Characteristics Time Multiple Review of Information Required Influence Suppliers Needed New-task Much Much Much Much Buying Modified Medium Some Some Some Rebuy Straight Little Little None Little Rebuy

37. Three Kinds of Organizational Buying Processes • New-task buying • a firm has a new need and the buyer wants a great deal of information • Modified rebuy • the in-between process where some review of the buying situation is done—though not as much as in new-task buying • Straight rebuy • a routine repurchase that may have been made many times before © 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin—for use only with Basic Marketing

38. V. The Business Buying Process Exhibit 5-8 A business of buying process Recognize problem or opportunity Determine desired product characteristics & quantity Describe desired product specifications Locate and qualify suppliers Evaluate and select suppliers Make purchase and evaluate performance

39. Systems Approach to Problem Solving Define the Problem Develop Alternative Solutions Monitor and Evaluate Results Select the Solution Design the Solution Implement the Solution

40. Traditional Systems Development Life Cycle Systems Investigation Product: Feasibility Study Understand the Business Problem or Opportunity Systems Analysis Product: Functional Requirements Develop an Information System Solution Systems Design Product: System Specifications Systems Implementation Product: Operational System Implement the Information System Solution Systems Maintenance Product: Improved System

41. General Purchasing Process Forecast Demand Supplier / Seller Buyer Request for Proposal/Quote (RFP/RFQ) Bid Negotiate Contract Place Orders Process Orders Shipping Orders Receiving Orders Invoicing Payment Vender Performance Tracking & Management Customer Service

42. Group Purchasing Organization Process [Stage1-b] [Stage1-a] Forecast Demand RFQ G P O B u y e r RFQ Bid Response Confirm (Price OK) Negotiate Contract S Place Orders u Process Orders p Shipping Orders p Receiving Orders . . . l Invoicing Payment RFQ i VPTM e [Stage3] [Stage2] r Shipping / Receiving Orders Returns / … … S Refund Process Shipping / Receiving Orders e Invoice l Payment l Returns e r [Stage4] Refund Process VPTM : Vender Performance Tracking & Management

43. The eBid process automates the RFQ development, distribution, and award process via the internet Volume Requirements By Location Buyer Defines RFQ -Items to Purchase -Specification -Bidding terms Buyer Selects Qualified Suppliers to Bid on Project Buyer Sends Info Via Internet to Selected Suppliers Suppliers Locate And Download Project Info and Files from Internet Suppliers Review Info Files and Prepare Bids for Items They Want To Bid on D O Specification Requirements P P P S S R Does Buyer want To initiate another round of bidding? Buyer Downloads And Evaluates All Bids Bids are Sent Electronically via Internet to Buyer eContract Desired Terms & Conditions P P S P L P=Purchasing O=Operations F=Finance D=Demand Plan T=Transportation R=R&D L=Legal M=Mobile Empl. S=Supplier B=Broker Award Bid Deposit RFQ Into Electronic Library P P

44. Organizational Buying Processes

45. VI. The Buying Center • Buying Center: • Includes more than the purchasing department or the purchasing function; it is made up of people throughout the organization at all levels. The makeup of the buying center may vary as decisions change.

46. Buying Center • Business purchases often involve multiple influence • "Buying center"—all people who participate in or influence a particular purchase • Buying center varies from purchase to purchase • Does not appear on the "organizational chart" • Structure may be formal or informal

47. Possible Needs Motivating a Person to Some Action Buyers Initiators Buying Center Influencers Users Gatekeepers Deciders

48. Gatekeepers: Control the flow of information and communication among the buying-center participants. Sponsor: Advocates purchase of a particular product of service. The Buying Center

49. Major Sources of Information Used by Organizational Buyers

50. Organizational Buying Methodsand E-Commerce • Both B2B marketers and business customers are turning to the Internet to speed up the flow of market information and to make the “market matching” process more efficient. • Impact is across industries & vertical channel levels in the value adding process (producer, wholesaler, etc.) • Significant factor in opening up some markets to global competition • A variety of special types of websites have come on the scene • Examples: Procurement hubs, collaboration hubs, seller sites, exchanges, etc. • Competition among similar websites is still shaking out and in the process causing some uncertainty, inefficiency, and expense.