Chapter 7
Analyzing Business Markets
7-1
Copyright © 2003 Prentice-Hall, Inc.
Key Points for Chapter 7
1.
2.
3.
4.
5.
Derived demand
Inelastic demand
Fluctuating demand
Systems buying and systems selling
Buying center
 Influencer
 Gatekeeper
6. Solution selling

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Key Points for Chapter 7
7. Purchasing orientation
8. Stages in the buying process
9. E-procurement
10.Supplier selection
11.Institutional markets
12.Governmental markets
7-3
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Organizational Buying
 Business Market versus Consumer
Market
 Business Buying Situation
 Systems Buying and Selling
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Business Market versus
Consumer Market
 Business market consists of all the
organizations that acquire goods and
services to use in the production of other
products or to sell, rent or supply to
others.
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Business Market versus Consumer
Market
 Characteristics of Business Market
 Fewer, larger buyers than consumer market
 Fewer number but large purchase amount
 Close supplier-customer relationship
 Smaller customer base
 Customized offering
 Professional purchasing
 By trained professional purchasing agents
 Purchasing policy
 Multiple buying influences
 Several participants in buying decision
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Business Market versus Consumer
Market
 Multiple sales calls
 4 to 4-1/2 sales calls to close average sale
 Derived demand
 Derived from demand for consumer goods by
consumers
 Inelastic demand
 Inelastic of price change specially in short run
 Less affect on demand than demand for
consumer goods
 Raw materials or components must be obtained
to run a business
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Business Market versus Consumer
Market
 Fluctuating demand
 A small percentage change in consumer demand
can lead to a much larger percentage change in
demand for plant and equipment due to
depreciation
 Geographically concentrated
 NY, CA, PA, IL, OH, NJ, MI
 Direct Purchasing
 Direct purchasing from manufacturers
7-8
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Business Buying Situations
 Straight rebuy
 Reordering without a change on a routine basis
 Modified rebuy
 Modifying some conditions in product
specifications, price, delivery requirements, etc.
 New Task
 Buying a product or service for the first time
 Usually go through all buying process
7-9
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Systems Buying and Selling
 Systems buying:
 Buying a total solution from one seller
 Solicit bids from prime contractor
 Systems selling:
 A single seller provides the buyer with entire
requirements
7-10
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Participants in the Business
Buying Process
 The Buying Center
 Buying Center Influences
 Buying Center Targeting
7-11
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The Buying Center
 The decision-making unit of a buying organization.
 Participants play any of 7 roles
 Initiators: request that something be bought
 Users: use the product or service
 Influencers:
 influence buying decisions, define specifications, and
evaluate alternatives. Usually technical personnel
 Deciders: decide on product specifications or on
suppliers
 Approvers: authorize proposed action of deciders or
buyers
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The Buying Center
 Buyers: have formal authority to select supplier and
arrange purchase terms.
 Gatekeepers:
 Prevent sellers or information from reaching
members of buying center
 Purchasing agents or receptionists
7-13
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Buying Center Influences
 Buying center usually includes several
participants with differing interests, authority,
status, and persuasiveness
 Each member is likely to give priority to very
different decision criteria
 Business member also respond to many
influences when they make their decisions
 Each member carries personal motivations,
perceptions, and preferences, and attitudes
toward risks
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Buying Center Targeting
 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?
7-15
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Stages in the Buying Process
 8 stages of business buying process
 Table 7.2 Buygrid Framework
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Table 7.2: Buygrid Framework: Major Stages (Buyphases) of
the Industrial Buying Process in Relation to Major Buying
Situations (Buyclasses)
Buyclasses
Buyphases
New
Modified
Straight
Task
Rebuy
Rebuy
1. Problem recognition
Yes
Maybe
No
2. General need description
Yes
Maybe
No
3. Product specification
Yes
Yes
Yes
4. Supplier search
Yes
Maybe
No
5. Proposal solicitation
Yes
Maybe
No
6. Supplier selection
Yes
Maybe
No
7. Order-routine
specification
Yes
Maybe
No
8. Performance review
Yes
Yes
Yes
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Stages in the Buying Process








Problem Recognition
General Need Description
Product Specification
Supplier Search
Proposal Solicitation
Supplier Selection
Order-Routine Specification
Performance Review
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Stages in the Buying Process
 Problem Recognition
 Can be triggered by internal or external stimuli
 General Need Description
 Needed item’s general characteristics and required
quantity
 Product Specification
 Item’s technical specification
 Product value analysis (PVA)
 For cost reduction, if components can be
redesigned or standardized or made by cheaper
method of production
7-19
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Stages in the Buying Process
 Supplier Search
 Buyer tries to identify the most appropriate
suppliers
 E-Procurement via Websites
 Vertical e-hubs of industries: plastics, steel,
chemicals, paper
 Set up direct external links to major suppliers
 Form buying alliances: ISYNC (Coca-Cola, Sara
Lee, PepsiCo, P&G, etc), Covisint (GM, Ford,
Chrysler, etc)
 Set up company buying sites: GE’s Trading
Process Network (TPN) where it posts Request
for Proposals (RFP)
7-20
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The e-hub plastics.com home page offers buyers and sellers
of plastics a marketplace plus news and information
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Covisint’s Web site offers both services and information
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Stages in the Buying Process
 Proposal Solicitation
 Invites qualified suppliers
 To submit written proposal-RFP (Request for
Proposal)
 To make formal presentations
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Stages in the Buying Process
 Supplier Selection
 Buying center specifies desired supplier attributes
and indicates their relative importance
 Each supplier is rated on specified attributes of
supplier-evaluation model such as
 Price, Supplier reputation, Product reliability,
Service reliability, Supplier flexibility, etc. Table
7.3
 The supplier of the highest score gets the order. But
 Usually negotiates with preferred suppliers for
better prices and terms before making the final
selection. Still price remains a key criterion.
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Table 7-3: An Example of Vendor Analysis
Attributes
Rating Scale
Importance
Weights
Price
.30
Supplier reputation
.20
Product reliability
.30
Service reliability
.10
Supplier Flexibility
.10
Poor
(1)
Fair
(2)
Good
(3)
Excellent
(4)
x
x
x
x
x
Total score: .30(4) + .20(3) + .30(4) + .10(2) + .10(3) = 3.5
7-25
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Stages in the Buying Process
 Methods Overcoming Price Pressure
 Risk and gain sharing:
 In return for a large order, seller promises buyer
a certain amount of cost savings
 If the savings do not reach the target, then, seller
will make up the difference
 If the savings exceed the target, seller will receive
a certain portion of exceeded savings
 Showing lower total cost of ownership (lifecycle cost)
 Citing the value of superior services
 Improving productivity
7-26
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Stages in the Buying Process
 Methods Overcoming Price Pressure
 Solution selling
 Solutions to Enhance Customer Revenues
 Solutions to Decrease Customer Risks
 Solutions to Reduce Customer Costs
7-27
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Stages in the Buying Process
 Number of Suppliers
 Companies are increasingly reducing the number of
suppliers to achieve continuous quality and
performance improvements, and to lower the supply
price
7-28
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Stages in the Buying Process
 Order-Routine Specification
 Lists the technical specification, the quantity
needed, the expected time of delivery, return policy,
and the warranty
 Blanket contract (Stockless purchase plans)
 Vendor-managed inventory system replenishes
inventory through continuous replacement programs
7-29
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Stages in the Buying Process
 Performance Review
 Periodically reviews the performance of chosen
suppliers
 Decides to continue, modify or end a supplier
relationship
 Incentive systems to reward purchasing managers
for good buying performance
7-30
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Managing Business-to-Business
Customer Relationships
 The Benefits of Vertical Coordination
 Great coordination between seller and buyer will
create more value for both parties
 Building trust between parties is often seen as one
prerequisite to healthy long-term relationships
 Buyer-supplier relationships differ according
to 4 factors




Availability of alternatives
Importance of supply
Complexity of supply
Supply market dynamics
7-31
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Institutional Markets
 Schools, hospitals, nursing homes, prisons, and
other institutions
 They provide goods and services to people in
their care
 Tend to have low budgets and captive clienteles
 Quality needs to meet or exceed a certain
minimum standard and prices need to be low
7-32
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Government Market
 Typically requires suppliers to submit bids and
normally awards the contract to the lowest bidder
 Some negotiated contract purchases
 Products need to meet the minimum standards
 Government provides a debriefing to vendors who lost
a bid
 Some companies have a separate government
marketing department.
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Government Market
 Special programs for
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Small businesses
Minority-owned businesses
Woman-owned businesses
Businesses located in depressed areas (HUB Zone,
Historically Underutilized Business Zone )
 Most purchases are now through online
 U. S. GSA (www.gsaadvantage.gov)
 US. Dept of Defense (www.defense.gov/contracts)
 Federal Business Opportunities (www.fbo.gov)
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