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Lecture Three: Outline Organisational Buying Organisational Buying Situations Business Market Customers Classifying Goods for the Business Market

The Supply Chain Business Buying Processes Buying Patterns Of Business Users The Influence of Brand Strength Customer Service Content

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Organisational Buying

Hutt and Speh (1998) suggest that “every firm, regardless of its organisational characteristics, must procure the materials, supplies, equipment, and services necessary to operate the business successfully”.

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Organisational Buying (cont’d)Essentially, inter-organisational buying is a process. Walters (2002) illustrates:

Source: Walters (2002)

SupplierProcesses

“Organisation” ProcessesCustomerProcesses

Core (Distinctive)Processes

Support (reproducible)Processes

Decisions and Materials

Information Flows

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Organisational Buying Situations Hutt and Speh (1998) show that

demand in business markets is derived. “Demand for industrial products is derived from ultimate consumer demand. Customers in the business market, such as commercial firms, governments, and not-for-profit institutions, buy goods and services in order to produce other goods and services for their own customers”.

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Organisational Buying Situations (cont’d)

Hutt and Speh (1998) suggest that each business-to-business buying situation can be categorised into one of the below categories:

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Organisational Buying Situations (cont’d)

“New task. In the new-task buying situation, the problem or need is perceived by organisational decision makers as totally different from previous experiences; therefore a significant amount of information is required for decision makers to explore alternative ways of solving the problem and to search for alternative suppliers.

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Organisational Buying Situations (cont’d)

Straight rebuy. Where there is a continuing or recurring requirement, buyers have substantial experience in dealing with the need, and they require little or no new information. Evaluation of new alternative solutions is unnecessary and unlikely to yield appreciable improvements.

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Organisational Buying Situations (cont’d) Modified rebuy. In the modified rebuy

situation, organisational decision makers feel that significant benefits may be derived from a revaluation of alternatives. The buyers have experience in satisfying the continuing or recurring requirement, but they believe it worthwhile to seek additional information, and perhaps to consider alternative solutions”.

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Business Market Customers

Hutt and Speh (1998) argue that business market customers can be categorised into three categories:

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Business Market Customers (cont’d)

Users. Users purchase industrial products or services to produce other goods or services that are, in turn, sold in the business or consumer markets.

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Business Market Customers (cont’d)

Original Equipment Manufacturers (OEMs). The OEM purchases industrial goods to incorporate into other products sold in the business or ultimate consumer market.

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Business Market Customers (cont’d)

Dealers and Distributors. Dealers and Distributors include those commercial enterprises that purchase industrial goods for resale (in basically the same form) to users and OEMs.

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Classifying Goods for the Business Market

Hutt and Speh (1998) classify the goods that are bought and sold in the business market.

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Classifying Goods for the Business Market (cont’d)

Entering goods. Entering goods are those that become part of the finished product. This category of goods consists of raw materials and manufactured materials and parts. Their cost is an expense item that is assigned to the manufacturing process.

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Classifying Goods for the Business Market (cont’d)

Foundation goods. The distinguishing characteristic of foundation goods is they are capital items. As capital goods are used up or worn out, a portion of their original cost is assigned to the production process as a depreciation expense. Foundation goods include installations and accessory equipment.

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Classifying Goods for the Business Market (cont’d)

Facilitating goods. Facilitating goods are the supplies and services that support organisational operations. Because these goods do not enter the production process or become part of the finished product, their costs are handled as expense items.

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The Supply Chain

Supply chain management has been defined by members of ‘The International Centre for Competitive Excellence’ in 1994 as: “Supply chain management is the integration of business processes from end-user through original suppliers that provide products, services and information and add value for customers”.

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The Supply Chain (cont’d)

Hutt and Speh (1998) offer the following definition of supply chain management. “SCM is a technique for linking a manufacturer’s operations with those of it strategic suppliers and its key intermediaries and customers.

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The Supply Chain (cont’d)

It seeks to integrate the relationships and operations of both immediate, first-tier suppliers and those several tiers back in the supply chain…The goal of SCM is to improve timing and costs in manufacturing through strong vendor relationships”.

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Business Buying Processes

Miller and Layton (2000) believe these to include needs recognition, identification of alternatives, evaluation of alternatives, purchase decision and post purchase behaviour.

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Business Buying Processes (cont’d)

There are several factors will influence the business buying decision-making process including:

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Business Buying Processes (cont’d)

Miller et al (2000) show that a buying centre refers to “all the individuals or groups involved in the process of making a decision to purchase”.

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Business Buying Processes (cont’d)

A buying centre includes the people who play any of the following buying roles:

- Users- Influencers- Deciders- Gatekeepers- Buyers

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Business Buying Processes (cont’d)

Environmental concerns. The company will base its purchasing decisions on what it anticipates demand for its own products to be.

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Business Buying Processes (cont’d)

The purchasing situation. Whether it is a straight rebuy, a modified rebuy or a new task will determine the level of involvement required in orchestrating the purchase.

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Business Buying Processes (cont’d)

Access to information. The greater the buying organisation’s access to information, the greater their ability to search for more favourable buying situations.

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Business Buying Processes (cont’d)

Relationship with the supplier. The closer the organisation is to its suppliers, the less likely they are to search for other suppliers.

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Business Buying Processes (cont’d)

Position within the supply chain. if the company is further upstream in the supply chain, it’s inputs will mostly be raw materials.

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Business Buying Processes (cont’d)

Organisation size. The size of the organisation will determine its power within the market place (in most situations

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Business Buying Processes (cont’d)

Organisational orientation. The more customer centric an organisations is, the greater the influence of customer requirements will be on its purchasing habits.

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Business Buying Processes (cont’d)

Source: Walters (2002)

ConsumptionChain profile

Buyingorganisation

Barriers Value Use Risk

Significance ofExpenditure

Level of use Proportional

spend

“Lifestyle”characteristics Activities Interests Opinions

Strength and influenceof suppliers

Brand strength Services “Loyalty”

CustomerPurchasingInfluences

Customer value criteria(Benefits

expected/perceived)

Customer ValueModel (value

drivers)

Customer Acquisition Costs(Lifecycle Costs)

ValueProposition

‘CustomerExperience’

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Buying Patterns Of Business Users

There are some differences between consumer and business buying behaviour.

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Buying Patterns Of Business Users (cont’d)

Nature of the relationship. In business markets, a lean towards supply-chain management leads to more enduring relationships, meaning companies are more likely to pay more attention to the roles of suppliers, products, distributors and end users.

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Buying Patterns Of Business Users (cont’d)

Frequency of purchase. In business markets, purchases are usually higher in frequency.

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Buying Patterns Of Business Users (cont’d)

Size of order: the average business order is larger than in the customer market.

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Buying Patterns Of Business Users (cont’d)

Length of the negotiation period. The period of negotiation in business sales are normally much longer than in customers buying situations.

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Buying Patterns Of Business Users (cont’d)

Service expectation higher service expectations are the norm in business markets.

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Buying Patterns Of Business Users (cont’d)

The presence of professional buyers. Organisations tend to use full-time professionals to source inputs for the organisation, making inputs highly scrutinised.

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Buying Patterns Of Business Users (cont’d)

Organisational goals also influence purchase decisions.

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Organisational Buying Structures

Hutt and Speh (1998) show that organisational buying processes may be centralised or decentralised.

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Organisational Buying Structures (cont’d)

A centralised buying process exists where the purchasing of company inputs is controlled exclusively by one group or department within the organisation.

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Organisational Buying Structures (cont’d) The advantages of centralised purchasing

include: - Purchases are made in large volumes,

leading to economies of scale.- The ability to use a highly specialised group

of staff to maximise the possibility of making favourable purchase decisions.

- The ability to maximise purchasing efficiency through task-specific technology.

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Organisational Buying Structures (cont’d) Disadvantages include:- Inability to cater for large widely dispersed

markets.- Goal confusion, where the goals of the

purchasing department a contrary to those of other departments.

- Lack of exposure to other organisational departments may lead to an inability to grasp their perspectives. That is, knowledge management may be difficult in this situation.

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Organisational Buying Structures (cont’d)

A decentralised buying process is one that is dispersed between different areas of the business, each being responsible for a discrete product line.

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Organisational Buying Structures (cont’d)

Advantages of this method include:- Greater ability to cater to the leads of

individual customer groups.- Greater knowledge management

capability.

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Organisational Buying Structures (cont’d)

Disadvantages include:- Lesser ability to gain economies of

scale.- Less-specialised staff.- Large costs involvement.

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Organisational Buying Structures (cont’d)

A hybrid between each of these two methods is a way that organisations with groups of similar customers as well as groups of dissimilar customers can manage their purchasing activities effectively.

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The Influence of Brand Strength

Keller (1998) shows that “Customer – based brand equity is defined as the differential effect that brand knowledge has on consumer response to the marketing of that brand”.

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The Influence of Brand Strength (cont’d)

The greater the brand equity, the greater the affect of the brand on the customer’s final purchase decision. Brand equity results from the company’s overall positioning effort.

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The Influence of Brand Strength (cont’d)

The difference between customer expectations and customer perceptions (resulting from company positioning) has previously been identified as the “value delivery gap”.

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The Influence of Brand Strength (cont’d)

The main time that the brand influences a corporate purchasing decision is in the instance of a new task purchase.

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Customer Service Content

Since companies are dealing with other companies rather than individuals, the ability to adequately service their market offering bears somewhat larger consequences if performed inadequately.

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Customer Service Content (cont’d)

Customer servicing can also generate large amounts of valuable information that can be used to close the value deliver gap.

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Discussion Questions Describe the business-to-business buying

process for an organisation you are familiar with. How can a company use knowledge of this process to generate greater profitability for themselves?

Describe the difference between centralised, decentralised and hybrid purchasing organisations. What is the most appropriate organisational structure for a small business with a diverse customer base? Why?

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Discussion Questions (cont’d)

Describe five major influences on the business buying process. How can knowledge of these individual factors be used to gain competitive advantage?