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Business Market Management:Business Market Management:
Understanding, Creating, andUnderstanding, Creating, andDelivering ValueDelivering Value
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Chapter 3:Chapter 3:
Understanding Firms as CustomersUnderstanding Firms as Customers
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Defining the Process:Defining the Process:Understanding Customer FirmsUnderstanding Customer Firms
Understanding firms as customersUnderstanding firms as customersis theis theprocess of learning how companies relyprocess of learning how companies relyon a network of suppliers to add value toon a network of suppliers to add value totheir offerings; integrate purchasingtheir offerings; integrate purchasing
activities with those of other functionalactivities with those of other functionalareas and outside firms, and makeareas and outside firms, and make
purchasing decisions.purchasing decisions.
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Understanding Firms as CustomersUnderstanding Firms as CustomersThings You Need to Know about Each CustomerThings You Need to Know about Each Customer
What is the customer firms purchasing orientation?What is the customer firms purchasing orientation?
Who participates on the buying team?Who participates on the buying team? What are the roles of each member?What are the roles of each member? What value does each member gain from the offering?What value does each member gain from the offering?
Who makes the final decision to buy?Who makes the final decision to buy?
What are the customers requirements?What are the customers requirements?
What is the firms buying process?What is the firms buying process? Is this a new task, modified rebuy, or straight rebuy?Is this a new task, modified rebuy, or straight rebuy?
How does the customer evaluate suppliers?How does the customer evaluate suppliers?
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UnderstandingUnderstanding
Purchasing OrientationPurchasing Orientation
PurchasingPurchasing entails the acquisition of resourcesentails the acquisition of resources
and capabilities for the firm from outsideand capabilities for the firm from outsideproviders.providers.
Purchasing orientationPurchasing orientation is the overallis the overall
philosophy that guides managers who makephilosophy that guides managers who makepurchasing-related decisions and delineatespurchasing-related decisions and delineatestheir domain and span of influence.their domain and span of influence.
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Understanding PurchasingUnderstanding Purchasing
OrientationOrientationThree Purchasing OrientationsThree Purchasing Orientations
BuyingBuying ProcurementProcurementSupplySupply
ManagemenManagemen
tt
Primary Goal of Orientation:Primary Goal of Orientation:
LowestLowest
PricePriceLowestLowest
Total CostTotal CostBestBest
ValueValue
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BuyingBuying concerns executing discreteconcerns executing discretetransactions with suppliers.transactions with suppliers.
The central pursuits of buying are:The central pursuits of buying are:
obtain theobtain the best dealbest dealin terms of price,in terms of price,quality, and availabilityquality, and availability
maximizemaximizepowerpowerover suppliersover suppliers
avoid riskavoid riskwherever possible.wherever possible.
Understanding PurchasingUnderstanding PurchasingOrientationOrientation
BuyingBuying
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Obtaining theObtaining the Best DealBest DealThe Industry Price BandThe Industry Price Band
(Adapted from Ross(Adapted from Ross
1984)1984)
AverageAverage
PricePrice+ 3%*+ 3%*- 3%*- 3%*
* Band varies by industry* Band varies by industry
PricePrice
PremiuPremiu
mm
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Obtaining theObtaining the Best DealBest DealDistributive NegotiationsDistributive Negotiations
Maximum priceMaximum pricethe buyer isthe buyer is
willing to pay orwilling to pay or
VIU PriceVIU Price
Minimum priceMinimum pricethe seller isthe seller is
willing towilling to
acceptaccept
Zone ofZone of
AgreementAgreementPricePrice
AnalysisAnalysisSupplierSupplier
CostCost
AnalysisAnalysis
ValueValue
AssessmentAssessment
Price perPrice per
UnitUnit
00
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Maximizing PowerMaximizing Powerover Suppliersover Suppliers
MultisourcingMultisourcing
CommoditizationCommoditization
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The Never-Ending Battle BetweenThe Never-Ending Battle Between
Buying and MarketingBuying and Marketing
Buying seeksBuying seeks
CommoditizatioCommoditizatio
nn
MarketingMarketing
seeksseeks
DifferentiationDifferentiation
VA = VB VA PA> VB - PB
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ProcurementProcurement pursues quality improvements andpursues quality improvements and
cost reductions through the integration ofcost reductions through the integration of
purchasing with other functions and cooperativepurchasing with other functions and cooperative
relationships withrelationships with firstfirst--tiertiersuppliers.suppliers.
Procurement increases customer productivity by:Procurement increases customer productivity by:
improvingimproving qualityquality
reducingreducingtotal coststotal costs
cooperatingcooperatingwith suppliers.with suppliers.
Understanding PurchasingUnderstanding Purchasing
OrientationOrientationProcurementProcurement
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ImprovingImproving QualityQuality
SpecificationsSpecifications describe products or services that thedescribe products or services that thefirm is seeking.firm is seeking.
functional specificationsfunctional specifications
technical or materials specificationstechnical or materials specificationsprocess specificationsprocess specifications
performance specificationsperformance specifications
brand specificationsbrand specifications
StandardizationStandardization entails establishing agreement onentails establishing agreement onuniform identifications for definite characteristics ofuniform identifications for definite characteristics ofquality, performance, service, etc.quality, performance, service, etc.
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QualityQuality asas
Conformance to SpecificationsConformance to Specifications
0
Supplier Specifications minus CustomerSupplier Specifications minus Customer
SpecificationsSpecifications
PerfectPerfect
QualityQuality
+x-x
UnderspecifiedUnderspecified OverspecifiedOverspecified
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QualityQuality asas
Conformance to SpecificationsConformance to Specifications
DefeatureDefeature to eliminate a feature from an offering to eliminate a feature from an offering
and then reduce price by a set amountand then reduce price by a set amount
ProductProduct
PricePrice
TraditionalTraditionalPricingPricing DefeaturingDefeaturing
fixedfixed
fixedfixedvariablvariabl
ee
variablvariabl
ee
(Adapted from Nagle & Holden 2002)(Adapted from Nagle & Holden 2002)
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ReducingReducing Total CostsTotal Costs
Total Cost of Ownership (TCO)Total Cost of Ownership (TCO) or Life Cycleor Life CycleCosts are the sum of all expenses associatedCosts are the sum of all expenses associatedwith thewith the acquisitionacquisition,, useuse, and, and disposaldisposal ororrecyclingrecycling of a market offering.of a market offering.
TCO AnalysisTCO Analysis is the application of Activity-Basedis the application of Activity-BasedCosting to sourcing strategy and purchasingCosting to sourcing strategy and purchasingdecisions.decisions.
If the offering remains productive for severalIf the offering remains productive for severalyears, state total costs in terms of theiryears, state total costs in terms of theirnetnet
present valuepresent value (NPV).(NPV).
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ReducingReducing Total CostsTotal CostsBeware of theBeware of the Seesaw Effect!Seesaw Effect!
CostCost
ReductionsReductions
searchsearch
transactiontransaction
informationinformation
inventoryinventory
physical assetsphysical assets
Cost IncreasesCost Increases
systemssystems
orderorder
fulfillmentfulfillment
deliverydelivery
returnsreturns
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CooperatingCooperating with Supplierswith Suppliers
With a procurement orientation,With a procurement orientation,purchasing managers draw upon thepurchasing managers draw upon thecapabilities and resources of their first-capabilities and resources of their first-
tier suppliers totier suppliers tojointlyjointly improve qualityimprove qualityand reduce total costs.and reduce total costs.
Cooperation requires that customer andCooperation requires that customer and
supplier:supplier:trust one anothertrust one anotherequitably share rewardsequitably share rewards
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CooperatingCooperating with Supplierswith SuppliersIntegrative NegotiationsIntegrative Negotiations
Zone ofZone of
AgreementAgreementCustomerCustomer
s Minimals Minimal
AcceptablAcceptabl
e Levele Level
for Item Afor Item A
Suppliers MinimalSuppliers Minimal
Acceptable Level for Item BAcceptable Level for Item B
(Adapted from Bazerman 1986)(Adapted from Bazerman 1986)
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Supply ManagementSupply Management entails the integration andentails the integration andcoordination of purchasing with other functions in thecoordination of purchasing with other functions in the
firm and other firms in the value network.firm and other firms in the value network.Supply managementSupply management has four tenets:has four tenets:
focus all of the firms efforts tofocus all of the firms efforts to deliver valuedeliver valueto end-usersto end-users
concentrate the firms resources on aconcentrate the firms resources on aset of core competenciesset of core competencies
andand outsourceoutsource all other activitiesall other activities build abuild a supply networksupply networkthat efficiently completes requiredthat efficiently completes required
business processesbusiness processes
sustain highlysustain highly collaborative relationshipscollaborative relationships withwith selectselect first-tier andfirst-tier andlower-tier supplier firms.lower-tier supplier firms.
Understanding PurchasingUnderstanding Purchasing
OrientationOrientation
Supply ManagementSupply Management
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Supply Management ModelsSupply Management ModelsPurchasing Portfolio MatrixPurchasing Portfolio Matrix
CustomeCustome
r Valuer Value
Customer RiskCustomer Risk
leverage itemsleverage items
genericsgenerics
criticalscriticals
bottleneckbottleneckitemsitems
build to orderbuild to order design to orderdesign to order
build tobuild to
forecastforecastbuild tobuild to
replenishreplenishlowlow
highhigh
lowlow highhigh
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IT Infrastructure for e-BusinessIT Infrastructure for e-Business
Enterprise Application IntegrationEnterprise Application Integration(EAI)(EAI)
SuppliersSuppliers
EE
mm
pp
ll
oo
yy
eeee
ss
PPaa
rr
tt
nn
ee
rrss
CustomersCustomers
EnterpriseEnterprise
ResourceResource
PlanningPlanning
(ERP)(ERP)
EnterpriseEnterprise
RelationshipRelationship
ManagementManagement(ERM)(ERM)
CustomerCustomer
RelationshipRelationshipManagementManagement
(CRM)(CRM)
Supply ChainSupply Chain
ManagementManagement
(SCM)(SCM)
PartnerPartner
RelationshipRelationshipManagementManagement
(PRM)(PRM)
(Adapted from Sawhney 2000)
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The Buying TeamThe Buying Team
RolesRoles Likely PersonLikely Person
initiatorinitiator general managergeneral managerdeciderdecider controllercontroller
influencerinfluencer R&D engineerR&D engineer
purchaserpurchaser buyerbuyer
gatekeepergatekeeper purchasing managerpurchasing manageruseruser workerworker
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The Buying TeamThe Buying Team
Building theBuilding the
Value StackValue Stack
Beware: different units of a customer firm mayBeware: different units of a customer firm may
perceive or receive only a portion of an offeringsperceive or receive only a portion of an offerings
total value!total value!
Distribution of value elements 1-5.Distribution of value elements 1-5.
11
22
33
44
5
manufacturinmanufacturin
gg
R&DR&D
purchasingpurchasing
ITIT
logisticslogistics
(Adapted from Narayandas(Adapted from Narayandas
2002)2002)
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The Buying TeamThe Buying TeamBuilding theBuilding the Value StackValue Stack
Marketers create aMarketers create a value stackvalue stackby educating all unitsby educating all units
on the total value of the offering to their firm!on the total value of the offering to their firm!
11
22
33
44
5
The ValueStack
(Adapted from Narayandas(Adapted from Narayandas2002)2002)
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Learning Customer RequirementsLearning Customer Requirements
Customer Understanding of Their Own NeedsCustomer Understanding of Their Own Needs
KnownKnown UnknownUnknown
SupplierSupplier
UnderstandingUnderstanding
of Customerof Customer
NeedsNeeds
Known
Unknown
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Learning Customer RequirementsLearning Customer RequirementsMicrosoft CorporationMicrosoft Corporation
Customer Understanding of Their Own NeedsCustomer Understanding of Their Own Needs
Known Unknown
MicrosoftMicrosoft
UnderstandingUnderstanding
of Customerof Customer
NeedsNeeds
KnownKnown
UnknownUnknown
CustomerCustomer
SatisfactionSatisfactionService UsageService Usage
Activity-BasedActivity-Based
CostingCosting
AB PlanningAB PlanningUsability TestingUsability Testing
Supportability TestingSupportability Testing
Beta TestingBeta TestingOffLine PlusOffLine Plus
WISH LinesWISH Lines
On-Site TrainingOn-Site Training
Online ServicesOnline ServicesMS MagazinesMS Magazines
Joint ProductJoint ProductDevelopmentDevelopment
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Buying Classes:Buying Classes:
Buying Phases:Buying Phases:
NewNew Modified StraightModified Straight
TaskTask Rebuy RebuyRebuy Rebuy
1. problem recognition1. problem recognition yesyes maybemaybe nono
2. determination of need2. determination of need yesyes maybemaybe nono
3. product specification3. product specification yesyes yesyes yesyes
4. certification of vendors4. certification of vendors yesyes maybemaybe nono
Depicting the Buying ProcessDepicting the Buying ProcessThe BuyGrid FrameworkThe BuyGrid Framework
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Buying Classes:Buying Classes:
Buying Phases:Buying Phases:NewNew Modified StraightModified Straight
TaskTask RebuyRebuy RebuyRebuy
5. request for proposals5. request for proposals yesyes maybemaybe nono
6. supplier selection6. supplier selection yesyes maybemaybe nono
7. order routine selection7. order routine selection yesyes yesyes yesyes
8. performance evaluation8. performance evaluation yesyes yesyes yesyes
(Adapted from Robinson, Faris, with Wind 1967)(Adapted from Robinson, Faris, with Wind 1967)
Depicting the Buying ProcessDepicting the Buying ProcessThe BuyGrid FrameworkThe BuyGrid Framework