Marketing ch. 6

industrial firms; resellers; government units

The NAICS provides common industry definitions for Canada, Mexico, and the United States, which makes it easier to measure economic activity in the three member countries of NAFTA.

purchasing department

new buy; straight rebuy; modified rebuy

A make-buy decision is an evaluation of whether components and assemblies will be purchased from outside suppliers or built by the company itself.

A bidder's list is a list of firms believed to be qualified to supply a given item.

E-marketplaces are online trading communities that bring together buyers and supplier organizations to make possible the realtime exchange of information, money, products, and services.

traditional auction; reverse auction

the marketing of goods and services to companies, governments, or not-for-profit organizations for use in the creation of goods and services that they can produce and market to others.

those manufacturers, wholesalers, retailers, and government agencies that buy goods and services for their own use or for resale. For example, these organizations buy computers and telephone services for their own use. However, manufacturers buy raw materials and parts that they reprocess into the finished goods they sell. Wholesalers and retailers resell the goods they buy without reprocessing them. Organizational buyers include all buyers in a nation except ultimate consumers.

makes the measurement of industrial, reseller, and government markets (an important first step for a firm interested in gauging the size of one, two, or all three of these markets in the United States and around the world) easier. The NAICS provides common industry definitions for Canada, Mexico, and the United States, which makes it easier to measure economic activity in the three member countries of the North American Free Trade Agreement (NAFTA). The NAICS replaced the Standard Industrial Classification (SIC) system, a version of which has been in place for more than 50 years in the three NAFTA member countries. The SIC neither permitted comparability across countries nor accurately measured new or emerging industries. Furthermore, the 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.

means that the demand for industrial products and services is driven by, or derived from, demand for consumer products and services. Derived demand is based on expectations of future consumer demand

The size of the purchase involved in organizational buying is typically much larger than that in consumer buying. The dollar value of a single purchase made by an organization often runs into thousands or millions of dollars.

Firms selling consumer products or services often try to reach thousands or millions of individuals or households. Firms selling to organizations are often restricted to far fewer buyers.

Organizations buy products and services for one main reason: to help them achieve their objectives. For business firms the buying objective is usually to increase profits through reducing costs or increasing revenues.

the objective attributes of the supplier's products and services and the capabilities of the supplier itself. These criteria serve the same purpose as the evaluative criteria used by consumers. The most commonly used criteria are (1) price, (2) ability to meet the quality specifications required for the item, (3) ability to meet required delivery schedules, (4) technical capability, (5) warranties and claim policies in the event of poor performance, (6) past performance on previous contracts, and (7) production facilities and capacity. Suppliers that meet or exceed these criteria create customer value.

developed by the International Standards Organization (ISO) in Geneva, Switzerland, refer to standards for registration and certification of a manufacturer's quality management and assurance system based on an on-site audit of practices and procedures.

Many organizational buyers today are transforming their buying criteria into specific requirements that are communicated to prospective suppliers. This practice, called supplier development, 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.

an industrial buying practice in which two organizations agree to purchase each other's products and services. The U.S. Justice Department disapproves of reciprocal buying because it restricts the normal operation of the free market. However, the practice exists and can limit the flexibility of organizational buyers in choosing alternative suppliers.

exists when a buyer and its supplier adopt mutually beneficial objectives, policies, and procedures for the purpose of lowering the cost or increasing the value of products and services delivered to the ultimate consumer.

several people in the organization participate in the buying process. The individuals in this group, called a buying center, share common goals, risks, and knowledge important to a purchase decision. For most large multistore chain resellers, such as Sears, 7-Eleven convenience stores, Target, or Safeway, the buying center is highly formalized and is called a buying committee. However, most industrial firms or government units use informal groups of people or call meetings to arrive at buying decisions. The importance of the buying center requires that a firm marketing to many industrial firms and government units understand the structure, the technical and business functions represented, and the behavior of these groups. 1 9 Four questions provide guidance in understanding the buying center in these organizations: (1) Which individuals are in the buying center for the product or service? (2) What is the relative influence of each member of the group? (3) What are the buying criteria of each member? and (4) How does each member of the group perceive our firm, our products and services, and our salespeople?

the people in the organization who actually use the product or service, such as a secretary who will use a new word processor.

affect the buying decision, usually by helping define the specifications for what is bought. The information systems manager would be a key influencer in the purchase of a new mainframe computer.

have formal authority and responsibility to select the supplier and negotiate the terms of the contract.

have the formal or informal power to select or approve the supplier that receives the contract. In routine orders the decider is usually the buyer or purchasing manager; in important technical purchases it is more likely to be someone from R&D, engineering, or quality control. The decider for a key component being incorporated in a final manufactured product might be any of these three people.

control the flow of information in the buying center. Purchasing personnel, technical experts, and secretaries can all keep salespeople or information from reaching people performing the other four roles

three types of buying situations. These buy classes vary from the routine reorder, or straight rebuy, to the completely new purchase, termed new buy. In between these extremes is the modified rebuy. New buy. Here the organization is a first-time buyer of the product or service. This involves greater potential risks in the purchase, so the buying center is enlarged to include all those who have a stake in the new buy. Straight rebuy. Here the buyer or purchasing manager reorders an existing product or service from the list of acceptable suppliers, probably without even checking with users or influencers from the engineering, production, or quality control departments. Office supplies and maintenance services are usually obtained as straight rebuys. Modified rebuy. In this buying situation the users, influencers, or deciders in the buying center want to change the product specifications, price, delivery schedule, or supplier. Although the item purchased is largely the same as with the straight rebuy, the changes usually necessitate enlarging the buying center to include people outside the purchasing department.

the decision-making process that organizations use to establish the need for products and services and identify, evaluate, and choose among alternative brands and suppliers. There are important similarities and differences between the two decision-making processes.

After a contract is won, project personnel must often make a make-buy decision—an evaluation of whether components and assemblies will be purchased from outside suppliers or built by the company itself.

a systematic appraisal of the design, quality, and performance of a product to reduce purchasing costs.

a list of firms believed to be qualified to supply a given item. This list is generated from the company's purchasing databank as well as from engineering inputs. Specific items that are unique may be obtained from a single supplier after careful evaluation by the buying center.

A significant development in organizational buying has been the creation of online trading communities, called e-marketplaces, that bring together buyers and supplier organizations. These online communities go by a variety of names, including B2B exchanges and e-hubs, and make possible the realtime exchange of information, money, products, and services. E-marketplaces can be independent trading communities or private exchanges. Independent e-marketplaces act as a neutral third party and provide an Internet technology trading platform and a centralized market that enable exchanges between buyers and sellers. They charge a fee for their service and exist in settings that have one or more of the following features: (1) thousands of geographically dispersed buyers and sellers, (2) volatile prices caused by demand and supply fluctuations, (3) time sensitivity due to perishable offerings and changing technologies, and (4) easily comparable offerings between a variety of sellers. Private exchanges focus on streamlining a company's purchase transactions with its suppliers and customers. Like independent e-marketplaces, they provide a technology trading platform and central market for buyer-seller interactions. They are not a neutral third party, however, but represent the interests of their owners.

a seller puts an item up for sale and would-be buyers are invited to bid in competition with each other. As more would-be buyers become involved, there is an upward pressure on bid prices. Why? Bidding is sequential. Prospective buyers observe the bids of others and decide whether or not to increase the bid price. The auction ends when a single bidder remains and "wins" the item with its highest price. Traditional auctions are often used to dispose of excess merchandise.

a buyer communicates a need for a product or service and would-be suppliers are invited to bid in competition with each other. As more would-be suppliers become involved, there is a downward pressure on bid prices for the buyer's business. Why? Like traditional auctions, bidding is sequential and prospective suppliers observe the bids of others and decide whether or not to decrease the bid price. The auction ends when a single bidder remains and "wins" the business with its lowest price. Reverse auctions benefit organizational buyers by reducing the cost of their purchases. Clearly, buyers welcome the lower prices generated by reverse auctions. Suppliers often favor reverse auctions because they give them a chance to capture business that they might not have otherwise had because of a long-standing purchase relationship between the buyer and another supplier. On the other hand, suppliers say reverse auctions put too much emphasis on prices, discourage consideration of other important buying criteria, and may threaten supply partnership opportunities.

There are three different organizational markets: industrial, reseller, and government. Industrial firms in some way reprocess a product or service they buy before selling it to the next buyer. Resellers—wholesalers and retailers—buy physical products and resell them again without any reprocessing. Government agencies, at the federal, state, and local levels, buy goods and services for the constituents they serve. The North American Industry Classification System (NAICS) provides common industry definitions for Canada, Mexico, and the United States, which facilitates the measurement of economic activity for these three organizational markets.

Seven major characteristics of organizational buying make it different from consumer buying. These include demand characteristics, the size of the order or purchase, the number of potential buyers, buying objectives, buying criteria, buyer-seller relationships and supply partnerships, and multiple buying influences within organizations. The organizational buying process itself is more formalized, more individuals are involved, supplier capability is more important, and the postpurchase evaluation behavior often includes performance of the supplier and the item purchased.

Buying centers and buying situations have an important influence on organizational purchasing. A buying center consists of a group of individuals who share common goals, risks, and knowledge important to a purchase decision. A buyer or purchasing manager is almost always a member of a buying center. However, other individuals may affect organizational purchasing due to their unique roles in a purchase decision. Five specific roles that a person may play in a buying center include users, influencers, buyers, deciders, and gatekeepers. The specific buying situation will influence the number of people and the different roles played in a buying center. For a routine reorder of an item—a straight rebuy situation—a purchasing manager or buyer will typically act alone in making a purchasing decision. When an organization is a first-time purchaser of a product or service—a new buy situation—a buying center is enlarged and all five roles in a buying center often emerge. A modified rebuy buying situation lies between these two extremes.

Organizations dwarf consumers in terms of online transactions made and purchase volume. Online buying in organizational markets is popular for three reasons. First, organizational buyers depend on timely supplier information that describes product availability, technical specifications, application uses, price, and delivery schedules. This information can be conveyed quickly via Internet technology. Second, this technology substantially reduces buyer order processing costs. Third, business marketers have found that Internet technology can reduce marketing costs, particularly sales and advertising expense, and broaden their customer base. Two developments in online buying have been the creation of e-marketplaces and online auctions. E- marketplaces provide a technology trading platform and a centralized market for buyer-seller transactions and make possible the real-time exchange of information, money, products, and services. These e-marketplaces can be independent trading communities, such as PlasticsNet, or private exchanges, such as the Global Healthcare Exchange. Online traditional and reverse auctions represent a second major development. With traditional auctions, the highest-priced bidder "wins." Conversely, the lowest-priced bidder "wins" with reverse auctions.