Industrial Marketing

Module 3 Nature of Industrial buying and buying behavior Atul Atre Dec 2009
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SUMMARY OF Module - 2
Types /Classifications of Industrial/ Business Customers are (i) Commercial Enterprises, (ii) Government (iii) Institutional, (iv) Cooperative societies. Industrial Products/Services are classified into (i) Materials & Parts, (ii) Capital Items, (iii) Suppliers & Services. Marketing strategies differ for different product & Customer types. Industrial / business Buyers follow one of the three purchasing orientations : buying, procurement, or supply chain management. Purchasing practices vary for different types of customers. It is important to understand it for each major customer. Types of environment are Ecological, Physical, Internal, & External, Strategies used for managing changing external marketing environment are : (i) Independent, (ii) Cooperative, (iii) Strategic Planning.
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THE NATURE OF INDUSTRIAL BUYING AND BUYING BEHAVIOUR

Learning Objectives Understand Organizational buying objectives. Gain knowledge of buying activities, including different phases in buying decision process, types of buying situations; buygrid framework & its analysis. Identify members of buying centers. Understand organizational buying behavior. Know how industrial buyers choose and evaluate suppliers.
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PURCHASING OBJECTIVES OF FIRMS Reliability in delivery. Consistent product Quality. Lowest price (If delivery & Quality objectives are met) Excellent pre & post sales services. Long Term collaborative relationship. Industrial buyers try to achieve organizational purchasing objectives & personal objectives like higher status, job security, salary increments, promotions & social relationships.
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Industrial Buying Decision Process

Marketers must study this for developing effective marketing strategy. In Consumer Marketing, Household / Individual consumer / Buyer makes buying decisions based on certain mental stages like (i) Problem (Need) Recognition, (ii) Information Search (iii) Evaluation (iv) Purchase decision (v) Post Purchase Behavior In Industrial Marketing, Buying Decision making process is observable, involving many people in buying firm & includes sequential activities / stages / phases, as follows:
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Introduction and organizational buying activities

Buyer
Industrial marketing strategy Based on Understanding every aspect Of customers Buying process
Customer Organization

Industrial Marketer

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Introduction and organizational buying activities

What influences Organizational buying activities?

1.Level of experience 2.Level of information in purchasing certain products and services

Examples: Routine buys , vast experience , no extra information required New buys no or less experience, information AGA/Dec 2009

Buygrid model
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Buygrid model
buygrid framework - A conceptual model that describes the organizational buying process. It consists of two dimensions: buyclasses and buyphases. The buyclasses are new task purchase, modified rebuy, and straight rebuy. The buyphases are need recognition, need definition, need description, seller identification, proposal solicitation, proposal evaluation 2009 selection, and AGA/Dec ordering procedures, and performance

Buygrid model
buyclasses - Buying situations that are distinguished on four characteristics: newness to decision makers, number of alternatives to be considered, uncertainty inherent in the buying situation, and the amount of information needed for making a buying decision. There are three buy classes: new task purchase, modified rebuy, and straight rebuy. A new task purchase is a problem or requirement that has not arisen before such that the buying center does not have any relevant experience with the product or service.
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Buygrid model

buyclasses - continued A modified rebuy is a situation such that the buying center has some relevant experience to draw upon. The alternatives considered, however, are different, or changed from the ones considered the last time a similar problem arose. A straight rebuy is the purchase of standard parts; maintenance, repair, and operating items and supplies; or any recurring need that is handled on a routine basis
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Buygrid model
Buy class
New task Modified rebuy Straight re-buy

B U Y P H A S E

1 2 3 4 5 6 7 8

Anticipation of problem/need and general solution Determination of characteristics and quantity of needed item Description of characteristics and quantity of needed item Search for and qualification of potential sources Acquisition and analysis of proposals Evaluation of proposals and selection of suppliers Selection of order routine Performance feedback and evaluation AGA/Dec 2009

Buygrid model

Highly complex/multiple influences For marketer ..most important time

Buy class
New task Modified rebuy Straight re-buy

B U Y P H A S E

1 2 3 4 5 6 7 8

Anticipation of problem/need and general solution Determination of characteristics and quantity of needed item Description of characteristics and quantity of needed item Search for and qualification of potential sources Acquisition and analysis of proposals Evaluation of proposals and selection of suppliers Selection of order routine Performance feedback and evaluation AGA/Dec 2009

Creeping Commitment

Buygrid model: Buy-classes

Buy-classes: buying situations
1) New task: triggered by internal or external factors New product linenew equipment External: change in competition product or change in customer specs 2) Modified re buy: Product improvement cost reduction , minor changes or present supplier in adequate 3) Straight re buy: continuing and recurring routine response well developed choice criteria
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(B) Buying Situations / Buyclasses

3 Common types of purchases / buying situations

i. New Task / New Purchase : Here, buyers have limited knowledge and experience of the new product/service. Hence, more information is obtained, more people are involved, risks are more, and decisions take longer time. ii. Modified Rebuy / Change in supplier : This situation occurs when the firm is not satisfied with the performance of existing suppliers, or there is a change in product specs. Hence, the need for searching alternate suppliers. iii. Straight Rebuy / Repeat purchase : Here, the buying firm places repeat orders on suppliers who are currently supplying certain products/services. Such decisions are routine, with less risks and less information needs, and can be taken by junior executives.
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(A) PHASES IN INDUSTRIAL BUYING DECISION MAKING PROCESS / BUYPHASES PHASE 1 :- Recognizing A problem / need. PHASE 2 :- Determining Characteristics & Quantity of needed product / Service*. PHASE 3 :- Developing specifications of the product*. PHASE 4 :- Searching & Qualifying Suppliers. PHASE 5 :- Obtaining & Analyzing suppliers offers* PHASE 6 :- Evaluating & Selecting Suppliers. (shown on next slide) PHASE 7 :- Selecting an order routine PHASE 8 :- Post Purchase evaluation * These are in addition to five stages of consumer buying decision process.
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Buygrid model: phases in purchasing process Phase 1 ) Anticipation of problem/need and general solution
Recognition of problem Need Potential opportunity ( outdated product, equipment failure, un availability of supplies)

Marketer, U must get in here.. U have the big advantage: This the right time
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Buygrid model: phases in purchasing process

Phase 2 : Determination of characteristics and

quantity of needed item How to resolve situation arising out of phase 1? Performance specification/ application requirement ( engineering or user dept prepares these)

Critical decisions/ info needs are with user department

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Buygrid model: phases in purchasing process

Phase 3: Description of characteristics and quantity of needed item
1. One critical step for marketer to get into the buying process 2. Many influencer enters 3. Only close insiders are still aware

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Buygrid model: phases in purchasing process

Phase 4: Search for and qualification of potential sources 1. Search for alternate suppliers 2. Qualification of suppliers 3. Decision on potential vendors taken in this phase

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Buygrid model: phases in purchasing process

Phase 5: Acquisition and analysis of proposals 1. Proposals from qualified short listed vendors 2. Phase 4 and 5 are distinct in complex cases but may be overlapping in routine purchases 3. Info requirement are high
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Buygrid model: phases in purchasing process

Phase 6: Evaluation of proposals and selection of suppliers 1. Weighing and analysis of alternate proposals 2. Make and buy decisions 3. Terms/prices/delivery/past performance

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Buygrid model: phases in purchasing process

1. 2. 3. 4. Phase 7:Selection of order routine Forwarding PO Status report Receiving of consignment Order routines are different for capital goods, direct material and in-direct material and service
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Buygrid model: phases in purchasing process

Phase 8: Performance feedback and evaluation 1. Review and feedback 2. Vendor performance analysis 3. Revisit alternate sources if performance of vendor is not as per original requirement in terms of QCD
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Creeping commitment

Overview of buy grid

Sequence of choices elimination of certain choices for further considerations As you go to next step, commitment level increase as it affects value in use Creeping commitment: firmer commitment as buyer move down in buy-phases from phase 1 to phase 8

Center of gravity
As one moves down in phases , different department or function become more critical than others. Phase 2 engineering may be CG but phase 8 , Quality and inspection may be CG.
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Marketing implications of buygrid Marketing strategy is affected by

1. Purchasing situation 2. Decision phase
In an organization, different departments and functions perceive buygrid differently
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Marketing implications of buygrid

Phase New task
Anticipate problem Convince buyers of problem solving capabilities

Modified re-buy Straight rebuy

In supplier : maintain QCD and service Out suppliers: Watch for trends and tap on QCD/service of in suppliers trends In supplier: close touch with users and buyers Out suppliers: Convince buyer /users about better value in use proposals

Problem recognition

Solution determination

Provide technical assistance and info

In/Out suppliers Same as above Stress capability and tap on QCD Problem solving capability demonstration

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Marketing implications of buygrid

Phase New task Modified re- Straight rebuy buy
Same as phase 1

Determining needed item

Provide detail Same as phase 2 product/service info to decision maker

Searching for and qualifying suppliers

In supplier: maintain In supplier: watch for Same as phase 1 dependability problems Out suppliers: Out supplier: Demonstrate ability to Demonstrate ability to perform the task perform task

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Marketing implications of buygrid

Phase New task Modified re- Straight rebuy buy

Analysis proposals

Understand problem Understand problem Make timely proposals Needs Needs Timely proposals Timely proposals

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Product analysis for identifying info needs of key influencers

Rating scale ( giving weights to each features as applicable to target) for computers Buying tires 1. Technical competency 2. Credit terms 3. Maintenance service
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Product info need marketing Tech competency .5

Purchase .3

management .4

Credit terms

.1

.5

.4

Maintenance

.4

.2

.2

Buying tires : development of rating scale AGA/Dec 2009

A SUPPLIER EVALUATION SYSTEM.

ATTRIBUTE/ FACTOR PRICE QUALITY DELIVERY SERVICE FLEXIBILIY TOTAL WEIGHT/ IMPORTANCE 15 30 25 20 10 100 SUPPLIERS PERFORMANCE 0.5 0.7 0.6 0.7 0.4 SUPPLIERS RATING SCORE 07.5 21.0 15.0 14.0 04.0 61.5

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(C) Buygrid Framework

BUYPHASES New Task 1. Problem Recognition 2. Characteristics of Product 3. Product Specification 4. Supplier Search 5. Analyzing Supplier Offers 6. Supplier Selection 7. Order Routine Selection 8. Post Purchase Review Yes Yes Yes Yes Yes Yes Yes Yes
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BUYCLASSES Modified Rebuy May Be May Be May Be Yes Yes Yes Yes Yes Straight Rebuy No No No No May Be No May Be Yes

BUYGRID FRAMEWORK ANALYSIS

All Phases are Applicable for a New Task. Some Phases are Applicable for modified / Straight Rebury. New task situation is most difficult since buyers have less knowledge, no experience & more people involved. Modified Rebury is not difficult situation since it has few activities. Straight rebury situation is handled routinely, as repeat purchases are made.
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Buying centers and multiple buying influencers

DMU Decision making unit: people involved in purchasing decision process directly or indirectly
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Buying centers and multiple buying influencers

DMU is buying center in industrial marketing consisting of 1. Group of individuals 2. Common goals which decision will help them to achieve 3. Sharing of risk arising from decision
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Buying centers and multiple buying influencers

A buying center (also known as a decision making unit), in marketing, procurement, and organizational studies, is a group of employees responsible for purchasing an item for the organization. In a business setting, major purchases typically require input from various parts of the organization, including finance, accounting, purchasing, information technology management, and senior management. Highly technical purchases, such as information systems or production equipment, also require the expertise of technical specialists. In some cases the buying center is an informal ad hoc group, but in other cases, it is a formally sanctioned group with specific mandates, criteria, and procedures. The employees that constitute the buying center will vary depending on the item being purchased.

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Buying centers and multiple buying influencers

In a generic sense, there are typically five roles within any buying center. They are: 1. End users of the item being purchased. 2. Buyers who are responsible for the contract . 3. Influencers who try to affect the outcome decision with their opinions. 4. Deciders who make the final decision. 5. Gatekeepers who control the flow of information.
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Buying centers and multiple buying influencers

Objectives
Buying center
1. Informal 2. Cross departmental Decision unit 1. Acquisition 2. Impartation
(transmission of information )

3. Processing Of purchase related info

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Buying centers and multiple buying influencers

Identifying buying center members 1. Marketing: Salability in end product 2. Manufacturing: feasibility and economic consideration, mainly responsible for cost reduction. Tendency to minimize changes 3. R&D: New product development. early involvement by marketing to freeze specs in their favor 4. General management: new /unfamiliar buying situation, establishing guideline and criteria
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Buying centers and multiple buying influencers

Identifying buying center members Purchasing: not the central figure in process of purchasing Influence only if specifications and suppliers are established Major influence on negotiations and selected types of purchases
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Buying centers and multiple buying influencers

Buying center roles Primary roles 1. Deciders 2. Influencers Secondary roles 1. User 2. Buyer 3. gatekeepers
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Buying centers and multiple buying influencers

Who is the key buying influencer? Who can sway the deal?

Marketers most difficult task AGA/Dec 2009

(D) Buying Center roles & key members.

Roles of Buying center members are Initiators. First recognize problem / need. Any individual in buying firm often, users. Buyers. Carry out purchase activities. They are purchase officers / executives. User. Any person who uses the product / service. Influencers. Influence buying decision. Technical people are often key influencers. Deciders. Make buying decisions. Senior executives are deciders for high value & complex products. For straight rebuy / routine purchase, junior purchase officer can decide. Gatekeepers. They control / filter information & meetings with buying center members. Often, P.A. / Junior person attached to purchase head is the gatekeeper.
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(E) Identifying key members of buying centre

Sales / Marketing persons must identify important members of buying centre. Buying centre consists of individuals and groups who take part in buying decision making process, have common objectives & share common risks. It is also called purchase committee, buying committee or decision making unit. Members of buying centre are (i) Technical persons. Represent design, production /operations, maintenance, Q.C., Industrial Engg. Depts. (ii) Purchasers / Buyers. Purchase / Materials dept. persons. (iii) Accounts / Finance persons. (iv) Marketing persons (v) Top management persons. G. M. & above.
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(F) Organizational buying behavior

Industrial / business buyers are influenced by many factors. Two most important factors are (i) Organizational factors / task oriented objectives, like best product quality, lowest price, dependable delivery. (i) Personal factors / Non-task oriented objectives, such as good increments, promotion, Job security, personal favors. When suppliers offers are similar, buyers can satisfy organizational objectives from any supplier. Hence, personal factors become important. However, when suppliers offers differ substantially, buyers give importance to organizational factors to satisfy organizational objectives.
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Objectives in organizational buying

Organizational goals Organizational members influenced by Task and non task oriented objectives Different criteria used by organization to rate the suppliers Roles of buying center members
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Objectives in organizational buying

1. 2. 3. 4. 5. 6. Task oriented objectives Business goal making profit Technical service Quality Cost delivery Budgetary constraints Economic risk
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Objectives in organizational buying

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Objectives in organizational buying

1. 2. 3. 4. 5. Task oriented objectives Price : evaluated cannot be considered in isolation Service: technical assistance/spares/training Quality: consistent, reliability, inspection Assurance of supply: interruption are costly Reciprocity: exchange of mutually beneficial business

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Objectives in organizational buying

Non task objectives Personal objective : status, promotions, salary increase, job security, social interaction Friendship Reputation Mutually beneficial interactions
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Objectives in organizational buying

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Objectives in organizational buying

Marketer you have to find the way:

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Product analysis for identifying info needs of key influencers

Product is bundle of promises to perform

These are important to few but may be incidental to other? How about steam engine? Product features appeal to few but not all in buying center
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Product analysis for identifying info needs of key influencers

Product analysis consist of A list of criteria considered relevant to needs of target market Developing rating scale Examples : engine weight important in buses and trucks but not important for genset buyer
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Definition A model can be defined as a simplified representation of reality. It simplifies only those aspects of reality that interest model builder. Types of models Just verbal Limited Scope Comprehensive model
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models

models
Use of models Assist in constructing theory that guide research on consumer behavior To facilitate the learning what is presently known Model serves structured, systematic and logical thinking about consumer. Identify relevant variables Indicate their characteristics Specify inter-relationships
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Model for determining composition of org buying center :

Buying Mission
Capital/product/ support/consumption New/modified/rebuy Prod/distribution /service

Purchase Needs
Money Value High/low

Firm

Buy class

Buy phase

Time Life cycle Long/short

Procurement

Executive/manager/agent/ buyer/computer

Other Buying center Member-ship Mngt levels members Functional Management/R&D/ Engg areas Pod/Finance/Traffic/Mktg Transaction Roles Interaction
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 Many models have been developed to explain organizational buying behavior. One of the comprehensive models is the Sheth model, described below. The Sheth model of industrial buyer behavior, shown below , focuses on (i) Psychological aspects of individual buyers (Component 1), (ii) Conditions causing joint decision making (Component 2), (iii) Conflict among those involved in decision process & resolution of conflict (Component 3). Situational factors include economic conditions, labor disputes, mergers & acquisitions. The model does not explain their influence on buying process.
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Webster and wind model

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Webster and wind model

A buying centre makes joint purchase decisions as an informal group. Its task consists of information acquisition, search processes, the development of choice criteria and decision making among alternatives. The buying centre has three principal aspects: 1. composition: the size, hierarchical levels and functional areas involved; 2. influence: those individuals with the most influence in the buying process; 3. roles: the identification of different roles played by buying centre members. A buying centre includes all members of the purchasing organization who play any of six roles in the purchase process:
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Webster and wind model

The model structured industrial buying processes that are characterized by multi- person involvement levels, extensive internal and external coordination effort, and long lead times. An individual can facilitate or assume more than one role in the purchase process and several individuals may hold the same role. The importance of the different roles varies by buy phase and organization size.

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Webster and wind model

Isolating the important player involves: 1. Isolate the personal stakeholders Those individuals who have an important personal stake in the purchase decision- making exert more influence than other members of the buying centre. 2. Follow the information flow Influential members are central to the information flow that surrounds the purchase decision. Other members direct information to them. 3. Identify the experts Expertise is an important determinant of influence in the buying centre. Those individuals who possess the most knowledge and ask the most questions of the sales person are often influential.
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Webster and wind model

Isolating the important player involves: 4. Trace the connections to the top Powerful individuals often have direct access to top management that provides a direct link to valuable information and resources and enhances the status and influence of those individuals within the buying centre. 5. Understand the role of the purchasing department The purchasing department is dominant in repetitive buying situations through its technical expertise, knowledge of the dynamics of the supplier's industry and close working relationships with individual suppliers.
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Webster and wind model

pros: The six buying roles help the sales person structure large scale sales in complex corporate environments. Successful inside selling requires planning and preparation before making first contact. cons: The concept does not include the political aspect of decision making. The sales person must consider multiple, often conflicting goals. The model omits the selling side. A complex transaction often requires the involvement of multiple individuals from the selling party, e.g. mixed teams consisting of sales people and product engineers. This group of actors is called the Problem-Solving Unit (PSU).
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CUSTOMER SERVICE
Important Customer Service Elements. Carry out market survey to understand which of the following elements of customer service are important to customers, what service levels are expected by customers, the service levels offered by the firm and its competitors. (i) Pre Sales Service : Advising, Informing, Problem solving (ii) During Sales Service : Product availability, ontime delivery, order cycle time, and information. (iii) Post Sales Service : Warranty, AMC, Repair, Installation & Training. Develop superior service package. Test, Set Goals, and Establish Control system

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Contemporary purchasing activities

1. 2. 3. 4. 5. JIT Outsourcing Single sourcing Value analysis Buying committee

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Contemporary purchasing activities

JIT is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated carrying costs. In order to achieve JIT the process must have signals of what is going on elsewhere within the process. This means that the process is often driven by a series of signals, which can be Kanban that tell production processes when to make the next part.

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Outsourcing
Outsourcing is contracting with another company or person to do a particular function. Almost every organization outsources in some way. Typically, the function being outsourced is considered non-core to the business
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Outsourcing

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Buying committee

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VALUE ANALYSIS
An organized effort directed at analyzing the function of systems, products, specifications, standards, practices, and procedures for the purpose of satisfying the required function at the lowest total cost of effective ownership consistent with the requirements for performance, reliability, quality and maintainability.
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SUMMARY OF CHAPTER - 3
Industrial marketers should understand that business buyers try to achieve both organizational & personal objectives. Industrial buying decision process consists of eight steps / stages (buyphases) & three types of buying situations (buyclasses). Buygrid model combines buyphases & buyclasses. Marketers must understand roles & key members of buying centre, including key buying influencers. Many factors influence organizational buying behavior, but major factors are organizational ( or task oriented ) objectives and personal (non task oriented ) objectives. The Sheth model of industrial buyer behavior is comprehensive, focusing of psychological & joint decision making aspects. Webster and wind model is also widely used & comprehensive model on buyer behavior.
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Howard Sheth model

Three level of decision making : Extensive/limited/routine problem solving or response behavior. Four major components of the model 1. Input variables 2. Output variables 3. Hypothetical construct 4. Exogenous ( External) variables
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Input variables
Input stimuli are two types 1. Significative : actual element of brand or product such as quality, price, distinctiveness ,availability, service 2. Symbolic: Projected element of brand or product by advertiser such as quality, price, distinctiveness ,availability, service Social stimuli created by society, group, family
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Howard Sheth model

Exogenous variables
Importance of purchase, Personality variables, Social class, Culture, Organization, Time pressure, Financial status

Inhibitor

Predisposition

Input

Perceptual construct

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Learning construct

Output

Inputs (stimuli) significative The 'real' (physical) aspects of the product or service symbolic The ideas or images attached by the supplier social The ideas or images attached to the product by society, such as reference groups. Outputs The consumers actions Constructs perceptual Obtaining and handling information about the product or service. learning The process of learning leading to the decision itself
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Output variables 1. Attention: magnitude of buyers 2. Information intake 3. Comprehension: buyers store of info about brand 1. Attitude: Buyers evaluation of brands potential to satisfy motive 2. Intention: Buyers forecast of which brand he will buy 3. Purchase behavior : Actual purchase act by buyer. Pre disposition modified by any inhibitors
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Hypothetical construct :
There are number of intervening variables. Two major groups are 1. Perceptual: related to how consumer process the information 2. Learning : related to How buyers form the concept

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Hypothetical construct :
1. Perceptual: related to how consumer process the information Sensitivity to information: How much information buyer try to regulate Perceptual bias: How buyer distort or alter information Search for information: How actively buyer search for additional information
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Hypothetical construct :
2) Six learning constructs
1. Motive: General and specific goal impelling action ( taken with force or urge) 2. Brand potential of evoked set (that is in memory and under active consideration) 3. Decision mediators: Buyers mental rules for matching and ranking purchase alternatives
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Hypothetical construct :
2) Six learning constructs
4) Pre dispositions: Preference towards brand as expressed by attitude 5)Inhibitors : they restrains purchasing. Typical inhibitors are time and price 6)Satisfaction: degree to which consequences of a purchase measures upto buyers expectations
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Exogenous or external variables

1. Importance of purchase 2. Personality variables 3. Social class 4. Culture 5. Organization 6. Time pressure 7. Financial status These are not well defined as external to buyer
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Model dynamic : how this work

1. Start of process: When buyer confronts input stimuli and achieves attention 2. Stimulus is subjected to perceptual bias as a results of his predispositions as affected by motives, decision mediators and evoked set 3. Modified info will again influence these variables leading to change in predisposition 4. Actual purchase will be influenced by buyers intentions and inhibitors 5. Purchase will lead to satisfaction that will change predisposition. 6. With more knowledge, it will lead to routine purchase behavior
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Howard Sheth model evaluation

Significant contribution in understanding CB/ organizational behavior Different types of customer problem solving and info search behavior

Limitations:
No sharp difference between exogenous and other variables Limited generality. not useful for joint family decisions Complex model difficult to use.
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