Chapter 4: Analyzing Business Markets PDF

# Chapter 4: Analyzing Business Markets ## Business Markets Business markets are substantially larger than consumer markets but often less visible. They include all businesses, organizations, and governments who buy and sell raw materials, manufactured components, plants, equipment, supplies, an...

# Chapter 4: Analyzing Business Markets ## Business Markets Business markets are substantially larger than consumer markets but often less visible. They include all businesses, organizations, and governments who buy and sell raw materials, manufactured components, plants, equipment, supplies, and services. They focus on creating market value by developing offerings that meet the needs of business customers. Caterpillar is one example of a company that has been able to consistently meet needs and exceed customer expectations. **Caterpillar** was founded in 1925 when two California-based tractor companies merged. The company's name, however, dates back to the early 1900s when Benjamin Holt designed a tractor crawler with wide, thick tracks instead of wheels. These tracks prevented the machine from sinking into California's deep, rich soil and allowed the tractor to “crawl like a caterpillar.” The company grew steadily at first, hitting a few critical milestones along the way: * **World War I and World War II:** Caterpillar's trademark farm treads were used on Army tanks. * **Postwar Construction:** Strong overseas demand kept sales high. * **Diesel tractor and rubber-tired tractors:** Innovations boosted sales. Today, Caterpillar Inc. is the world's largest manufacturer of earth-moving equipment and engines. Its products are known for high quality and reliability, and the company has maintained a strong focus on innovation while expanding its product portfolio. Its distinctive yellow machines are found all over the globe and have helped make it a U.S. icon. **Some of the world's most valuable brands belong to business marketers:** ABB, Caterpillar, DuPont, FedEx, HP, IBM, Intel, and Siemens. Many principles of basic marketing also apply to business marketers. They need to embrace holistic marketing principles, such as building strong loyalty relationships with their customers, just like consumer marketers. However, business marketers face some unique challenges. ## The Organizational Buying Process Organizational buying is the decision-making process by which formal organizations establish the need for purchased products and services and then identify, evaluate, and choose among alternative brands and suppliers. ## Understanding Business Markets Business markets consist of all the organizations that acquire goods and services used in the production of products or services that are sold, rented, or supplied to others. Any firm that supplies components for products is in the business-to-business (B2B) marketplace. Some of the major industries making up the business market include: * Aerospace * Agriculture, forestry, and fisheries * Chemical * Computer * Construction * Defense * Energy * Mining * Manufacturing * Construction * Transportation * Communication * Public Utilities * Banking, Finance, and Insurance * Distribution * Services ## Learning Objectives After studying this chapter, you should be able to: 1. Explain the key aspects of the organizational buying process. 2. Define the role of the buying center in an organization. 3. Describe the stages of the decision process in business markets. 4. Explain how organizations develop marketing programs to attract and retain business customers. 5. Describe how business-to-business marketers build and maintain relationships with customers. ## Key Differences Between Business and Consumer Markets Business markets have several notable differences from consumer markets. * **Fewer but larger buyers:** Business marketers normally deal with far fewer buyers of much larger quantities than consumer marketers do, particularly in industries such as aircraft engines and defense weapons. * **Close supplier-customer relationships:** Suppliers are frequently expected to customize their offerings for individual business customer needs. * **Professional purchasing:** Business goods are often purchased by trained purchasing agents, who must follow their organizations' purchasing policies, constraints, and requirements. * **Multiple buying influences:** More people typically influence business-buying decisions. * **Derived demand:** The demand for business goods is ultimately derived from the demand for consumer goods. * **Inelastic demand:** The total demand for many business goods and services is inelastic. * **Fluctuating demand:** The demand for business goods and services tends to be more volatile than the demand for consumer goods and services. * **Geographically concentrated buyers:** More than half of U.S. business buyers have been concentrated in seven states: New York, California, Pennsylvania, Illinois, Ohio, New Jersey, and Michigan. * **Direct purchasing:** Business buyers often buy directly from manufacturers rather than through intermediaries, especially items that are technically complex or expensive, such as agricultural equipment, industrial machinery, and aircraft. ## Types of Buying Decisions The business buyer faces many decisions in making a purchase. How many depends on the complexity of the problem being solved, the newness of the buying requirement, the number of people involved, and the time required to complete the purchase. There are three types of business-buying situations: * **Straight rebuy:** The purchasing department habitually orders items from a list of approved suppliers. * **Modified rebuy:** The buyer wants to change product specifications, prices, delivery requirements, or other terms. * **New Buy:** The buyer is acquiring a product or service for the first time. ## The Buying Center The decision-making unit of a buying organization is often referred to as the buying center. It consists of all those individuals and groups who share some common goals and who have some influence in the purchase decision-making process. The buying center includes all members of the organization who play one or more of the following roles: * **Initiators:** request that something be purchased. * **Users:** will use the product or service. * **Influencers:** help to define specifications and provide information. * **Deciders:** decide on product requirements and suppliers. * **Approvers:** authorize proposed actions. * **Buyers:** select the supplier and arrange the purchase terms. * **Gatekeepers:** prevent sellers or information from reaching members of the buying center. ## The Role of the Buying Center in the Organization In the past, purchasing departments occupied a humble position in the management hierarchy. However, recent competitive pressures have led many companies to upgrade their purchasing departments and elevate administrators to vice-presidential rank. * **Some companies are now elevating purchasing departments to “strategic supply departments” with responsibility for global sourcing and partnering.** **Examples:** * **Rio Tinto:** a world leader in finding, mining, and processing the earth's mineral resources. They partnered with one key supplier and saved time, expenses, and overall money. * **Medline Industries:** used software to enhance product margin, improve customer retention, reduce revenue lost to pricing errors, and increased the productivity of its sales representatives. ## Buying Center Dynamics Buying centers usually include participants with differing interests, authority, status, and susceptibility to persuasion. * **Engineers may want to maximize the performance of the product, production people may stress ease of use and reliability of supply, financial staff will focus on the economics of the purchase, purchasing may be concerned with operating and replacement costs, and union officials may emphasize safety issues.** ## Selling to Buying Centers Successful business-to-business marketing requires that marketers not only determine the types of companies on which to focus their selling efforts but also whom to concentrate on within the buying centers in those organizations. * **Marketers need to identify the type of businesses on which to focus marketing efforts. They must then decide how best to sell to these businesses. Who are major decision participants? What decisions do they influence? And how deeply? What evaluation criteria do they use**? **Example:** * A hospital buys nonwoven disposable surgical gowns. The hospital staff who participate in the buying decision include the vice president of purchasing, the operating-room administrator, and the surgeons. ## Understanding the Buying Process The business-buying process encompasses a number of explicit stages. A popular model delineates eight distinct stages of the decision process in business markets: * **Problem Recognition:** Someone in the company recognizes a problem or need that can be met by acquiring a good or service. * **Need Description:** The buyer determines the general characteristics and required quantity. * **Product Specification:** The buying organization develops technical specifications. * **Supplier Search:** The buyer identifies the most appropriate suppliers. * **Proposal Solicitation:** The buyer invites qualified suppliers to submit written proposals. * **Supplier Selection:** The buyer evaluates the proposals and selects a supplier. * **Contract Negotiation:** The buyer negotiates the final order, which includes listing technical specifications, quantity needed, expected time of delivery, return policies, and warranties. * **Performance Review:** The buyer periodically reviews the performance of the chosen supplier using one of three methods: The buyer may contact end users, rate the supplier on several criteria using a weighted-score method, or aggregate the cost of poor performance to come up with adjusted costs of purchase. ## Supplier Selection Business buyers seek the highest benefit package (economic, technical, service, and social) in relation to a market offering's costs. The strength of their incentive to purchase is a function of the difference between perceived benefits and perceived costs. **Some of the common attributes that buyers use to evaluate vendors include:** * Price * Reputation * Reliability * Agility **Business marketers must therefore ensure that customers fully appreciate how the firm's offerings are different and better**. Sellers often present or “frame” their offerings in a way that enables them to underscore the benefits they provide. ## Contract Negotiation After selecting suppliers, the buyer negotiates the final order, which includes listing the technical specifications, the quantity, expected time of delivery, return policies, and warranties. Many industrial buyers lease rather than buy heavy equipment such as machinery and trucks. The lessee gains a number of advantages: * The latest products * Better service * Conservation of capital * Some tax advantages Many industrial buyers prefer blanket contracts, which establish a long-term relationship in which the supplier promises to resupply the buyer as needed, at agreed-upon prices, over a specified period of time. ## Performance Review The buyer periodically reviews the performance of the chosen supplier(s) using one of three methods: The buyer may contact end users and ask for their evaluations, rate the supplier on several criteria using a weighted-score method, or aggregate the cost of poor performance to come up with adjusted costs of purchase. ## Developing Effective Business Marketing Programs Businesses need to attract and retain customers, and they are using every marketing tool at their disposal. Some examples include: * Systems selling * Adding valuable services to their product offerings * Employing customer reference programs * Utilizing a mix of online and offline communication and branding activities ## Transitioning from Products to Solutions Many business buyers prefer to buy a total problem solution from one seller. **Examples:** * **Government purchases of major weapons and communications systems.** * **Technology giants such as HP, IBM, Oracle, and Dell are all transitioning from specialists to competing one-stop shops.** * **Systems contracting.** Shell Oil manages the oil inventories of many of its business customers and knows when they require replenishment. ## Selling to the Indonesian Government An example of a business successfully selling to the government: A US company proposed to build a cement factory in Indonesia. The company hired crews, assembled the materials and equipment, and turned over the finished factory to the Indonesian government. A Japanese firm, in its proposal, exported the cement through its trading companies and used the cement to build roads and new office buildings in Jakarta. Even though the Japanese plan involved more money, the Japanese won the contract. They understood the problem not just as building a cement factory, but as contributing to Indonesia’s economic development. This is an example *true* systems selling. ## Enhancing Services Services play an increasing strategic and financial role for many business-to-business firms that sell primarily products. Adding high-quality services to their product offerings allows companies to provide greater value and establish closer ties with customers. **An example:** * **Rolls-Royce:** invested heavily in developing giant jet engine models and sells long-term repair and maintenance contracts. Margines are higher because customers are willing to pay a premium for the peace of mind and predictability the contracts offer. **Another example:** * **Adobe Systems:** offers cloud-based monthly subscriptions for its software products such as Photoshop, Illustrator, and InDesign. The subscription model eliminates the need to convince users who purchased the product in the past to upgrade to the new version; in the subscription model it happens automatically. Revenue is also increasing because the company is able to sell support services to its cloud customers. ## Building Business-to-Business Brands * Business marketers are increasingly recognizing the importance of their brands. **The old saying goes: “Nobody gets fired for buying IBM."** **Examples:** * **ABB:** a global leader in power and automation technologies. They undertook an extensive rebranding project to ensure that ABB would stand for “Power and Productivity for a Better World.” The company’s business advertising contains images of actual projects, with business-specific messages that explain technologies. * **Emerson Electronic:** a global provider of power tools, compressors, electrical equipment, and engineering solutions. They were once a conglomerate of 60 autonomous, and sometimes anonymous, companies. To achieve a broader presence so they could sell locally while leveraging its global brand name, they aligned the brands under a new global brand architecture and identity. * **SAS:** a business analytics software and services firm. To connect with C-level executives in the largest companies, SAS made the decision to make changes to its image: a new logo, a new slogan, "The Power to Know," and a series of TV spots and print ads in business publications such as BusinessWeek, Forbes, and The Wall Street Journal. ## Overcoming Price Pressures Despite moves toward strategic sourcing, partnering, and participation in cross-functional teams, buyers still spend a large chunk of their time haggling with suppliers on price. **Here are some ways marketers can counter requests for a lower price:** * **Framing:** * **Total cost of ownership:** The life-cycle cost of using the product. * **Value of the services:** * **Service support and personal interactions:** * **Improving productivity:** ## Partnering with Customers Across the Product Lifecycle **Example:** * **Tata Steel:** the oldest and largest steel manufacturer in India. They made changes to their product mix, implemented a multi-year, multi-phase customer value management (CVM) program, and leveraged collaborative partnerships. They also used retail branding to boost brand recall while ensuring a 5% price premium over competitive offerings. ## Managing Corporate Trust, Credibility, and Reputation * **Building trust is one prerequisite to enjoying healthy long-term relationships.** It depends on a number of interpersonal and interorganizational factors, such as the firm's perceived competence, integrity, honesty, and benevolence. ## Risks and Opportunism in Business Relationships * **Vertical coordination can facilitate stronger customer-seller ties but may also increase the risk to the customer's and supplier's specific investments.** **Specific investments:** are those tailored to a particular company and value-chain partner, such as investments in company-specific training, equipment, and operating procedures or systems. **Risks:** * **Opportunism:** a “form of cheating or undersupply relative to an implicit or explicit contract.” ## Managing Institutional Markets * **The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that must provide goods and services to people in their care. Many of these organizations are characterized by low budgets and captive clienteles.** **Examples:** * **Aramark**: a large food service company that provides food services for stadiums, arenas, campuses, businesses, and schools. They focus on refining its purchasing practices and supply chain management. * **The federal government:** is one of the largest buyers of goods and services. <start_of_image> Areas of focus: * **Bidding process** * **Awarding of contracts** * **Complex projects** * **Paperwork and regulations** * **Decision-making delays** * **Shifts in procurement staff** The federal government has been trying to simplify the contracting procedure and make bidding more attractive. Reforms place more emphasis on buying off-the-shelf rather than customized items, communicating with vendors online to eliminate paperwork, and debriefing losing vendors to improve their chances of winning the next time around. The General Services Administration (GSA) has launched web-based catalogs that allow authorized defense and civilian agencies to buy everything from medical and office supplies to clothing online. ## Managing Communication * **Although marketing communication is usually associated with consumer markets, it also plays an important role in business markets.** * **Companies need to inform business customers about the benefits of their offerings as well as coordinating their activities with collaborators.** Examples: * **Chapman Kelly:** a subsidiary of HMS Business Services that provides medical, dental, and pharmacy claims and dependent auditing services to help firms reduce their health care and insurance costs. * **Makino:** a machinery manufacturer that builds relationships with end-user customers by hosting an ongoing series of industry-specific Webinars. * **Kinaxis:** a Canadian supply chain management company that uses a fully integrated approach to communications - including blogs, white papers, and a video channel that hinges on specific keywords to drive traffic to its website and generate qualified leads.