Chapter Two The Character of Business Marketing

2-2 Review of Chapter One B2B is an important element in the economies of industrialized nations B2B includes: - Marketing to companies that buy products in order to make other products. (e.g., McDonald buy salts to make French Fry) - Marketing to government agencies, including state & local governments - Marketing to institutions such as university & hospitals - Marketing to resellers, including retailers & industrial distributors B2B is important: - Most marketing majors will begin their career in B2B - The magnitude of B2B, accounting for more than half of the economy B2B is different from B2C:

2-3 Learning Objectives The focus is business relationship between buyers & sellers Describe the effectiveness of markets for coordinating business transactions. Examine the motivations for relationships and how they develop. Identify the complementary mechanisms for coordinating business transactions. - Supply chain management (discussed in Chapter3) - Relationship management Describe the network of participants in the value chain.

2-4 The Magic of Markets Markets provide a mechanism for meeting individual and organizational needs and allocating productive resources. (e.g., the buyer’s circumstance determined the value of any product or service; price coordinates the activities of the various businesses; when demand is greater than the supply, the price goes up.) There are technical limits to the effectiveness of markets - Incomplete information about product performance - Buyer or seller integrity - Hidden costs not well reflected in price

2-5 Additional Means for Coordinating Supply Chain Management (SCM) - We will discuss SCM in chapter 3 the purchasing function Relationship Management - Motives to relate - Developing relationships - Safeguarding relationships

2-6 Motivation to Relate What determines a successful relationship? 1.The seller has motivation to relate; 2.The buyer has motivation to relate; 3.If they are not equally motivated it won’t be an equal relationship.

2-7 Seller’s motivation to relate High Low Buyer’s motivation to relate High Low Seller’s market Seller- maintained relation Joint relationship maintenance Buyer-maintained relation Buyer’s Market Discrete exchange (spot contracts) No exchange

2-8 BUYER’S MOTIVATION TO RELATE The Types of Relationship SELLER’S MOTIVATION TO RELATE HIGH BUYER’S ADVANTAGE STRATEGIC PARTNERSHIPS LOWHIGH TRANSACTIONAL RELATIONSHIPS SELLER’S ADVANTAGE LOW

2-9 The Types of Relationship Transactional relationships (Spot exchanges) -Both seller & buyer have no motivation to relate -These markets are best suited to: highly standardized goods/services which require little description/explanation; the products primarily bought on the basis of price Strategic partnerships -At least one party is motivated to build and keep a relationship -Both buyers and sellers must have strong MUTUAL interests in maintaining an ongoing exchange

2-10 The Preferences of Sellers & Buyers DEVELOP A COMMON GROUND BUYERS Want: Reliable delivery without interruptions Reliable products with low rejection and defect rates Efficient lead times SELLERS Want to: Sell Large Volumes Sell similar amounts over time Manage their selling and support expenses (They want to have substantial & reliable volumes at adequate margins)

2-11 Requirements for High Performance Relationships Beyond the financial considerations, both parties want: Integrity Fairness Loyalty Flexibility Input into your partner’s strategy Partner’s input into your strategy Compliance with procedures and agreement Honor commitment Stand behind your products

2-12 Strategic Partnerships 1.When are strategic relationships most likely to emerge? 2.What are the benefits and risks of strategic partnerships for buyers and suppliers? 3.Why are JIT systems a prime example of a strategic partnership? 4.What types of internal and external standards are typically used to evaluate JIT systems? 5.What problems have attended the widespread use of JIT? How have firms addressed these issues?

When are strategic relationships most likely to emerge? In order for such “high-trust” relationships to evolve, both buyers and sellers must have strong MUTUAL interests in maintaining an ongoing exchange.

What are the benefits and risks for buyers and suppliers? Benefits for buyers: Shift some inventories up the channel; Take advantage of supplier expertise & contacts; Reduce purchasing/quality control costs; Trade on the supplier’s reputation Benefits for suppliers: Gain large, dependable purchase volume; Obtain revenue predictability, benefits from specialization; Gain exposure to larger markets; Enhance their quality/dependability reputation Major risks for both parties: Derive from unexpected disruptions in the delivery of goods and/or vital communications, e.g., buyers become more vulnerable to strikes, acts of God, and transportation disruptions because of the small inventories; Trust is vital and fragile element which, if damaged, creates damaging conflicts; Both parties may find themselves “shut out” from other, more attractive, alternatives.

Why are JIT systems a prime example of a strategic relationship? OEM buyers have worked with suppliers of component parts and materials to eliminate costly inventories and frequent handling costs by establishing just-in-time (JIT) relationship. “JIT” requires the supplier to produce and deliver to the OEM precisely the necessary quantities at the necessary time, with the objective that products produced by the supplier conform to performance specification every time. To be successful, JIT systems require all parties to share proprietary information relevant to production capability, scheduling, inventory sizes and procedures and delivery equipment, routes, delivery times, and capabilities. The firms often connect systems to share such information electronically. Clearly, TRUST is essential.

What types of internal and external standards are typically used to evaluate JIT systems? Internal standards: Firms often ask their own managers to assess supplier professionalism, responsiveness, quality, technical capability, and vision. External standards: Popular external assessments may be derived from trade associations or consulting companies.

What problems have attended the widespread use of JIT? As a form of strategic partnerships, JIT has all of the problems associated with these approaches e.g, buyers may have underestimated the impact of small inventories in several areas. Buyers become MORE vulnerable to strikes, acts of God, and transportation disruptions.

2-18 Developing Relationships Four-stage relationship development 1.Awareness – Unilateral considerations of potential partners; buyers and sellers engage in “arm-length” evaluations of potential partners 2.Exploration – The parties probe and test each other; interaction occurs, and tentative associations may form 3.Expansion – Both parties are satisfied with some customization involved. Additional benefits are sought from each other; the ESSENCE is increasing dependence between exchange partners 4.Commitment – Partners exchange significant resources to maintain the relationship; marked by partners adapting and resolving disputes internally in order to sustain the relationship

2-19 Developing Relationships Dissolution – Termination of an advanced relationship. The dissolution is a counterpart to the process of relationship development Staying in business relationships for two broad reasons: 1.YOU WANT TO - The rewards are financial, strategic or psychological 2.YOU HAVE TO - The cost to exit is too high or there are no alternatives

2-20 Sustaining (Safeguarding) Relationships Make on-site visits to your partner (House calls) – efforts to obtain evidence of partner capabilities & commitment Trade personnel and offices (Trading places) – buyers & sellers may exchange personnel to provide assurance Manage total dependence with an alternate supplier (Managing dependence) – A buyer reduce its dependence on the supplier by cultivating relationships with other exchange partners Make the pledge of continuous service (Supplier pledges) – Promise to give good service and fair prices over the course of the relationship Develop a relational contract (Contracts) – Under a relational contract, important current buyer/supplier roles/performance agreements re specified while describing procedures for resolving future disagreements Provide ownership by bringing functions or technology within boundaries of partner’s firm (Ownership) – Vertical integration