Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Four Organizational Buyer Behavior

4-2 Review of Chapter Three Three most important elements of the purchasing department’s function are to: quantity, quality and low cost Two types of purchasing philosophies: adversarial purchasing philosophy and partnership purchasing Two methods to evaluate suppliers: buy-grid model and multiattribute decision making Trends in purchasing: reducing purchasing cost; developing strategic relationships; internet makes centralization easier to accomplish; outsourcing activities; developing cross-functional teams; increasing professionalism Additional: purchasing in government; ethics in purchasing

4-3 Learning Objectives Focus: how buyers in organizations buy products and services Explore a group of theories designed to explain individual buyer actions within organizations - Reward-measurement theory - Behavior choice theory - Role theory - Buying determinant theory Predict marketing action based on the choice of a particular buying theory. Describe the influence of risk on buyer behavior Illustrate how these theories work in concert with partnering

4-4 The Theories of Buyer Motivation Reward-Measurement Theory — The motivation is the benefits Behavior Choice Theory — The motivation is the situation Role Theory — The motivation is the norms/expectations

4-5 Reward-Measurement Theory An expectancy theory of organizational buyer motivation Focuses upon how performance is measured and rewarded -Buyers are motivated by both intrinsic rewards & extrinsic rewards; probability times valence determines the individual level of motivation -Intrinsic rewards: buyers give themselves (e.g., feeling of satisfaction) -Extrinsic rewards: bestowed by one’s organization (e.g., salary, promotion) -Each individual ranks potential rewards according to the valence (importance) to them and estimates the likelihood (possibility) of a variety of possible actions delivering those payoffs -The results determine the level of motivation -Finally, the individual considers their own self-efficacy (ability to carry out particular strategies

4-6 R-M Theory - Valence What is valence? Why must valence be considered in addition to the rewards themselves? Valence is the degree of importance or value attached to a reward. An individual may be interested in a variety of rewards. BUT, they are unlikely to be equally important to him/her. Obviously, those rewards of greatest importance should receive more emphasis.

4-7 R-M Theory - Probability What is perceived probability? How does perceived probability of success impact motivation? Perceived probability is the perception that effort on a particular set of tasks will lead to accomplishment of performance outcomes that will, in turn, lead to desired rewards. The RM model says that probability times valence determine the individual level of motivation. That means a person will be more highly motivated to take actions and/or seek outcomes that they perceive as attainable means to achieve desirable goals.

4-8 Buyer Behavior Choice Theory Buyers go through a choice process to arrive at decisions of how they will buy, as opposed to the choice process of what will be bought ( modeled as part of the buy-grid model ). 1.Identify situation Self-orientation Company orientation 2.Evaluate personal relevance 3.Assesses action alternatives & requirements 4.Choose behavior strategy Offensive strategies Defensive strategies

4-9 Identify Situation Self-orientation – the degree to which the individual works to achieve personal benefits Company orientation – the degree to which the individual works to achieve benefit for the company How can an organization motivate self-oriented individuals to engage in company-oriented behavior? The key is to demonstrate a strong linkage between behaviors that benefit the firm and the achievement of personal benefits. Self-orientation and company orientation operate independently, so one purchase situation could result in both high self-orientation and high company orientation. For example, exhibit strong managerial skills & be crucial to the company

4-10 Evaluate Personal Relevance In this stage, the buyer examines the reward structures (including formal reward system and informal and social reward system), associated with the purchase situation. For example, a buyer might evaluate if it is an opportunity to show off decision-making skills, how about the opportunity to get promotions, management recognition.

4-11 Assess Action Alternatives & Requirements In this stage, the buyer look at: −The amount of control over the task −Are there any choices in what the buyer can and can’t do? −Company policies and procedures that may limit the choice of buying activities

4-12 Choose Behavior Strategy There are two types of strategies – Defensive or offensive The difference between offensive & defensive strategies Offensive strategies designed to maximize gain; Defensive strategies designed to minimize loss Which is most likely to be favored by the organization? Purchasing agent? the individual? Organizations typically favor “maximizing” profit; Purchasing agents tend to favor more conservative, less risky, and more likely to be achieved strategies that minimize losses to the firm & themselves; Employees choose alternatives that will be “acceptable” o the firm & which carry an “acceptable” level of risk for themselves. Most people are risk- averse and will try to minimize losses as a means of ensuring their continued employment. This may lead to less risky (& less profitable) choices unless the firm empowers greater risk-taking.

4-13 Role Theory People behave within a set of norms or expectations of others due to the role in which they have been placed. Autonomous - when a person makes a purchase decision alone for an organization Buying center or decision-making unit (DMU) – when more than one person is involved, the group of participants in the company is called DMU Roles in buying center – Initiator, controller, gatekeeper, influencer, decision maker… Dimensions of buying centers – Time, Vertical, Horizontal, Formalization…

4-14 Roles in Buying Center Role theory defines the roles people take when involved in purchase: Initiator – starts the purchase process by recognizing the need Controller – controls or sets the budget for the purchase Gatekeepers – control information into and out of the buying group or between members of the group Influencers – are those individuals who seek to affect the decision maker’s final decision through recommendations of which vendors to include or which products are bested suited to solve the organization’s needs. Influencers can also affect the evaluation of the organization’s needs Decision makers – the person(s) who make the final purchase decision.

4-15 How a fax machine is purchased in a company PERSON Secretary Vice President Office Manager Secretary & Office Manager Office Manager Vice president of operations ROLE Initiator-reports that fax keeps breaking down Controller-sets budget for purchase of new fax Gatekeeper-gathers review from vendors. Influencers-view demonstrations narrow choices Recommender-recommends a particular product to decision maker Decision Maker – Selects fax to purchase

4-16 Dimensions of buying centers Time Dimensions Time is highly fragmented: Many participants for short time participation Time is not fragmented: Same people stay through entire process Vertical Dimensions How many layers of management are involved in decision-making Horizontal Dimensions How many departments are involved in decision-making Formalization Dimensions Purchasing tasks and roles are guided and enforced by written procedures and policies

4-17 Time Fragmentation Influences Seller’s Marketing Efforts INVOLVEMENT INFLUENCE NUMBER OF DECISION MAKERS HIGHLY MANY FEW MINIMALLY FRAGMENTED A LITTLE A LOT FRAGMENTED DECISION CYCLE TIME INFLUENCE SIZE OF BUYING CENTER LONGER LARGE SMALL SHORTER DECISION CYCLE A LITTLE A LOT DECISION CYCLE EXPERIENCE OF DECISION MAKERS EXPERIENCE OF DECISION MAKERS TIME SPENT ON DECISION STAGES Sales objective is to move to the right on the continuum

4-18 Types of Risks to Overcome 1. Financial Risk (Economic Risk) – Potential for lost revenue with faulty product 2. Performance Risk – The risk that selected products will break or not perform as required 3. Social Risk (Ego Risk) – The disapproval of an important reference group inside or outside of the firm

4-19 Three Approaches to Reducing Risks Gather more information from more sources Using loyalty to present suppliers – build trust Spread the risk by using more decision makers or getting more suppliers

4-20 Using Information to Reduce Risks ImpersonalPersonal Trade publications Word of mouth from colleagues, consultants, and coworkers Noncommercial Sales literature Advertising Websites Direct mail Personal selling Trade shows Telemarketing Commercial

4-21 Buying Determinants Theory Individual factors Organizational factors Market factors Environmental factors

4-22 EXPANDED BUYING DETERMINANTS THEORY Organizational Factors Extrinsic reward systems Role expectations Corporate culture and intrinsic rewards Cross-functional purchasing teams Policies supporting vertical and horizontal dimensions Individual factors Experience: new buy straight rebuy Choice of reward-Role orientation Valence of reward Probability perceptions Environmental factors Market factors