Chapter 2: The Business Market: Perspectives on the Organizational Buyer

Chapter Topics A business marketer must understand the three broad market sectors: commercial enterprises, governments and institutions. By the end of this chapter, you will understand: 1. The nature and central characteristics of each market sector. 2. How the purchasing function is organized in each sector. 3. The dramatic role that online purchasing assumes in the business market. 4. The need to design a unique marketing program for each sector in the business market.

Commercial Enterprises Commercial Enterprises consist of:  Manufacturers  Construction companies  Service firms  Transportation companies  Professional groups  Resellers

Manufacturers & Size Approximately 350,000 in the U.S. Top 10%--or 36,000 firms--employ >100 workers Top 10% ship 75% of all products manufactured in U.S. Business marketers typically serve far fewer, but far larger, customers Highly Concentrated

Smaller Manufacturing Firms Two-thirds of U.S. manufacturers employ fewer than 20 people 5 million U.S. small businesses employ less than 6 people Big numbers - however, very difficult market to serve because of its diversity Strategy - develop services that can meet these diverse needs in a way that is profitable

Manufacturers & Geography Half are located in eight states: CA, NY, OH, IL, MI, TX, PA, and NJ Important strategic implications: –First, seller can concentrate marketing efforts –Second, with distribution centers in large volume areas, rapid delivery is possible –Third, sales personnel may not be tied to specific geographic areas –By understanding how buyer’s purchase (central or de-central), the marketer is better equipped to identify influential participants and to develop responsive strategies

Naics- Classifying Commercial Enterprises  NAICS organizes business activity into economic sectors and identifies groups of business firms that use similar production processes  Result of NAFTA  Replaces SIC system Source: Reprinted from K. Douglas Hoffman, et al., Marketing: Best Practices (Mason, Ohio: South-Western/Thomsen Learning, 2003) North American Industrial Classification System

Purchasing Function & Goals Goals Protect the cost structure of the firm Improve quality & firm competitiveness Coordinate JIT inventory control Keep inventory investment to a minimum PURCHASING DEPARTMENTS NOW PLAY A CENTRAL ROLE IN SUPPLY CHAIN MANAGEMENT Small firms – 1 person may do all buying Large firms – VP of Sourcing and many procurement professionals / buyers

Total Cost Considerations of Producing a Product or Service Factors that drive total cost Acquiring and managing costs Quality, reliability over the life cycle Value of product to firm/customers

Key Concept - Total Cost of Ownership TCO considers: 1. Supplier and buyer activities 2. Cost of a product’s (or service’s) complete life-cycle 3. Example: Ownership considers purchase price and overall cost, taking into consideration such things as the product’s life-cycle, defects, unit costs, cost savings, administrative costs, etc.

Levels of Procurement Development & Pathways to Savings/Revenue Enhancement

Segmenting Purchase Categories

Purchases that Affect Performance Revenue impact / business risk dimension considers the degree to which a purchase category can influence the customer’s perception of value. Example: Ford feels that brand identity for highly visual parts, such as tires or steering wheels, is important in terms of increasing revenue by increasing consumer confidence.

E-Procurement: the process of purchasing over the Internet E-procurement is not a strategy but a technology that automates procurement. It has lead to: 1.Online negotiations 2.Collaboration tools 3.Knowledge management 4.Analytical tools Use of and other tools allow online, real-time communication between internal and external stakeholders.

Online Negotiations Online negotiations enable the buyer to query suppliers: RFP – Request for Proposal RFQ – Request for Quote RFI – Request for Information Even conducts reverse auctions

E-Procurement Delivers Measurable results of e-procurement include: a. Cutting purchasing cycle in half b. Reducing purchasing costs by 14%+ c. Reducing administrative costs by 60%+ d. Allowing global access to supplies, resources, and labor (outsourcing)

Buy-Side Requisitioning Process 1. Customer gets online 2. Browses various online catalogs 3. Selects product 4. Checks price quotes 5. Creates online purchase order (or buys directly via Pay-pal or credit card) 6. Sends purchase order to supplier 7. Follows tracking of purchase 8. Receives product

Relative Govt. Expenditures U.S. Government is by far the largest single buyer in the world 1 federal, 50 state and 87,000 local governments Federal accounts for about 27% of all government purchase expenditures State and local spend remaining 73%

Government Contracts Programs Compliance: Requires government contractors to maintain affirmative action programs Set-aside: A percentage of contract set aside for small minority businesses Minority-subcontracting: May require major contractors to subcontract a certain percentage of a contract to minority firms

Two Types of Government Contracts 1. Fixed-price contracts The price is agreed to before contract is awarded and payment is made at conclusion of work Provides for the greatest profit potential Poses greater risks (especially if unforeseen expenses are incurred, if inflation increases dramatically, or if conditions change) 2. Cost-reimbursement contracts Reimbursement for allowable costs may be permitted “Cost-plus” contracts allow for a certain number of dollars above cost as profit

Department of Defense (DOD) Each military division is responsible for its own purchases. The DLA – Defense Logistics Agency – procures supplies that are common to all the military branches. GSA – General Services Administration – also procures items such as cars, desks, office machinery and hand tools. Help reduce duplication Can mass purchase to lower prices

FedBizOpps  Marketers who sell to the government use services such as FedBizOpps (FBO).  Published by the Department of Commerce, this service lists all government procurements, subcontracting leads, contract awards, and sales of surplus property.

Two Procurement Strategies 1. Formal Advertising—Government solicits bids from suppliers. Usually the lowest bidder is awarded the contract. 2. Negotiated Contract—Used to purchase products or services that are not differentiated on price alone. Competition is common.

Selling to Governments Selling to governments is much different than selling to industries Rules, forms, and standards are very complex One needs to stay abreast of agency procurement plans There is much politics involved There are strict rules on adhering to contract procedures and requirements

Strategy to Sell to Governments 1. Understand their complex rules. 2. Develop a system to keep informed of plans. 3. Generate a strategy for R&D that responds to government needs. 4. Develop a communications strategy on “how” technology meets their needs. 5. Generate a negotiation strategy that considers payments, contract completion, cost overruns, etc.

 Institutional market includes schools, health care organizations & non-profit agencies.  Similar to government buyers—one needs to understand political considerations and laws.  Similar to commercial buyers—often managed like corporations with a broad range of purchase requirements.  Group purchasing is quite common.

 In some ways public institutions (public schools) buy similar to governments (bid process)  In other ways private institutions (churches, non-profits, hospitals) purchase more like corporations  Both types value efficient purchasing  To sell to these diverse institutional markets, many companies employ a market-centered approach

Marketing & Selling to Institutions Because each institutional market is unique, one strategy to maximize company objectives is to arrange organization around market sectors. Each sector is headed by a specialist and each specialist needs to understand “what” his or her market needs and “how” the market purchases. For example, many institutions develop budgets and attempt to spend up to that limit. Specialists know this and work around these budget objectives by providing products and service in a timely manner to meet their institutional customers’ needs.

Marketing & Selling to Institutions Some markets face strong budgetary constraints, thus they work with outside vendors who specialize in a particular area, thus providing efficiency and effectiveness. For example, many institutions outsource their food & beverage service or cleaning operations to efficient outside providers. Many institutions have buyers who purchase for their professional staff. Often there is a conflict. Ex: Universities consist of professors & administration. Professors are motivated by product benefits whereas buyers are concerned with price, quality and value. The strategy is for salespeople to cultivate relationships with the professionals by promoting benefits while marketing timetables, maintenance contracts and price to buyers.

 Many Institutions employ group purchasing through a cooperative purchasing association to obtain quantity discounts.  Hospitals exceed $10B annually.  More than a 1/3 of public sector hospitals do group purchasing.  This situation imposes a great challenge to marketers.

 Group buyers are very price conscious and discount pricing assumes special significance.  To sell to group buyers, vendors need to have a distribution system that meets the needs of each institution and each individual within buying group.

Diverse Buyers – A Market-Centered Organization Because markets are so diverse (military, businesses, profit & non- profit institutions and state, local & federal governments, etc.), firms have developed a market-centered organization which employs specialists who are thoroughly knowledgeable about one particular market. Ex: J.M. Smuckers markets to institutions, military and business markets. To do that effectively, J.M. Smuckers has organized its marketing program around its markets (see next frame). This strategy provides a firm with a structure to meet the multiple needs of these various institutions.