Organizational Buying

Influences on Organizational Buying Behavior

customer-relationships banner Figure 1. Influences on organizational purchasing behavior | Source: The Internet

The Figure above shows the three factors that influence how organizations buy, who buys and the choice criteria they use: the product type, the buy class and the importance of purchase.

The Buy Class

Organizational purchasesOpens in new window may be distinguished between a new task, a straight rebuy and a modified rebuy.

The buy classes affect organizational buying in the following ways.

First, the membership of the DMUOpens in new window changes. For a straight rebuy possibly only the purchasing officer is involved, whereas for a new buy senior management, engineers, production managers and purchasing officers may be involved. Modified rebuys often involve engineers, production managers and purchasing officers, but senior management, except when the purchase is critical to the company, is unlikely to be involved.

Second, the decision-making process may be much longer as the buy class changes from a straight rebuy to a modified rebuy and to a new task.

Third, in terms of influencing DMU members, they are likely to be much more receptive to new task and modified rebuy situations than straight rebuys.

In the latter case, the purchasing manager has already solved the purchasing problem and has other problems to deal with. So why make it a problem again?

The first implication of this buy class analysis is that there are big gains to be made if a company can enter the new task at the start of the decision-making process. By providing information and helping with any technical problems that can arise, the company may be able to create goodwill and creeping commitment, which secures the order when the final decision is made.

The second implications is that since the decision process is likely to be long, and many people are involved in the new task, supplier companies need to invest heavily in sales personnel for a considerable period of time. Some firms employ missionary sales teams, comprising their best salespeople, to help secure big new-task orders.

Companies in straight rebuy situations must ensure that no change occurs when they are in the position of the supplier. Regular contact to ensure that the customer has no complaints may be necessary, and the buyer may be encouraged to use automatic reordering systems.

For the out-supplier (i.e. a new potential supplier) the task can be difficult unless poor service or some other factor has caused the buyer to become dissatisfied with the present supplier.

The obvious objective of the out-supplier in this situation is to change the buy class from a straight rebuy to a modified rebuy. Price alone may not be enough since changing supplier represents a large personal risk to the purchasing officer. The new supplier’s products might be less reliable, and delivery might be unpredictable.

In order to reduce risk, the company may offer delivery guarantees with penalty clauses and be very willing to accept a small (perhaps uneconomic) order at first in order to gain a foothold.

Supplier acquisition of a total quality management (TQM)Opens in new window standard such as EM29000, ISO9000 or BS5750 may also have the effect of reducing perceived buyer risk. Other tactics are the use of testimonials from satisfied customers, and demonstrations. Many straight rebuys are organized on a contract renewal.

Value analysis and life-cycle cost calculations are other methods of moving purchases from a straight rebuy to a modified rebuy situation.

Value analysis, which can be conducted by either supplier or buyer, is a method of cost reduction in which components are examined to see if they can be made more cheaply. The items are studied to identify unnecessary costs that do not add to the reliability or functionality of the product.

By redesigning, standardizing or manufacturing by less expensive means, a supplier may be able to offer a product of comparable quality at lower cost. Simple redesigns like changing a curved edged to a straight one may have dramatic cost implications.

Life-cycle cost analysis seeks to move the cost focus from the initial purchase price to the total cost of owning and using a product.

There are three types of life-cycle costs: purchase price, start-up costs and post-purchase costs.

Against these costs would be placed residual values (e.g. trade-in-values of cars). Life-cycle cost appeals can be powerful motivators. For example, if the out-supplier can convince the customer organization that its products has significantly lower post-purchase costs than the in-supplier’s, despite a slightly higher purchase price, it may win the order.

This is because it will be delivering a higher economic value to the customer. This can be a powerful competitive advantage and, at the same time, justify the premium price.

The Product Type

Products can be classified according to four types: materials, components, plant and equipment, and MROs (maintenance repair and operation), as follows:

  1. materials to be used in the production process, e.g. aluminium
  2. components to be incorporated in the finished product, e.g. headlights
  3. plant and equipment, e.g. bulldozer
  4. products and services for maintenance repair and operation (MRO), e.g. spanners, welding equipment and lubricants.

This classification is based upon a customer perspective—how the product is used—and may be employed to identify differences in organizational buyer behavior.

First, the people who take part in the decision-making process tend to change according to product type. For example, senior management tend to get involved in the purchase of plant and equipment or, occasionally, when new materials are purchased if the change is of fundamental importance to company operations, e.g. if a move from aluminium to plastic is being considered.

Rarely do they involve themselves in component or MRO supply. Similarly, design engineers tend to be involved in buying components and materials but not normally MRO and plant equipment. Second, the decision-making process tends to be slower and more complex as product type moves from:

MRO → components → materials → plant and equipment

For MRO items, blanket contracts rather than periodic purchase orders are increasingly being used. The supplier agrees to resupply the buyer on agreed price terms over a period of time.

Stock is held by the seller and orders are automatically printed out by the buyer’s computer when stock falls below a minimum level. This has the advantage to the supplying company of effectively blocking the effort of the competitors for long periods of time.

Classification of suppliers’ offerings by product type gives clues as to who is likely to be influenced in the purchase decision. The marketing task is then to confirm this in particular situations and attempt to reach those people involved. A company selling MROs is likely to be wasting effort attempting to communicate with design engineers, whereas attempts to reach operating management are likely to prove fruitful.

The Importance of Purchase

A purchase is likely to be perceived as being important to the buying organization when it involves large sums of money, when the cost of making the wrong decision, e.g. in production downtime, is high and when there is considerable uncertainty about the outcome of alternative offerings.

In such situations, many people at different organizational levels are likely to be involved in the decision and the process will be long, with extensive search and analysis of information. Thus extensive marketing effort is likely to be required, but great opportunities present themselves to those sales teams that work with buying organizations to convince them that their offering has the best payoff.

This may involve acceptance trials, e.g. private diesel manufacturers supply railway companies with prototypes for testing, engineering support and testimonials from other users.

Additionally, guarantees of delivery dates and after-sales service may be necessary when buyer uncertainty regarding these factors is high. An example of the time and effort that may be required to win very important purchases is the order secured by GEC to supply £250 million worth of equipment for China’s largest nuclear power station. The contract was won after six years of negotiation, 33 GEC missions to China and 4000 person-days of work.