Understanding Business Markets and Environment

Chapter Questions
Who are the business customers? How are industrial products classified? What are the marketing implications for different types of customers and products? What are the business customers purchasing orientations and practices? What are the different types of environment? How to manage external environment?

Types of Business Customers

Commercial enterprises (Private Sector firms)
Industrial distributors Original equipment manufacturers (OEMs) Users

Government customers Institutional customers Cooperative societies

Classification of Industrial Products and Services

Materials and parts Capital items Suppliers and services

 Materials and parts: these goods enter the final product directly.
Raw materials Basic products like iron ore, crude oil, fish, fruits, vegetables. Manufactured materials Acids, fuel oil, steel, chemicals Component parts These are semi-finished parts like bearings, TV tubes, gauges, small motors, batteries, tyres Subassemblies These are semi-finished goods like exhaust pipe in motorcycle.

Capital items: these goods are used in production process.

Light equipment or accessories Hand tools, dies, jigs, computer terminals

 Supplies and services: these goods/services support the operations.

Supplies These are operating and maintenance supplies like fasteners, fuels, packaging materials, lubricants, paints, electrical items. Services Legal, auditing, advertising, courier, marketing research.

Marketing Implications for Different Products and Customers

Materials and parts when sold, selling is mostly done directly from a seller to a buyer organization. Personal contact, product leaflets/brochures help an industrial marketer in communicating product or other information. In case of standard products, the factors which influence buying decisions, with differing shares of business for various suppliers, are product quality and performance, delivery dependability, price, payment terms, customer service, and customer rapport.

 Selling of Capital items, consisting of heavy machinery and construction of factories and office buildings, is often done by personal selling with extensive interactions, involving top executives in both buying and selling organizations.
Supplies and services often sold to business customers directly.

Purchasing Orientations of Business Customers

Buying orientation Here the purchasing firm has a narrow and short-term focus. The buyers, in these firms, follow the practices like
Lowest price: quality and availability are considered as qualifiers for a supplier to be considered. The buying firms invite short-listed suppliers for negotiations. Gain power: commodification and multisourcing Risk: Buyers avoid risk. The tactics used are (a) follow the standard purchase procedure established by the company and (b) depend on the suppliers who have proved their performance in the past.

 Procurement orientation the purchasing firm has a strategic focus and is proactive. The influence is more with integration with other activities and the buyers seek both quality improvements and cost reductions. The company adopts the following practices:
Collaborative Relationship with Major Suppliers: The customer and supplier have inter-firm teams who implement just-intime delivery scheduling and quality assurance to attain zero defects level. They use integrative negotiation that includes focusing on common interests and goals, minimizing differences, exchanging information, and seeking solutions to meet the goals and interests.

 Supply chain management orientation It includes coordination & integration of purchasing function with other functions within the company & also with other organizations in the value chain. It primarily focuses on how to improve the value chain from the raw materials to end users. This orientation has 3 purchasing philosophies:
Deliver value to End users Outsource Non-core Activities: The top management identifies the core competencies of the company, thereby, grouping its products & services into strategic & non-strategic systems & subsystems. The firms would then outsource those systems or subsystems that have become non-competitive, are nonstrategic, involve mature technologies & have many qualified suppliers.

Purchasing Practices of Business Customers

In commercial Enterprises
Involvement of various departments like production, materials, quality, finance/cost accountant, engineering and senior management executives. Materials/Purchase managers are professionals who are knowledgeable about price trends, commercial matters, and negotiating skills. Major tasks performed 1. Identify, negotiate, Select suppliers. 2. Ensure purchase objectives and efficiency. 3. Good relationship with suppliers. 4. Establish procedure and documentation.

Purchasing in Government Organizations

There are many centers where state & central govt.units buy a variety of products. DGS&D (Directorate General of Supplies & Disposals) is an agency which finalizes the running contracts for various standard products on behalf of the Central Govt. Establish purchase procedure. Get the name of the company & products registered with the government units.

 Purchasing through Competitive Bidding / Tenders 1. Closed / sealed tenders 2. Open / limited tenders: This method is usually adopted when the govt. organizations require non-standard or complex technical products and services. 3. Reverse Bidding: The buyers set the highest possible bidding price, beyond which the offers will not be accepted. Each supplier is encouraged to offer its price below the set price indicated by the buyer. The lowest price bidder get the order, without compromising on quality of product and service.

 Other Government contracts: There are generally two types of contracts under the category.
i. Fixed-price contracts a firm price is agreed without any variation in the price, when negotiation is concluded between govt. customer & the supplier firm. Disadvantage is if the costs of raw material & other production inputs goes up substantially during the contract period, it may result in loss to the supplier. Cost-reimbursement contract the supplier firms are reimbursed for allowable costs that are incurred in performing the contract.

ii.

Purchasing in Institutions and Cooperative Societies

Government institutes follow government process. Often private sector institutes follow commercial enterprises buying process.

Managing External Environment

First, continuously collect and monitor relevant information on external environment. Identify changes in opportunities and threats Manage proactively, using strategies: 1)Independent 2)Cooperative 3)Strategic planning