Indian B2B Clients – An Insight on Procurement Behavior
Although a common man might see consumer market much bigger than business-to-business market place. In fact, B2B is much more bigger than B2C markets. Whether we talk about commercial markets, trade industries, government organizations or institutions, all are involved in B2B transactions, either directly or indirectly.
Some firms focus entirely on business markets, while some sell both to consumer and business markets. Infosys, Satyam, TATA, IBM, WIPRO, Logitech, Epson, HP, Canon, LG, Samsung for example. Business-to-Business markets deal with business purchases of good & services to support or facilitate production of other goods & services, either to facilitate daily company operations or for resale.
According to Reeder et al (1991), all marketing strategies must begin with a thorough understanding of Organisation Buying Behaviour as this entails a different knowledge about the buying situation, process and criteria to apply when making purchasing decisions. Also, the understanding of Organisational Buying Behaviour is fundamental for the supplier of an industrial firm in order to perceive how to satisfy customer demand in an optimal way.(Baptista, Forsberg, 1997).
Further, Haas (1995) stated that organisational buying is not simply the action someone takes. It is actually the outcome of interactions between purchasing professionals. And those who are involved in the process may in one way or another influence what is being purchased and supplied. The evolution of technology has changed the traditional way of business purchases. New tools have opened a new era and new opportunities in every part of market. The arrival of internet as a multifaceted tool continues to change the performance of the organisations.(Smith, Berry & Pulford, 1998)
Rational Nature of Business Market
Like consumers, business purchase/ procurement is done to fill needs. However, its primary need i.e. meeting the demands of its own customer- is similar for all organizations.
Organizational buying differs largely from consumer buying. One of the salient features of organizational buying is that it is basically a rational buying process. i.e it is based purely on Utilitarian concept. There is nothing called hedonic buying. By, principle, organizational buyers do not bring emotions in their buying process and as such emotional appeals do not make any impact on their buying process.
Moreover, there are some other distinctions, which can be stated as:
- Geographical concentration
- Fewer, but larger buyers
- Vertical or horizontal markets
- Derived demand : derived from consumer demand
- Price Inelasticity : Unaffected by price changes in short run
- Fluctuating demand
Like a manufacturer buys raw material, machinery, etc. to create company’s product while a wholesaler or reseller buys products to resell. Similarly, institutional purchasers such as government agencies and non-profit organizations buy things to meet needs of their constituents.
As far as business market is concerned, it is completely rational by nature and there is no scope for impulse buying. This all is due to environmental, organizational, interpersonal & buying centre factors, which influence B2B markets. Moreover, budget, cost, profit considerations all play parts in business buying decisions. Also, business buying process typically involves complex interactions among many people.
Now, B2B markets are diverse, transactions ranging from order as small as box of paper clips to deals as large as parts for an automobile manufacturer.
For sake of simplicity business markets categories can be defined as:
1. Commercial Market
- Sells raw material used in production
- Sells product which aid in production
- Sells maintenance supplies
2. Trade Industry
3. Government organization/ Public Sector Unit
- Under Central government
- Under State government
- Under Foreign government
- Church/ Temple,etc
- College/ university
- Not-for-profit organisations
Commercial market: It is one of the largest segment of business market. It includes all individuals/ firms that acquire goods & services, either directly or indirectly.
When Air India buys aircraft, when IBM purchases software to produce new software or hardware products and when purchase manages orders light bulb for a factory. These all transactions take place in commercial markets.
Typically we can divide the products/ services as:
- Used as raw material (like CD, DVD, etc.)
- Help in production (like desktops, laptops, etc.).
- Used for maintenance.
The commercial market includes farmers manufacturers & other members of resource producing industries, construction contractors & provides of such services as transportation, public utilities, financing, insurance & real-estate brokerage.
Trade industry: It includes retailers and wholesalers that purchase goods for resale to others. We can also term them as resellers. These markets include software, hardware, clothing, appliances, sports equipment, automobile, etc. products.
Government organizations/ Public Sector Units: It includes domestic units of government- central and state, as well as foreign governments. This is also one of the most important segment which purchases wide variety of products, ranging from highways development to social services.
Institutions: Both public and private, are the fourth component of business markets. This category includes wide range of organizations like hospital, temple, church, college, school, university, museum, not-for-profit organization, etc.
Some business follow standardized purchasing & selling procedures, while others may employ less formal buying practices. B2B marketers often have to set up separate divisions to sell to institutional buyers.
B2B Market Segmentation
B2B markets include a variety of customers optimal strategy can be made by applying market segmentation concepts to groups of business customers. The overall process of segmenting divides markets based on different criteria, usually organizational characteristics and products applications.
We can mainly segment the markets on basis of:
- Demographics (size, geographic location).
- Customer type.
- End use application.
- Purchasing situation.
Based upon demographic, firms or business can be grouped by size (either sales revenue or number of employees). Even different strategies can be developed for Big and Small corporations with complex purchasing procedures and another strategy for small firms where decisions are made by one or two people. Now-a-days, small and medium businesses have caught the eye of business-to-business marketers. This fast growing segment offers tremendous potential according to business analysts like Microsoft, SAP, nucleus, etc.
Segmentation based on customer type
B2B organizations can group customers based on broad categories like manufacturer, service provider, government agency, not for profit organization, retail and much more, which can further be subdivided as per the need.
In fact, customer based segmentation is a related approach which is often used in B2B markets. Moreover, organizational buyers tend to detail much more precise product specifications than ultimate consumers do. This all is required to meet specific buyer requirements, creating a form of market segmentation.
Segmentation based on end use application
This approach focuses on a precise way in which a business purchases will use a product. For e.g. a mineral manufacturer may serve markets ranging from paints to cosmetics to inks to paper to government departments. Each end use of the product may dictate unique specifications for performance, quality and price. This can prove a good approach for small and medium enterprises, so as to concentrate on specific end use market segments.
Segmentation by purchasing situation
Purchasing procedures for Big organizations in fact structure their purchasing functions in specific ways. Some organizations have centralized purchasing departments while others have decentralized purchasing. Similarly, purchasing may be done by 2-3 persons in a small or medium enterprise while a big organization may involve more number of persons for taking purchasing decisions. A supplier may deal with one purchasing agent or several decision makers at various levels. All of these structures result in different buying behaviour. When buying situation is one of the criteria, one has to consider whether customer has made previous purchases or if this is clients first order. Like Birla soft might use a different marketing approach to sell to its existing customer than to a potential new customer who is unfamiliar with its offerings.
Today’s internet era has become a useful tool for businesses. Internet provides products and its information to potential buyers and gives marketers an opportunity to make available virtual catalogues, forms, product information, etc. Samli, Wills and Herbig (1997), stated that, in future the WWW is expected to offer a much broader range of benefits to both suppliers and customers, due to improved international communication generated by the Internet.
Unlike the traditional media, internet is characterised by interaction and it facilitates tow way communication as well. Though this interaction is not physically face to face, but diminishes the boundation of time or any geographic location. This means that people can, without any face to face contacts still be able to meet each other and manage their regular work such as communication, businesses and even negotiations.
Haas (1995), says that the way organisations purchase products is one of the most important questions to the business marketing managers of today. The buying of goods and services by organisations is complex and difficult to analyse. Over the years, many models have been developed in attempt to explain Organisational Buying Behaviour. Without the understanding of this, the marketing strategies and the tactical programs cannot be optimally developed. Moreover, Haas (1995) describes that it is the business marketing managers who are the one that are involved in this complex process with the following tasks:
- Describe the process by which customer organisations buy goods and services.
- Discover who in the customer organisations participates in this process and at what stage of the process each becomes involved.
- Find out what each of those people is seeking from the purchase, i.e. what their buying motives are.
- Discover what factors influence the interaction of the participants in the process.
Which means that one cannot simply focus his/her effort towards purchasing departments of businesses, but has to take care of the external factors along with whole decision makers web.
Each and every organisation has its own way of purchase procedure which can be better called as “organisational buying process”. There are many persons involved in the process and according to Haas (1995) – “a good definition of a buying influence is anyone within the purchasing firm who not only has the power to make a decision in favour of the product involved, but also may be able to cast a negative vote against that product”. Once, the composition of a buying centre is determined the business marketer faces the problem of determining the relative influence by each member. If marketing manager can determine what characteristics differentiate the key buying influences from the others, it may be possible to identify them and focus the marketing efforts in their direction to win the race.
Moreover, the purchase of new task products can involve significant investments of money, time and personnel without any guarantee of a successful outcome. But using the internet technology as tools in a certain way can provide new opportunities. In recent years access to new techniques is easier and cheaper.
More and more companies are adapting their system to this revolutionary superhighway communication system to the extent they can. The Internet provides opportunities for an organisation to enhance its business in a cost¬ effective and fruitful manner. That is, the Internet can be used to conduct research, reach new markets, serve customer problems, and communicate more efficiently with business partners. The Internet is a practical tool for gathering information concerning customers, competitors, and potential market. It is also useful when communicating information about companies and/or products. (Poon, & Jevons, 1997; Quelch, & Klein, 1996).
David Roberts (1999) stated in an article that the Internet could be used to “re-engineer” a company in a way that will have impact on revenue and cost, however, one that is difficult to measure. Moreover, several new opportunities appears for those who want to use this new opening to new markets where companies can reach selected customers with information that is of value. Kasper, van Helsdingen and de Vries (1999) discuss on one hand that the Internet has a communication and a distribution function and also the way companies offer their services via Internet. On the other hand they indicate the effect that the Internet has on the purchaser’s buying decisions, due to the fact that the Internet change the traditional way of communication.
Characteristics of B2B markets
Business must understand the needs of business i.e. vendor should put itself in place of buyer to better serve the latter. In order to do that, characteristics of B2B markets should also be understood which includes:
- Geographic concentration.
- Size & number of buyers.
- Purchase decision process.
- Buyer seller relationship.
Indian business market is more geographically concentrated than consumer markets. Industries are developed at places where either raw material is available or where finished product is sold or may be sometimes cheap facilities are available (like electricity, tax benefits, etc.).
Identifying geographical concentrations of customers enables business marketers to allocate resources effectively. A SME may choose to locate sales office or distribution centres in these areas to provide more attentive service.
Size & Number of buyers
Business markets feature a limited number of buyers with bigger sizes. Most of the business markets are large organizations served by small and medium enterprises. Segmenting markets based on size and number may help in development of strategies.
Purchase decision process
To market effectively and efficiently in business markets, one must understand the importance of organizational purchase process. In most of the organizations more than one decision makers are involved and at each and every level of purchase, they may influence upon. Also, purchase process is more formal and professional than consumers purchase. Even, time frame is much more longer in B2B buying with much more complex decisions. Based upon the technical requirements & specifications, proposals must be made. Also, decisions require more than one round of bidding & negotiation. So, is the need to take care of purchase decision process.
Buyer seller relationships
One of the most important characteristics of B2B markets is the relationship between buyers and sellers. Such relationships are more intense, require better communication and often long lasting.
Basic purpose of B2B relationships is to provide advantages that no other vendor can provide like lower price, quick delivery, better quality and reliability, customized product, service, etc.
Close relationships not only help in long run success of an enterprise but also provides a way to increase revenues through broad customer base.
Buying Process in B2B Markets
Further, according to Haas (1995), the conceptual model of the Organisational Buying Process is described as an eight stage model starting with “Using department” and ending with “Follow up”. However, this eight stage model is widely known as Buygrid Framework, which comprises three buy classes or buying situations, with eight progressive stages in buying or we can call them buy phases. The buy phases are an expression of thoughts and activities that a Buyer goes through in the sequence of activities leading to a purchase according to Robinson, Faris and Wind (1967).
The Buy phases consists of:
- Anticipation or Recognition of a Problem (Need).
- Determination of the Characteristics and Quantity of the Needed Item.
- Description of Characteristics and Quantity of the Needed Item.
- Search for and Qualification of Potential Sources.
- Acquisition and Analysis of Proposals.
- Evaluation of Proposals and Selection of Suppliers.
- Selection of Order Routine
- Performance Feedback and Evaluation.
While Buy classes consist of:
- Straight rebuy.
- Modified rebuy.
- New task buy.
Business buying behaviour responds to many purchasing influences like environmental, organizational, interpersonal and buying centre factors. The behaviour also involves the degree of effort that the purchase decision demands & the levels within the organization where it is made. B2B marketers can classify the buying situations into three general categories or buy classes, ranging from least complex to most as stated above.
It is the simplest buying situation, where purchaser are continuing or recurring and either little or no information is required. We can also say that, a recurring purchase is done in which an existing client places a new order for familiar product that has performed satisfactorily in the past. As delivery is prompt, quality is consistent and price reasonably competitive. So is the demand of situation.
Mostly purchaser of low cost items like paper clips, pencils for office are typical examples of straight rebuys. Even in industries with continuous need of raw materials, this option is exercised, but if the vendor concentrates on maintaining a good relationships with the buyer by providing excellent service & delivery performance, so that competitors find it difficult to offer better sales proposals to break the chain.
In modified rebuy, decision makers see some advantages in looking at attractive offerings like quality improvement or cost reduction. While, business marketers should induce current customers to make straight rebuys by responding to all of their needs but, competitors on the other hand should try to induce buyers to make modified rebuys.
New task buy
This is one of the most complex category which requires considerable efforts by decision makers due to first time or unique purchase situations.
Problem recognition may be triggered by internal/ external factors & new product line may require purchase of new equipments, parts or materials. Even, change in customer requirements may necessitate purchase of new machinery.
This situation often requires a purchase to carefully consider alternative offerings & vendors. The new task buying would require several stages, each yielding a decision and that decision would include development of product requirements, search of potential suppliers and evaluation of proposals, etc.
Even a fourth purchase category may be included i.e.
4. Reciprocity buy.
A policy to extent the purchasing preference to suppliers that are also the customers. We can also say it as a type of barter system. Like a SME might supply raw material to paint manufacturer. But at times may need paint for its office refurnishing in that case reciprocity principle might be in use.
Stakeholders of Buying Centre
According to Webster and Wind (1972), members in buying centre may assume different roles throughout the organizational purchase process. The identification of the roles they play helps marketers to better understand the nature of interpersonal influences in the buying centre. These roles can be categorized as:
User, are the one who will actually use the purchased product/ service. Their influence may range from negligible to most important. They may at times initiate purchase actions, help develop specifications, etc.
Gatekeepers, control information that is reviewed by buying centre members. They may provide access to some and deny access to others.
Influencers, affect the buying decision by supplying information to guide evaluation of alternatives or by setting buying specification. They might be a technical staff such as engineers, quality control specialist, R&D personnel, etc.
Deciders, chooses a good or service. He/she might be the top authority or the person with authority to take purchase decision.
Buyer, is the formal authority to select supplier/vendor and to implement the procedures for procuring the product or service.
In order to develop an efficient procurement system, purchase department people should clearly identify the various roles in buying centre. They must also understand how these members interact with each other and outside the business.
How to Enhance Procurement / Purchase Decisions through Tools?
In today’s localized global markets purchase decisions are not just taken by Gut feelings but various tools support the decision making. Some of these are:
- Value Analysis Tools
- Vendor Analysis Tools
Value analysis examines each component of procurement in an attempt to either delete the item or replace it with more cost effective substitute.
Vendor analysis provides evaluation of supplier’s performance in categories like price, orders, delivery times, etc.
Factors that Influence Buying Behaviour in Businesses
Business buying occurs within a formal organization’s budget, cost and profit considerations. Moreover, B2B buying decisions usually involve many people with a number of complex interactions among individuals & organizational goals. In order to understand this, marketers require in depth knowledge of influences on the purchase decision process, the stages in organizational buying, types of buying situations, etc.
Lets have a look at influencing factors:
- Economic : Price, cost, inventories, credit, etc.
- Political : Tarrifs, quotas, defense spendings, lobbying, etc.
- Legal : State, Central regulations, etc.
- Cultural : Corporate as well as personal culture.
- Physical : Climate, Geographic location, demographics, etc.
- Technological : Procurement related to inventory, etc.
- Ethical : Guidelines, norms, regulations, philanthropy, etc.
- Tasks : Buying task performed to achieve corporate goals.
- Buying Centre and its roles
- Power Relationships
- Differing evaluation criteria, rewards, responsive marketing strategy, information processing, memory, anticipation, individual / group decision making.
- Motivation of Buying Personal
- Perception of Buying Personal
- Learning of Buying Personal
5. Product Specific
- Perceived risk
- Type of purchase
- Time pressure
6. Company Specific
- Degree of Centralisation
Business to Business Buying Process
- Anticipate or recongnise Need/Problem/Opportunity along with a General Solution.
- Identify the Characteristics and Quantity of Product /Service.
- Describe those Characteristics and Quantity in detail.
- Search for and qualify Potential Sources/Vendors.
- Acquire Proposals, Analyse and Evaluate them.
- Select Suppliers and Finalise the Specific Order Routine.
- Obtain Feedback and Evaluate Performance.
A B2B buying situation requires a complex sequence of activities due to its rational nature. This model can be generalized to most of the B2B buying situations.
B2B Organisational Purchase Process starts with the anticipation/ identification of either need, problem or an opportunity based upon the circumstances ( may be either current or futuristic).
Now, Businesses are not just made to run but there is a rational benefit being sought in each and every business, which can be either:
- Improvement in Efficiency/ Productivity
- Improvement in Quantity
- Improvement in Customer Service
- Cost Reduction
Based upon the expectations of various stake holders involved, which can be a mix of:
- Technical Committee Members
Also, as far as the match / mismatch between rational benefits and expectations of stake holders are concerned, alternative strategic solutions help to a great extent. The source of information for these solutions includes:
- Company Websites and search engines
- Marketing Executives
- Word of Mouth Publicity
- IETF/IITF Exhibitions
- Seminars & Conferences
- Industry References
- New Employees from Rival Organisations
- Business Magazines like Business India, Economic Times, Hindu, Hindustan Times, etc.
Further, specific company deciders i.e. R& D, Purchase, Finance Departments, etc., their strengths and preferences plays an important role along with their background and previous Vendor as well as customer experiences.
Now, once the exact expectations are decided, budgetary quotations and product literature from vendors are asked in order to draft specific tenders or RFP specifications and bid document. Also, any process is incomplete unless and until funding and budget is provided. So, is the next step in purchase process.
After this, Vendor Eligibility Criteria i.e.
- Minimum Size/ Turnover
- Past Experience
- EMD/Purchase Receipt
And Product Specific Requirements i.e.
- Inspection Requirements
- Quality Parameters
Are identified and described to the extent possible, along with the competitive market requirements and vendor/ proprietary purchase preferences.
Now, the process can be further divided into Govt./PSU purchases & Corporate/MNC Purchases.
In case of Govt./PSU purchases tender notice is published in leading newspapers / websites inviting technical bids and purchase bids, while in case of Corporate/ MNC purchases, RFP is prepared and sent to the prospects, inviting proposal from vendors.
Once, the bids or proposals are acquired, then their evaluation takes place, along with a demo/ presentation & reference verification. In all these processes, file movement should be properly monitored in order to get the best results. Further, T1 and L1 vendor/s is/are found out, where T1 is Technically acceptable and L1 is Lowest Acceptable Price.
Now, comes the stage of negotiation with T1 and L1 vendor/s. As far as negotiation is concerned, if differences occur, then they can be sort out by negotiation, arbitration and litigation, etc. also.
Once, negotiations are thorough, then comes the stage of B2B contract, which is further approved and signed by H.O.D or authorized signatory. Now, contract is accepted by vendor with the deposition of security as finalized in contract.
Further, vendor delivers the product/ service as per terms and conditions, which is then accepted by the user department or stores after a quality and quantity check along with feedback submission and which completes the B2B Purchase process.
Each and Every businesses should have a look at the way their B2B clients (like Satyam, Wipro, Tata, Inforsys, for eaxmple.) in Indian Industry. The rational nature of B2B markets in commercial, trade, PSU’s and institutional businesses needs to be worked upon. Further, businesses can concentrate on their markets based upon the segmentation like demographics, Customer type, End use application or purchasing situation., Even, the characteristics of B2B markets should be known to the vendors. Lastly, The Buying Process of B2B, the stake holders involved in purchase/procurement, the tools they use, the factors they consider and the process they follow, must be known to the all businesses for a healthy and long run relationship.