Customer Behavior Module Eight Business & Government Customer Decision Making.
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Transcript of Customer Behavior Module Eight Business & Government Customer Decision Making.
Customer BehaviorCustomer BehaviorModule Eight
Business & Government
Customer Decision Making
Customer Behavior2
Module 8
Business Buying Behavior
A business is a licensed entity engaged in the activity of making, buying, or selling products and services for profit or nonprofit objectives. This definition considers any organiza tion that makes and sells something to be a business.
Customer Behavior3
Module 8
Business Buying Behavior
Marketers have developed different ways of serving household and business customers, in part because of differences in the behavior of these two customer groups. Business buying typically differs from household buying in several key ways: greater specialization of roles, more formalization of the buying process, more formal accountability for decisions, greater internal capabilities, and more complex requirements.
Customer Behavior4
Module 8
Business Buying Behavior
characteristichousehold buyingbusiness buying
Specialization of customer roles
Combined or slightlyspecialized
Moderately to very specialized
Formalization of the buying process
InformalSlightly formal (small
businesses) to formal (large businesses)
Accountability for decisions
Usually not formally measured
Strict measures
Internal capabilitiesWeakWeak (small businesses)
to very strong (large businesses)
Complexity of requirements
Little complexityOperational and strategic
complexity
Customer Behavior5
Module 8
Specialization of Customer Roles
Individual buying requires that the three customer roles—payer, buyer, and user—
be combined in a single individual, whereas in household buying decisions,
these roles may be held by a single person or distributed among various
family members.
Customer Behavior6
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Formalization of the Buying Process
Business buying is formalized with respect to policy, procedures, and beside the
solicitation of price quotes, preferential treatment to a certain class of vendors (e.g.,
minority businesses), and the way the decisions are to be made in the buying firm.
Customer Behavior7
Module 8
Accountability for Decisions
Unlike household buying, business buying holds accountable those who are in
charge of pay ing and buying. This results in more formal evaluation of and
feedback on these purchase decisions. There are also internal and external
audits of the buying process to ensure that value obtained through procurement
is maintained and enhanced by the decision makers.
Customer Behavior8
Module 8
Internal Capabilities
– More often than households, business customers are capable of producing certain items in house rather than buying them from others. This capability requires business customers to analyze the economics of the "make versus buy" options.
Customer Behavior9
Module 8
Complexity of Requirements
Business customers have both operational and strategic complexity
of buying behavior. Operationally, the number of employees who
participate in the buying process, often from several locations, adds
complexity.
Customer Behavior10
Module 8
Components of the Business Buying Process
With purchasing being such a significant and complex function, all but the smallest orga nizations have formal systems for carrying it out. These systems, called procurement sys tems, have several components.
Decision
Process
Manual
Buying Center
Nature of Purchase
OrganizationalCharacteristics
Rules & Procedures
Customer Behavior11
Module 8
Nature of the Purchase
The way an organization makes a purchase decision depends to a large degree on the
nature of the purchase. This nature is defined by the (type of purchase need); the
significance of the decision in terms of perceived risk, importance, and product
complex and the time pressure faced by the decision makers.
Customer Behavior12
Module 8
Buyclass
For an individual, purchase needs may require routine problem solving, limited problem solving, or extended problem solving. Similarly, businesses have three types of procure ment needs, or buy-classes:
Straight rebuy Modified rebuy New task.
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BuyclassDescription of needBuying center sizeInformation
search
Straight rebuy
Item is frequently needed and has been satisfactorily bought before
Very small; ordering may even be automated
Brief or nonexistent;new suppliers rarely
considered; technical expertise rarely sought Some information is gathered; new suppliers may be considered;
technical experts may have input into decision Extensive; new suppliers often considered experts usually have major input into decision
Modified rebuy
Need is broadly similar to one that has been fulfilled before but requires some change in specifications or the supply environment Need is completely new to the organization
Moderate
New TaskNeed is completely
new to the organization
Large
Customer Behavior14
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Perceived Risk, Importance, and Complexity
Each type of purchase involves a different level of perceived risk, importance, and com
plexity for the decision maker. Business customers use information such as the type
of purchase to estimate risk, importance, and complexity. Then they adjust their decision-making strategy accordingly.
Customer Behavior15
Module 8
Perceived Risk, Importance, and Complexity
Perceived risk refers to the expected probability that the purchase may not produce a satisfactory outcome. It is a product of two factors:
1. The degree of uncertainty that a choice may be wrong.
2. The amount at stake should a wrong choice occur.
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Module 8
Time Pressure
Time pressure re fers simply to how urgently the item is needed. When the item is needed urgently, the purchase decision will tend to short-circuit the usual process, make the process less delib erative, and give more direct role to the user/requisitioner.
Customer Behavior17
Module 8
Organizational Characteristics
Four organizational characteristics of the customer firm affect buying behavior
Size
Structure
PurchaseResources
PurchaseOrientation
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Module 8
Size
The size of the business determines not only the customer's potential
dollar volume, but also the sophistication of its buying process.
Customer Behavior19
Module 8
Structure
Refers to the number of departmental units, geographical locations over which the units are spread out, and its degree of centralization. The more departments
a business has, the larger the buying group and more prolonged the buying
process is likely to be.
Customer Behavior20
Module 8
Purchase Resources
Refer to the availability of professional buyers and the extent to which the purchase office is staffed with the
required type and number of experts as well as equipment
Generally, large and professionally managed (as opposed to owner-
managed) firms would have better resourced pur chasing departments.
Customer Behavior21
Module 8
Purchase Orientation
Refers to its purchasing philosophy along a continuum from viewing purchasing
simply as an administrative function that finds the most economical sources of
materials needed as and when they are needed to viewing it as a strategic,
managerial function whose goal is to add value to the organization's ability in turn to offer better value to its customers.
Customer Behavior22
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Purchase Orientation
As a strategic function, purchasing is engaged in several key activities:
Scrutinizing make versus buy decisionsContinually finding better products, materials, and technology.Developing long-term sources of supply and building relationships with the suppliers.
Customer Behavior23
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The Buying Center
In all but the smallest organizations, purchase decisions are handled by a formal or informal buying center
The buying center represents a subset of roles within the organization who participate in the buying process.
Customer Behavior24
Module 8
The Buying Center
Several roles have been identified: User Buyer Analyzer Influencer Gatekeepers Decider
Customer Behavior25
Module 8
Rules and Procedures
Businesses generally set up elaborate
policies, rules, and procedures
The degree of formalization and decision freedom
varies from buyer to buyer.
Customer Behavior26
Module 8
Decision Process
Like individual and household buying decisions, organizational buying decisions entail a multistage process. Business buying decisions comprise the following stages:
Need assessment Developing choice criteria Request for proposals (RFPs)
Customer Behavior27
Module 8
Procurement Costs
In business buying, when decision makers weigh costs, they consider the
total costs of a purchase. The total costs are more than the purchase price, sometimes significantly
higher. These costs consist of acquisition costs,
possession costs, and usage costs.
Customer Behavior28
Module 8
Procurement Costs
acquisition costspossession costsusage costs
PriceInterest costField defects
Paperwork costStorage costTraining cost
Shopping timeQuality controlUser labor cost
Expediting costTaxes and insuranceProduct longevity
Cost of mistakes in order
Shrinkage and obsolescence
Replacement costs
Prepurchase product
evaluation costs
General internal handling costs
Disposal costs
Customer Behavior29
Module 8
Psychology of Decision Makers
The decision-making process is primarily driven by two psychological processes occurring in the decision makers: (1)Their expectations (2)Their perceptual distortions.
Customer Behavior30
Module 8
EXPECTATIONS
One factor that sets organizational decision making apart from individual and
household decision making is that the various members of the buying center
tend to have a set of differential expectations. Their expectations are
influenced by their background and their satisfaction or dissatisfaction with past
purchases.
Customer Behavior31
Module 8
PERCEPTUAL DISTORTIONS
Business customers, like individual consumers, encode incoming
information selectively (attending to some and ignoring other information)
and in a biased manner. This tendency is called selective perceptual distortion.
Customer Behavior32
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Conflict and Its Resolution
When expectations of various members in the buying center differ, conflicts arise. These may concern either the
relative weight of the evaluative criteria or the rating of different suppliers on
these criteria.
Customer Behavior33
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Conflict and Its Resolution
Problem solving is a rational approach to conflict resolution. It entails a search for more information, further deliberation on the new information, and possibly consideration of new suppliers.
Persuasion, also a rational method of conflict resolution, is used when there is a disagreement on specific criteria for supplier evaluation (but overall agreement on what is to be expected of them).
Customer Behavior34
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A Comprehensive Model of Organizational Customer Behavior
Customer Behavior35
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The Future of Business Buying Behavior
In practice, the purchasing function in the future will see two strategic shifts:
(1) a shift from a transaction orientation to a relational orientation(2) a shift from domestic to global sourcing.
Customer Behavior36
Module 8
Forces for Change
Several forces are responsible for these shifts in the procurement strategy of business customers:Global competitiveness.The quality management (TQM) philosophy.Industry restructuring.Technology enablers.
Future procurement practices
Future procurement practices
Past procurement practices
Past procurement practices
Domestic
sourcing
Global sourci
ng
Relational oriented
Transaction oriented
Customer Behavior37
Module 8
Forecasted Changes
The above-mentioned four forces will bring about significant changes. These
include making procurement a core competency, treating suppliers as
partners, considering cross cultural values, and focusing more on
procurement of service
Customer Behavior38
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Procurement as a Core Competency
In industries where the supply function is strategically critical, companies will
focus on creating a core competency on supply side management. That is, for
these firms, their competitive advantage would stem from the fact
that, among other things, their procure ment is more cost-effective.
Customer Behavior39
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Suppliers as Partners
Suppliers will be treated less as suppliers and more like partners. This will call for a greater degree of commitment and
trust on the part of the supplier organization as they begin to work
together in a new relationship.
Customer Behavior40
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Cross-Cultural Values
Business buyers will increasingly rely on "global sourcing". As it becomes
evident to organizations that buying and selling practices differ widely
across the globe, there will be a big push to better understand cross-
cultural values, which differ widely from culture to culture.
Customer Behavior41
Module 8
Service Procurement
Many activities that used to be done by employees are being outsourced:
janitorial services, building security, recruitment, legal services, computer
network and data management, payroll, and so on.
To fulfill this need, new businesses are emerging around these niches.
Customer Behavior42
Module 8
Government Buying Behavior
Governments are legal entities empowered to organize and govern people, processes,
and infrastructure by the resources and compliance mechanisms they possess as
kings and monarchs, dictators and elected presidents, prime ministers, and
governors, the military and the civil service, along with the many
democratically elected or administratively appointed bodies.
Customer Behavior43
Module 8
Government as a Customer
Doing business with the government represents a huge opportunity for
businesses; many, in fact, exist solely as government suppliers. But selling to the government is nothing like selling
to private corporations.
Customer Behavior44
Module 8
Government Buying Procedures
Governments typically follow well-specified and rule-driven buying procedures.
Government buys in two basic ways: Direct purchase Competitive procurement
Customer Behavior45
Module 8
Similarities between Government and Business Procurement
Government spending, especially at the federal level, involves large amounts of money, complex procedures, and red tape in even the smallest purchase. However, there are some parallels between buying and government
buying.
Customer Behavior46
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Buyclass Parallel
In government, the buying tasks can be viewed asNon-developmentalModified non-developmentalDevelopmental. These classifications are based on the level of analysis and the degree of buyer attention they require.
Customer Behavior47
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Buying Steps Parallel
BusinessGovernment
Step 1Need IdentificationNeed planning and funding
Step 2Request for quotationsRequest for proposals
Step 3Supplier evaluation/selection
Bid selection
Step 4Finalization of price & delivery terms
Bid negotiation
Step 5Placement of orderContract award
Step 6Follow-up & expandingContract administration
Customer Behavior48
Module 8
Procurement Management Goals Parallel
Both business and government buyers pursue the same objectives in managing their
procurement responsibilities and in reaching their supplier decisions. Both exist to fulfill the
material needs of their user departments, seek to develop component and reliable
sources, must procure at prices most advantageous to the buying organization,
must minimize inventory costs, and encourage competition for their business.
Customer Behavior49
Module 8
How Government Customers Differ from Business Customers
These differences arise mainly in how the tasks
are procedurally implemented.
Customer Behavior50
Module 8
Size of the Average Purchase and Standardization
In the private sector, nothing compares in cost, other than perhaps large construction projects or
the development of commercial aircraft. But even for simple supplies such as stationary, the order size is generally
larger than most private sector orders of similar
products.
Customer Behavior51
Module 8
Legal Restrictions and Compliance Reviews
Laws regulate government procurement
procedures in areas such as competitive bidding, budgetary limitations, auditing of accounts, and the
use of standard specifications.
Customer Behavior52
Module 8
Solicitation of Sellers
Although business buyers also engage in soliciting competitive bidders, nothing in the business sector is comparable to
the active solicitation of potential suppliers in government procurement.
Customer Behavior53
Module 8
Diffusion of Authority
There is much greater diffusion of authority in government than in most private-sector procurement.
One reason is that government procurement uses input from multiple users and advisors.
In addition, authority for subtasks is separated.
Customer Behavior54
Module 8
Procedural Detail and Paperwork
Finally there is the inevitable
paperwork, substantially
more voluminous in government
than in business procurement.
Customer Behavior55
Module 8
Future of the Government as Customer
Just as corporations go through changes in their purchasing functions, so
too government procurement is
experiencing pressures to change.
The resulting changes include downsizing and
restructuring, globalization, and
economic pragmatism.
Customer Behavior56
Module 8
Downsizing and Restructuring of the Government
As businesses have improved efficiency through downsizing and restructuring, people are demanding that their governments do the same.
As a payer, the government is becoming more cost-conscious.
Consequently, it is more concerned about fraud, waste, and misman agement.
Governments at all levels have responded with efficiency improvements of many kinds.
Customer Behavior57
Module 8
Globalization
The government sector enterprises are becoming global.
The Internet is a government network operated by the Advanced Research Programs Agency (ARPA), and the Weather Satellite is operated by the government.
Many government agencies are looking for expansion to global markets.
Customer Behavior58
Module 8
Economic Pragmatism
Governments are reducing their emphasis on social objectives as a component of procurement.
Buying decisions are governed less by concern for affirmative action, minority enterprises
Rather, governments are becoming rigorous in ensuring that procurement decisions are economically sound.
Customer Behavior59
Module 8
Business and Government Customer Decision Making and the Three Customer Roles
Several unique aspects of business customer decision making were identified.Important among these are:
Greater role specialization Formalized process Accountability Internal capabilities Complexity Buyclass Buying center Decision process Conflict resolution process.