Business Market Management:Business Market Management:Understanding, Creating, and Understanding, Creating, and

Delivering ValueDelivering Value

Chapter 3:Chapter 3:

Understanding Firms as CustomersUnderstanding Firms as Customers

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Understanding Firms as CustomersUnderstanding Firms as CustomersThings You Need to Know about Each CustomerThings You Need to Know about Each Customer

What is the customer firm’s purchasing orientation?What is the customer firm’s purchasing orientation? Who participates on the buying team?Who participates on the buying team?

– What are the roles of each member?What are the roles of each member?– What value does each member gain from the offering?What value does each member gain from the offering?– Who makes the final decision to buy?Who makes the final decision to buy?

What are the customer’s requirements?What are the customer’s requirements? What is the firm’s buying process?What is the firm’s buying process?

– Is this a new task, modified rebuy, or straight rebuy?Is this a new task, modified rebuy, or straight rebuy? How does the customer evaluate suppliers?How does the customer evaluate suppliers?

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Defining the Process:Defining the Process:Understanding Customer FirmsUnderstanding Customer Firms

Understanding firms as customersUnderstanding firms as customers is the is the process of learning how companies rely process of learning how companies rely on a network of suppliers to add value on a network of suppliers to add value to their offerings; integrate purchasing to their offerings; integrate purchasing activities with those of other functional activities with those of other functional areas and outside firms, and make areas and outside firms, and make purchasing decisions.purchasing decisions.

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Understanding Understanding Purchasing OrientationPurchasing Orientation

PurchasingPurchasing entails the acquisition of resources entails the acquisition of resources and capabilities for the firm from outside and capabilities for the firm from outside providers.providers.

Purchasing orientationPurchasing orientation is the overall is the overall philosophy that guides managers who make philosophy that guides managers who make purchasing-related decisions and delineates purchasing-related decisions and delineates their domain and span of influence.their domain and span of influence.

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Understanding Purchasing Understanding Purchasing OrientationOrientation

Three Purchasing OrientationsThree Purchasing Orientations

BuyingBuying ProcurementProcurementSupply Supply

ManagemenManagementt

Primary Goal of Orientation:Primary Goal of Orientation:Lowest Lowest PricePrice

Lowest Lowest Total CostTotal Cost

Best Best ValueValue

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BuyingBuying concerns executing discrete transactions concerns executing discrete transactions with suppliers.with suppliers.

The central pursuits of buying are:The central pursuits of buying are:obtain the obtain the best dealbest deal in terms of price, quality, in terms of price, quality,

and availabilityand availabilitymaximizemaximize powerpower over suppliers over suppliersavoid riskavoid risk wherever possible. wherever possible.

Understanding Purchasing Understanding Purchasing Orientation Orientation

BuyingBuying

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Obtaining the Obtaining the Best DealBest Deal The Industry Price BandThe Industry Price Band

(Adapted from Ross (Adapted from Ross 1984)1984)

AverageAveragePricePrice

+ 3%*+ 3%*- 3%*- 3%** Band varies by industry* Band varies by industry

Price Price PremiuPremiu

mm

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Obtaining the Obtaining the Best DealBest Deal Distributive NegotiationsDistributive Negotiations

Maximum priceMaximum price the buyer is the buyer is

willing to pay or willing to pay or VIU PriceVIU Price

Minimum priceMinimum price the seller is the seller is willing to willing to

acceptaccept

Zone of Zone of AgreementAgreement

Price Price AnalysisAnalysis

Supplier Supplier Cost Cost

AnalysisAnalysis

Value Value AssessmentAssessment

Price per Price per UnitUnit

00

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Maximizing PowerMaximizing Power over Suppliers over Suppliers

MultisourcingMultisourcingCommoditizationCommoditization

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The Never-Ending Battle Between The Never-Ending Battle Between Buying and MarketingBuying and Marketing

Buying seeks Buying seeks CommoditizatioCommoditizatio

nn

Marketing Marketing seeks seeks

DifferentiationDifferentiation

VA = VB VA – PA VB - PB

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ProcurementProcurement pursues quality improvements and pursues quality improvements and cost reductions through the integration of cost reductions through the integration of purchasing with other functions and cooperative purchasing with other functions and cooperative relationships with relationships with firstfirst--tiertier suppliers. suppliers.

Procurement increases customer productivity by:Procurement increases customer productivity by: improving improving qualityquality reducingreducing total coststotal costs cooperatingcooperating with suppliers.with suppliers.

Understanding Purchasing Understanding Purchasing Orientation Orientation

ProcurementProcurement

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ImprovingImproving Quality Quality Specifications Specifications describe products or services that the describe products or services that the

firm is seeking.firm is seeking.– functional specificationsfunctional specifications– technical or materials specificationstechnical or materials specifications– process specificationsprocess specifications– performance specificationsperformance specifications– brand specificationsbrand specifications

StandardizationStandardization entails establishing agreement on entails establishing agreement on uniform identifications for definite characteristics of uniform identifications for definite characteristics of quality, performance, service, etc.quality, performance, service, etc.

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QualityQuality as asConformance to SpecificationsConformance to Specifications

0

Supplier Specifications minus Customer Supplier Specifications minus Customer SpecificationsSpecifications

Perfect Perfect QualityQuality

+x-x

UnderspecifiedUnderspecified OverspecifiedOverspecified

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QualityQuality as asConformance to SpecificationsConformance to Specifications

DefeatureDefeature – to eliminate a feature from an offering – to eliminate a feature from an offering and then reduce price by a set amountand then reduce price by a set amount

ProductProduct

PricePrice

Traditional Traditional PricingPricing DefeaturinDefeaturin

ggfixedfixed

fixedfixedvariablvariablee

variablvariablee

(Adapted from Nagle & Holden (Adapted from Nagle & Holden 2002)2002)

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ReducingReducing Total Costs Total Costs

Total Cost of Ownership (TCO)Total Cost of Ownership (TCO) or Life Cycle Costs are or Life Cycle Costs are the sum of all expenses associated with the the sum of all expenses associated with the acquisitionacquisition, , useuse, and , and disposaldisposal or or recyclingrecycling of a market offering. of a market offering.

TCO AnalysisTCO Analysis is the application of Activity-Based is the application of Activity-Based Costing to sourcing strategy and purchasing decisions.Costing to sourcing strategy and purchasing decisions.

If the offering remains productive for several years, state If the offering remains productive for several years, state total costs in terms of their total costs in terms of their net present valuenet present value (NPV). (NPV).

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ReducingReducing Total Costs Total Costs Beware of the Beware of the Seesaw Effect!Seesaw Effect!

Cost Cost ReductionsReductions

searchsearch

transactiontransaction

information information

inventoryinventory

physical assetsphysical assets

Cost IncreasesCost Increases

systemssystems

order order fulfillmentfulfillment

deliverydelivery

returnsreturns

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Cooperating Cooperating with Supplierswith Suppliers

With a procurement orientation, With a procurement orientation, purchasing managers draw upon the purchasing managers draw upon the capabilities and resources of their first-capabilities and resources of their first-tier suppliers to tier suppliers to jointlyjointly improve quality improve quality and reduce total costs.and reduce total costs.

Cooperation requires that customer and Cooperation requires that customer and supplier:supplier:– trust one anothertrust one another– equitably share rewardsequitably share rewards

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Cooperating Cooperating with Supplierswith SuppliersIntegrative NegotiationsIntegrative Negotiations

Zone of Zone of AgreementAgreement

Customer’Customer’s Minimal s Minimal AcceptablAcceptabl

e Level e Level for Item Afor Item A

Supplier’s Minimal Supplier’s Minimal Acceptable Level for Item BAcceptable Level for Item B

(Adapted from Bazerman 1986)(Adapted from Bazerman 1986)

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Supply ManagementSupply Management entails the integration and entails the integration and coordination of purchasing with other functions in the coordination of purchasing with other functions in the firm and other firms in the value network.firm and other firms in the value network.

Supply managementSupply management has four tenets: has four tenets: focus all of the firm’s efforts to focus all of the firm’s efforts to deliver valuedeliver value to end-usersto end-users concentrate the firm’s resources on a concentrate the firm’s resources on a set of core competenciesset of core competencies

and and outsourceoutsource all other activities all other activities build a build a supply networksupply network that efficiently completes required that efficiently completes required

business processesbusiness processes sustain highly sustain highly collaborative relationshipscollaborative relationships with with selectselect first-tier first-tier

and lower-tier supplier firms.and lower-tier supplier firms.

Understanding Purchasing Understanding Purchasing OrientationOrientation

Supply ManagementSupply Management

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Supply Management ModelsSupply Management ModelsPurchasing Portfolio MatrixPurchasing Portfolio Matrix

CustomeCustomer Valuer Value

Customer RiskCustomer Risk

leverage itemsleverage items

genericsgenerics

criticalscriticals

bottleneck bottleneck itemsitems

build to orderbuild to order design to orderdesign to order

build to build to forecastforecast

build to build to replenishreplenishlowlow

highhigh

lowlow highhigh

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IT Infrastructure for e-BusinessIT Infrastructure for e-Business

Enterprise Application Integration Enterprise Application Integration (EAI)(EAI)

SupplierSupplierss

EEmmppllooyyeeeess

PPaarrttnneerrss

CustomersCustomers

Enterprise Enterprise Resource Resource Planning Planning

(ERP)(ERP)

Enterprise Enterprise Relationship Relationship Management Management

(ERM)(ERM)

Customer Customer Relationship Relationship Management Management

(CRM)(CRM)

Supply Chain Supply Chain Management Management

(SCM)(SCM)

Partner Partner Relationship Relationship Management Management

(PRM)(PRM)

(Adapted from Sawhney 2000)

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The Buying TeamThe Buying Team

RolesRoles Likely PersonLikely Person

initiatorinitiator general managergeneral managerdeciderdecider controllercontrollerinfluencerinfluencer R&D engineerR&D engineerpurchaserpurchaser buyerbuyergatekeepergatekeeper purchasing managerpurchasing manageruseruser workerworker

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The Buying TeamThe Buying TeamBuilding the Building the Value StackValue Stack

Beware: different units of a customer firm may Beware: different units of a customer firm may perceive or receive only a portion of an offering’s perceive or receive only a portion of an offering’s

total value!total value!

Distribution of value elements 1-5.Distribution of value elements 1-5.

11

22

33

44

5

manufacturinmanufacturingg

R&DR&D

purchasinpurchasingg

ITIT

logisticslogistics

(Adapted from Narayandas (Adapted from Narayandas 2002)2002)

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The Buying TeamThe Buying TeamBuilding the Building the Value StackValue Stack

Marketers create a Marketers create a value stackvalue stack by educating all by educating all units on the total value of the offering to their firm!units on the total value of the offering to their firm!

11

22

33

44

5

The Value Stack

(Adapted from Narayandas (Adapted from Narayandas 2002)2002)

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Learning Customer RequirementsLearning Customer RequirementsCustomer Understanding of Their Own NeedsCustomer Understanding of Their Own Needs

KnownKnown UnknownUnknown

SupplierSupplierUnderstanding Understanding of Customer of Customer NeedsNeeds

Known

Unknown

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Learning Customer Requirements Learning Customer Requirements Microsoft CorporationMicrosoft Corporation

Customer Understanding of Their Own NeedsCustomer Understanding of Their Own Needs

Known Unknown

MicrosoftMicrosoftUnderstanding Understanding of Customer of Customer NeedsNeeds

KnownKnown

UnknownUnknown

Customer Customer SatisfactionSatisfactionService UsageService UsageActivity-Based Activity-Based CostingCostingAB PlanningAB PlanningUsability TestingUsability TestingSupportability TestingSupportability TestingBeta TestingBeta TestingOffLine PlusOffLine PlusWISH LinesWISH Lines

On-Site TrainingOn-Site TrainingOnline ServicesOnline ServicesMS MagazinesMS Magazines

Joint ProductJoint Product DevelopmentDevelopment

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Buying Classes:Buying Classes:

Buying Phases:Buying Phases:

NewNew Modified StraightModified StraightTaskTask Rebuy Rebuy Rebuy Rebuy

1. problem recognition1. problem recognition yesyes maybemaybe nono

2. determination of need2. determination of need yesyes maybemaybe nono

3. product specification3. product specification yesyes yesyes yesyes

4. certification of vendors4. certification of vendors yesyes maybemaybe nono

Depicting the Buying Process Depicting the Buying Process The BuyGrid FrameworkThe BuyGrid Framework

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Buying Classes:Buying Classes:

Buying Phases:Buying Phases:NewNew Modified StraightModified StraightTaskTask RebuyRebuy Rebuy Rebuy

5. request for proposals5. request for proposals yesyes maybemaybe nono

6. supplier selection6. supplier selection yesyes maybemaybe nono

7. order routine selection7. order routine selection yesyes yesyes yesyes

8. performance evaluation8. performance evaluation yesyes yesyes yesyes

(Adapted from Robinson, Faris, with Wind 1967)(Adapted from Robinson, Faris, with Wind 1967)

Depicting the Buying Process Depicting the Buying Process The BuyGrid FrameworkThe BuyGrid Framework

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V. ConclusionsV. Conclusions

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Understanding Firms as CustomersUnderstanding Firms as CustomersRelated Financial TechniquesRelated Financial Techniques

FunctionFunction TechniqueTechnique ApplicatioApplicationn

PurchasinPurchasingg

MarketingMarketing

FinanceFinance

TCO AnalysisTCO Analysis

Value AssessmentValue Assessment

ROI AnalysisROI Analysis

diagnose cost driversdiagnose cost drivers

configure offering configure offering and value and value

propositionpropositionjustify acquisition at justify acquisition at

a point in futurea point in future