Multimedia Marketing/Marketing.iso/market/chapter3.5p

Text File | 1996-08-22 | 17KB | 365 lines

SECTON 3.5  Industrial Buyer Purchasing

INSTRUCTIONS Try to imagine the major ways in which the purchasing behavior
of business and nonprofit organizations differ from the purchasing behavior of consumers.

EXAMPLE

No chief decision maker can feel pleased about a ,100 million
plus business writeoff. This decision was especially bitter for
the chairman of a major company that had to abandon the U.S.
market for digital telephone switching equipment. The firm
was unable to transform the system that it sold in Europe to
meet U.S. specificiations.

Digital equipment is in heavy demand in the U.S. because it allows
telephone companies to offer cash generating services such as
call forwarding, call waiting, and the equivalent of a private
telephone system for business customers.

The company failed because of bad timing. Its strategy was to
establish a leadership system in Europe and then bring the product
to the U.S. But this happened too late. Other companies moved in
to saturate the market. The loss meant more than the ,100 plus
business writeoff. It put the company in a vulnerable position
against hard-charging competitors in the rest of the world.

DETAILS

Far too many people envision marketing as solely relating to consumer
products. These products, however, represent only a portion of the
total picture. Industrial goods are the other major component.

Industrial buyers seek ways of attaining their objectives by
producing goods and services and selling them to others.In turn,
they buy goods and services to enable them to operate.

The major categories of industrial buyers include:
 .Agricultural producers (farming, forestry, and fishing).
 .Service companies (such as travel agencies and CPA firms).
 .Construction firms.
 .Extractive firms (mining, quarrying, and drilling).
 .Financial institutions (banks,  insurance, and real estate).
 .Manufacturing firms
 .Not-for-profit institutions (churches and charities).
 .Public utilities.
 .Transportation firms.

As a group, industrial buyers have behavioral characteristics different
from purchasers of consumer goods and marketers should be aware of
these differences when designing their strategies.

Fortunately for marketing decision makers, federal and state
governments and trade associations collect substantial detailed data
relating to industrial buyers. These organizations publish and make
available to managers much of this information. They report on the
number and type of establishments, their sales volume, number of
employees, cost structures, and other important variables. Most often,
the reported data are broken down into Standard Industrial
Classification (SIC) codes, which categorize producers by the types
of products they manufacture.

Breakdowns of sales and other data by SIC categories are useful
to industrial marketers in locating market opportunities. The codes
utilize a four-digit number, where the first two digits identify
a particular industry, such as machinery or apparel. The code 75_ _
refers to repair shops, for instance. The last two digits signify
subdivisions of the industry. 753_, for instance refers to all
automobile repair shops. Further,7534 identifies tire retreading
and repair and 7535 means paint shops.

Another characteristic of industrial buyers is that they are more
highly concentrated in geographic locations than are consumers.
To illustrate, roughly 50 percent of the 1.8 million manufacturing
and service firms in the U.S. are located in eight eastern and
midwestern states plus California.

Within individual industries,  concentration is even greater in
terms of both geography and size. Most of the rubber industry,
for example, is located in Ohio. Many steel plants are situated
near Pittsburgh. As for size concentration, nearly half of all
value added by manufacturing is accounted for by the largest
200 companies.

Concentration of the market has two important implications for
marketers. First, a single potential buyer is usually more important
to an industrial marketer's success than is a single consumer to a
marketer of consumer goods. This is because sales to a producer are
generally much larger in dollar volume than sales to a single
consumer. This being the case, marketers often segment markets on
the basis of individual potential customers and adopt a very
flexible approach to each.

Second, because of industrial buyer concentration, mass promotion
campaigns are often unnecessary. Because of concentration, personal
selling is generally much more efficient. Individual sales
representatives can call on specific buyers and spend considerable
time with them, in order to satisfy their specific needs.

PROBLEM 1

Because of concentration in the market, a seller of maintenance
supplies for the steel industry is likely to concentrate the
promotion mix on:

A. Sales promotion.
B. Advertising.
C. Personal selling.
D. Sales promotion.

WORKED

Concentration in the industrial goods market leads many firms that
sell to this sector to rely heavily on personal selling, rather than
advertising. A seller of maintenance supplies to the steel industry
could rely heavily on advertising, but much of this would be wasted,
as it would reach firms that are not in the steel industry. The
marketer is much more likely to succeed by maintaining a sales force
that has been trained to serve steel company buyers by discovering
their unique needs and making a major effort to satisfying them. In
fact, industrial marketers spend more than ten times more dollars on
personal selling than they do on advertising.

ANSWER  C
INSTRUCTIONS Try to imagine the major ways in which the purchasing behavior
of business and nonprofit organizations differ from the purchasing behavior of consumers.

EXAMPLE

No chief decision maker can feel pleased about a ,100 million
plus business writeoff. This decision was especially bitter for
the chairman of a major company that had to abandon the U.S.
market for digital telephone switching equipment. The firm
was unable to transform the system that it sold in Europe to
meet U.S. specificiations.

Digital equipment is in heavy demand in the U.S. because it allows
telephone companies to offer cash generating services such as
call forwarding, call waiting, and the equivalent of a private
telephone system for business customers.

The company failed because of bad timing. Its strategy was to
establish a leadership system in Europe and then bring the product
to the U.S. But this happened too late. Other companies moved in
to saturate the market. The loss meant more than the ,100 plus
business writeoff. It put the company in a vulnerable position
against hard-charging competitors in the rest of the world.

DETAILS

One of the key factors distinguishing industrial buyers is their
informed and skillful buying. When consumers buy a faulty product,
say a toaster that burns toast, they are likely to become upset,
but the consequences are not often monumental. On the other hand,
if an industrial buyer makes a multimillion dollar mistake it
could mean major losses and even bankruptcy.

Many factors such as favorable terms of sale, freight charges,
dependable rapid delivery, and price are all critical to an industrial
buyer's success. A price only a few cents per ton lower on steel,
for example, could result in added profits of a million dollars or
more to a large buyer of steel, such as an automobile producer.

Accordingly, industrial buyers devote a great deal of time and
effort to purchasing. Most are aware that they must remain current
on all information on items which might fill their needs. In fact,
many are actively involved in informing potential suppliers about
their existing needs as well as those anticipated in the future.
Further, many industrial buyers employ purchasing specialists
whose jobs entail aggressively seeking information about products,
services, and suppliers.

The types of products industrial buyers purchase include:
1. Installations--long-lived expensive manufactured products
   such as buildings and major equipment.
2. Accessory items--capital items used to complement installations.
   These include small power tools.
3. Supplies--items used for maintenance, repair, and to facilitate
   operations. Examples are electricity and pencils.
4. Services--such as legal advice and consulting.
5. Raw materials--such as coal and wheat.
6. Components--items that receive processing before delivery.
   Examples are tires on new automobiles and pig iron to be processed
   into steel.

PROBLEM 2

Purchasing personnel for a manufacturer of office machinery are
likely to be heavily involved in:

A. Formulating advertising plans for their companies.
B. Informing potential suppliers about their existing and future
   needs.
C. Developing strategies for new products.
D. Formulating pricing strategies for both old and new products.

WORKED

Purchasing personnel for industrial goods firms are likely to
be highly involved in informing potential suppliers about their
needs. The purchasing personnel for a manufacturer of office
machinery illustrate this point. They realize that they are highly
dependent on suppliers for their success. If suppliers cannot
adequately satisfy their needs the purchasing process may be very
ineffective and they may lose their jobs. Accordingly, they work
very closely with suppliers in taking steps to insure that the
latter develop and deliver products that will satisfy their unique
needs.

ANSWER  B

INSTRUCTIONS Try to imagine the major ways in which the purchasing behavior
of business and nonprofit organizations differ from the purchasing behavior of consumers.

EXAMPLE

No chief decision maker can feel pleased about a ,100 million
plus business writeoff. This decision was especially bitter for
the chairman of a major company that had to abandon the U.S.
market for digital telephone switching equipment. The firm
was unable to transform the system that it sold in Europe to
meet U.S. specificiations.

Digital equipment is in heavy demand in the U.S. because it allows
telephone companies to offer cash generating services such as
call forwarding, call waiting, and the equivalent of a private
telephone system for business customers.

The company failed because of bad timing. Its strategy was to
establish a leadership system in Europe and then bring the product
to the U.S. But this happened too late. Other companies moved in
to saturate the market. The loss meant more than the ,100 plus
business writeoff. It put the company in a vulnerable position
against hard-charging competitors in the rest of the world.

DETAILS

The process of industrial exchange can be complicated. It is based
on an interwoven web of exchanges in a chain that begins with a set
of resources and ends with the production and sale of some final
consumer good or service. Further, each exchange in the chain depends
on all others in the web.

Consider the manufacture of a book. Somewhere, perhaps in Ontario,
Canada, a mining company obtained iron ore and sold it to a steel
producer, which marketed the steel to machinery manufacturers who,
in turn made printing presses and equipment for lumbering. A saw
mill, possibly in Maine, logged a tree with this equipment in order
to produce paper. A printer commissioned by the publisher purchased
both paper and press. Finally, bookstores bought copies and sold
them to consumers. This example shows only a few links in the chain
leading to the production and sale of the book. Each link in the
chain contributes a small but important part of some final product
and each exchange involves strategic marketing decision making.

PROBLEM 3

The demand for the output of a steel mill is derived from:

A. The demand for industrial goods.
B. The demand for consumer goods.
C. The demand for governmental services.
D. The demand for financial services.

WORKED

The demand for the output of a steel mill is derived from the demand
for consumer goods. If consumers purchase more automobiles, pickup
trucks, paper clips, and other objects made from steel or by machinery
and equipment made from steel, the demand for steel mill output will
ultimately increase.

ANSWER  B
INSTRUCTIONS Try to imagine the major ways in which the purchasing behavior
of business and nonprofit organizations differ from the purchasing behavior of consumers.

EXAMPLE

No chief decision maker can feel pleased about a ,100 million
plus business writeoff. This decision was especially bitter for
the chairman of a major company that had to abandon the U.S.
market for digital telephone switching equipment. The firm
was unable to transform the system that it sold in Europe to
meet U.S. specificiations.

Digital equipment is in heavy demand in the U.S. because it allows
telephone companies to offer cash generating services such as
call forwarding, call waiting, and the equivalent of a private
telephone system for business customers.

The company failed because of bad timing. Its strategy was to
establish a leadership system in Europe and then bring the product
to the U.S. But this happened too late. Other companies moved in
to saturate the market. The loss meant more than the ,100 plus
business writeoff. It put the company in a vulnerable position
against hard-charging competitors in the rest of the world.

DETAILS

There is a fundamental difference between consumer and industrial
buyer behavior for goods and services. First, consumer demand is
direct because consumer goods and services provide personal need
satisfaction. On the other hand, industrial buyer demand is indirect.
Industrial buyers do not purchase products to obtain satisfaction
from using them. Instead they use purchased items to produce goods
and services for their customers and thereby earn profits.

Demand for industrial items is predicated upon what the customers
of producers (and eventually consumers) seek for need satisfaction.
Industrial buyer demand is consequently derived from the demand for
consumer goods. If demand for books diminishes, for example, so
would demand for trees, printing presses, and all other products in
that exchange chain.

The derived property also means that the total demand for a type of
industrial product tends to be inelastic. This means that price
changes bring about smaller increases in quantity demanded than
would be the case than if demand were elastic.

The value of each link in the chain of exchange depends on consumer
demand for the end product. Since each link contributes only a
fraction of the value of a total final offering, the impact of a
change in price at one link is diminished by the overall effect of
the other links. A price increase or decrease in any of the elements
of a consumer good brings about a far smaller result at the end
of the chain.

The discussion on price elasticity refers to total industry demand
for an industrial product. An individual company's demand, on the
other hand, can be very elastic. This is because many items that
competing producers sell are physically similar, sometimes identical.
A pine tree harvested in Washington, for example, is physically
the same as one taken in Wisconsin. Coal, iron ore, steel, wheat, and
even most machinery are similar between competitors. This means that
price differences can have a large impact on the demand for a single
supplier's goods, despite the total industry's relatively inelastic
total demand.

PROBLEM 4

The demand for steel is relatively inelastic. This means that a
large price increase in the steel industry will bring about:

A. A small change in total demand.
B. Decreased production of steel.
C. A large change in the demand for steel.
D. A large increase in employment in the steel industry

WORKED

Because of the chain of exchanges, industry demand for industrial
goods tends to be inelastic. This means that price increases will
not reduce demand substantially and price decreases will not
significantly raise demand. Purchasers of steel products use many
other goods in addition to steel. Hence, steel price changes will
affect their total costs but only to a degree. If these cost
changes are passed on to consumers, they will not be substanial
and will not materially affect the demand for consumer goods.

ANSWER  A