Chapter Two

The Character of Business Marketing

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Review of Chapter One

B2B is an important element in the economies of industrialized nations

B2B includes:- Marketing to companies that buy products in order to make other products. (e.g.,

McDonald buy salts to make French Fry)

- Marketing to government agencies, including state & local governments

- Marketing to institutions such as university & hospitals

- Marketing to resellers, including retailers & industrial distributors

B2B is important:- Most marketing majors will begin their career in B2B

- The magnitude of B2B, accounting for more than half of the economy

B2B is different from B2C:

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Learning Objectives

The focus is business relationship between buyers & sellers

• Describe the effectiveness of markets for coordinating business transactions.

• Examine the motivations for relationships and how they develop.

• Identify the complementary mechanisms for coordinating business transactions.

- Supply chain management (discussed in Chapter3)- Relationship management

• Describe the network of participants in the value chain.

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The Magic of Markets

• Markets provide a mechanism for meeting individual and organizational needs and allocating productive resources. (e.g., the buyer’s circumstance determined the value of any product or service; price coordinates the activities of the various businesses; when demand is greater than the supply, the price goes up.)

• There are technical limits to the effectiveness of markets

- Incomplete information about product performance

- Buyer or seller integrity

- Hidden costs not well reflected in price

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Additional Means for Coordinating

• Supply Chain Management (SCM)

- We will discuss SCM in chapter 3 the purchasing function

• Relationship Management

- Motives to relate

- Developing relationships

- Safeguarding relationships

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Motivation to Relate

What determines a successful relationship?

1. The seller has motivation to relate;

2. The buyer has motivation to relate;

3. If they are not equally motivated it won’t be an equal relationship.

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Seller’s motivation to relate

High

Low

Buyer’s motivation to

relate

HighLow

Seller’s market

Seller-maintained relation

Jointrelationshipmaintenance

Buyer-maintained relation

Buyer’s Market

Discrete exchange

(spot contracts)Noexchange

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BU

YE

R’S

MO

TIV

AT

ION

TO

RE

LA

TE

The Types of Relationship

SELLER’S MOTIVATION TO RELATE

HIGH

BUYER’S ADVANTAGE

STRATEGIC PARTNERSHIPS

LOW HIGHTRANSACTIONAL RELATIONSHIPS

SELLER’S ADVANTAGE

LOW

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The Types of Relationship

Transactional relationships (Spot exchanges)- Both seller & buyer have no motivation to relate- These markets are best suited to:

highly standardized goods/services which require little description/explanation;the products primarily bought on the basis of price

Strategic partnerships- At least one party is motivated to build and keep a

relationship- Both buyers and sellers must have strong MUTUAL

interests in maintaining an ongoing exchange

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The Preferences of Sellers & Buyers

DEVELOP

A

COMMON

GROUND

BUYERS

Want:

Reliable delivery without interruptions

Reliable products with low rejection and defect rates

Efficient lead times

SELLERS

Want to:

Sell Large Volumes

Sell similar amounts over time

Manage their selling and support expenses

(They want to have substantial & reliable volumes at adequate margins)

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Requirements for High Performance Relationships

Beyond the financial considerations, both parties want:

• Integrity

• Fairness

• Loyalty

• Flexibility

• Input into your partner’s strategy

• Partner’s input into your strategy

• Compliance with procedures and agreement

• Honor commitment

• Stand behind your products

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Strategic Partnerships

1. When are strategic relationships most likely to emerge?2. What are the benefits and risks of strategic partnerships for

buyers and suppliers?3. Why are JIT systems a prime example of a strategic

partnership?4. What types of internal and external standards are typically

used to evaluate JIT systems?5. What problems have attended the widespread use of JIT?

How have firms addressed these issues?

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1. When are strategic relationships most likely to emerge?

In order for such “high-trust” relationships to evolve, both buyers and sellers must have strong MUTUAL interests in maintaining an ongoing exchange.

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2. What are the benefits and risks for buyers and suppliers?

Benefits for buyers: Shift some inventories up the channel;Take advantage of supplier expertise & contacts;Reduce purchasing/quality control costs;Trade on the supplier’s reputationBenefits for suppliers: Gain large, dependable purchase volume;Obtain revenue predictability, benefits from specialization;Gain exposure to larger markets;Enhance their quality/dependability reputationMajor risks for both parties:Derive from unexpected disruptions in the delivery of goods and/or vital

communications, e.g., buyers become more vulnerable to strikes, acts of God, and transportation disruptions because of the small inventories;

Trust is vital and fragile element which, if damaged, creates damaging conflicts;Both parties may find themselves “shut out” from other, more attractive, alternatives.

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3. Why are JIT systems a prime example of a strategic relationship?

OEM buyers have worked with suppliers of component parts and materials to eliminate costly inventories and frequent handling costs by establishing just-in-time (JIT) relationship.

“JIT” requires the supplier to produce and deliver to the OEM precisely the necessary quantities at the necessary time, with the objective that products produced by the supplier conform to performance specification every time.

To be successful, JIT systems require all parties to share proprietary information relevant to production capability, scheduling, inventory sizes and procedures and delivery equipment, routes, delivery times, and capabilities. The firms often connect systems to share such information electronically. Clearly, TRUST is essential.

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4. What types of internal and external standards are typically used to evaluate JIT systems?

Internal standards:Firms often ask their own managers to assess supplier professionalism,

responsiveness, quality, technical capability, and vision.

External standards:Popular external assessments may be derived from trade associations or

consulting companies.

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5. What problems have attended the widespread use of JIT?

As a form of strategic partnerships, JIT has all of the problems associated with these approaches

e.g, buyers may have underestimated the impact of small inventories in several areas.

Buyers become MORE vulnerable to strikes, acts of God, and transportation disruptions.

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Developing Relationships

Four-stage relationship development

1. Awareness – Unilateral considerations of potential partners; buyers and sellers engage in “arm-length” evaluations of potential partners

2. Exploration – The parties probe and test each other; interaction occurs, and tentative associations may form

3. Expansion – Both parties are satisfied with some customization involved. Additional benefits are sought from each other; the ESSENCE is increasing dependence between exchange partners

4. Commitment – Partners exchange significant resources to maintain the relationship; marked by partners adapting and resolving disputes internally in order to sustain the relationship

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Developing Relationships

Dissolution – Termination of an advanced relationship. The dissolution is a counterpart to the process of relationship development

Staying in business relationships for two broad reasons:1. YOU WANT TO - The rewards are financial, strategic or

psychological

2. YOU HAVE TO - The cost to exit is too high or there are no alternatives

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Sustaining (Safeguarding) Relationships

• Make on-site visits to your partner (House calls) – efforts to obtain evidence of partner capabilities & commitment

• Trade personnel and offices (Trading places) – buyers & sellers may exchange personnel to provide assurance

• Manage total dependence with an alternate supplier (Managing dependence) – A buyer reduce its dependence on the supplier by cultivating relationships with other exchange partners

• Make the pledge of continuous service (Supplier pledges) – Promise to give good service and fair prices over the course of the relationship

• Develop a relational contract (Contracts) – Under a relational contract, important current buyer/supplier roles/performance agreements re specified while describing procedures for resolving future disagreements

• Provide ownership by bringing functions or technology within boundaries of partner’s firm (Ownership) – Vertical integration