Ch3 Understanding Customers Lecture

8/3/2019 Ch3 Understanding Customers Lecture

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Business Market Management:Business Market Management:

Understanding, Creating, andUnderstanding, Creating, andDelivering ValueDelivering Value


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Chapter 3:Chapter 3:

Understanding Firms as CustomersUnderstanding Firms as Customers


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

Understanding firms as customersUnderstanding firms as customersis theis theprocess of learning how companies relyprocess of learning how companies relyon a network of suppliers to add value toon a network of suppliers to add value totheir offerings; integrate purchasingtheir offerings; integrate purchasing

activities with those of other functionalactivities with those of other functionalareas and outside firms, and makeareas and outside firms, and make

purchasing decisions.purchasing decisions.


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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 firms purchasing orientation?What is the customer firms 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 customers requirements?What are the customers requirements?

What is the firms buying process?What is the firms 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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UnderstandingUnderstanding

Purchasing OrientationPurchasing Orientation

PurchasingPurchasing entails the acquisition of resourcesentails the acquisition of resources

and capabilities for the firm from outsideand capabilities for the firm from outsideproviders.providers.

Purchasing orientationPurchasing orientation is the overallis the overall

philosophy that guides managers who makephilosophy that guides managers who makepurchasing-related decisions and delineatespurchasing-related decisions and delineatestheir domain and span of influence.their domain and span of influence.


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Understanding PurchasingUnderstanding Purchasing

OrientationOrientationThree Purchasing OrientationsThree Purchasing Orientations

BuyingBuying ProcurementProcurementSupplySupply

ManagemenManagemen

tt

Primary Goal of Orientation:Primary Goal of Orientation:

LowestLowest

PricePriceLowestLowest

Total CostTotal CostBestBest

ValueValue


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BuyingBuying concerns executing discreteconcerns executing discretetransactions with suppliers.transactions with suppliers.

The central pursuits of buying are:The central pursuits of buying are:

obtain theobtain the best dealbest dealin terms of price,in terms of price,quality, and availabilityquality, and availability

maximizemaximizepowerpowerover suppliersover suppliers

avoid riskavoid riskwherever possible.wherever possible.

Understanding PurchasingUnderstanding PurchasingOrientationOrientation

BuyingBuying


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Obtaining theObtaining the Best DealBest DealThe Industry Price BandThe Industry Price Band

(Adapted from Ross(Adapted from Ross

1984)1984)

AverageAverage

PricePrice+ 3%*+ 3%*- 3%*- 3%*

* Band varies by industry* Band varies by industry

PricePrice

PremiuPremiu

mm


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Obtaining theObtaining the Best DealBest DealDistributive NegotiationsDistributive Negotiations

Maximum priceMaximum pricethe buyer isthe buyer is

willing to pay orwilling to pay or

VIU PriceVIU Price

Minimum priceMinimum pricethe seller isthe seller is

willing towilling to

acceptaccept

Zone ofZone of

AgreementAgreementPricePrice

AnalysisAnalysisSupplierSupplier

CostCost

AnalysisAnalysis

ValueValue

AssessmentAssessment

Price perPrice per

UnitUnit

00


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Maximizing PowerMaximizing Powerover Suppliersover Suppliers

MultisourcingMultisourcing

CommoditizationCommoditization


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The Never-Ending Battle BetweenThe Never-Ending Battle Between

Buying and MarketingBuying and Marketing

Buying seeksBuying seeks

CommoditizatioCommoditizatio

nn

MarketingMarketing

seeksseeks

DifferentiationDifferentiation

VA = VB VA PA> VB - PB


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ProcurementProcurement pursues quality improvements andpursues quality improvements and

cost reductions through the integration ofcost reductions through the integration of

purchasing with other functions and cooperativepurchasing with other functions and cooperative

relationships withrelationships with firstfirst--tiertiersuppliers.suppliers.

Procurement increases customer productivity by:Procurement increases customer productivity by:

improvingimproving qualityquality

reducingreducingtotal coststotal costs

cooperatingcooperatingwith suppliers.with suppliers.


OrientationOrientationProcurementProcurement


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ImprovingImproving QualityQuality

SpecificationsSpecifications describe products or services that thedescribe products or services that thefirm is seeking.firm is seeking.

functional specificationsfunctional specifications

technical or materials specificationstechnical or materials specificationsprocess specificationsprocess specifications

performance specificationsperformance specifications

brand specificationsbrand specifications

StandardizationStandardization entails establishing agreement onentails establishing agreement onuniform identifications for definite characteristics ofuniform identifications for definite characteristics ofquality, performance, service, etc.quality, performance, service, etc.


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QualityQuality asas

Conformance to SpecificationsConformance to Specifications

0

Supplier Specifications minus CustomerSupplier Specifications minus Customer

SpecificationsSpecifications

PerfectPerfect

QualityQuality

+x-x

UnderspecifiedUnderspecified OverspecifiedOverspecified


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QualityQuality asas

Conformance 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

TraditionalTraditionalPricingPricing DefeaturingDefeaturing

fixedfixed

fixedfixedvariablvariabl

ee

variablvariabl

ee

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


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ReducingReducing Total CostsTotal Costs

Total Cost of Ownership (TCO)Total Cost of Ownership (TCO) or Life Cycleor Life CycleCosts are the sum of all expenses associatedCosts are the sum of all expenses associatedwith thewith the acquisitionacquisition,, useuse, and, and disposaldisposal ororrecyclingrecycling of a market offering.of a market offering.

TCO AnalysisTCO Analysis is the application of Activity-Basedis the application of Activity-BasedCosting to sourcing strategy and purchasingCosting to sourcing strategy and purchasingdecisions.decisions.

If the offering remains productive for severalIf the offering remains productive for severalyears, state total costs in terms of theiryears, state total costs in terms of theirnetnet

present valuepresent value (NPV).(NPV).


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ReducingReducing Total CostsTotal CostsBeware of theBeware of the Seesaw Effect!Seesaw Effect!

CostCost

ReductionsReductions

searchsearch

transactiontransaction

informationinformation

inventoryinventory

physical assetsphysical assets

Cost IncreasesCost Increases

systemssystems

orderorder

fulfillmentfulfillment

deliverydelivery

returnsreturns


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CooperatingCooperating with Supplierswith Suppliers

With a procurement orientation,With a procurement orientation,purchasing managers draw upon thepurchasing managers draw upon thecapabilities and resources of their first-capabilities and resources of their first-

tier suppliers totier suppliers tojointlyjointly improve qualityimprove qualityand reduce total costs.and reduce total costs.

Cooperation requires that customer andCooperation requires that customer and

supplier:supplier:trust one anothertrust one anotherequitably share rewardsequitably share rewards


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CooperatingCooperating with Supplierswith SuppliersIntegrative NegotiationsIntegrative Negotiations

Zone ofZone of

AgreementAgreementCustomerCustomer

s Minimals Minimal

AcceptablAcceptabl

e Levele Level

for Item Afor Item A

Suppliers MinimalSuppliers 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 andentails the integration andcoordination of purchasing with other functions in thecoordination 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 firms efforts tofocus all of the firms efforts to deliver valuedeliver valueto end-usersto end-users

concentrate the firms resources on aconcentrate the firms resources on aset of core competenciesset of core competencies

andand outsourceoutsource all other activitiesall other activities build abuild a supply networksupply networkthat efficiently completes requiredthat efficiently completes required

business processesbusiness processes

sustain highlysustain highly collaborative relationshipscollaborative relationships withwith selectselect first-tier andfirst-tier andlower-tier supplier firms.lower-tier supplier firms.


OrientationOrientation

Supply ManagementSupply Management


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Supply Management ModelsSupply Management ModelsPurchasing Portfolio MatrixPurchasing Portfolio Matrix

CustomeCustome

r Valuer Value

Customer RiskCustomer Risk

leverage itemsleverage items

genericsgenerics

criticalscriticals

bottleneckbottleneckitemsitems

build to orderbuild to order design to orderdesign to order

build tobuild to

forecastforecastbuild tobuild to

replenishreplenishlowlow

highhigh

lowlow highhigh


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IT Infrastructure for e-BusinessIT Infrastructure for e-Business

Enterprise Application IntegrationEnterprise Application Integration(EAI)(EAI)

SuppliersSuppliers

EE

mm

pp

ll

oo

yy

eeee

ss

PPaa

rr

tt

nn

ee

rrss

CustomersCustomers

EnterpriseEnterprise

ResourceResource

PlanningPlanning

(ERP)(ERP)

EnterpriseEnterprise

RelationshipRelationship

ManagementManagement(ERM)(ERM)

CustomerCustomer

RelationshipRelationshipManagementManagement

(CRM)(CRM)

Supply ChainSupply Chain

ManagementManagement

(SCM)(SCM)

PartnerPartner

RelationshipRelationshipManagementManagement

(PRM)(PRM)

(Adapted from Sawhney 2000)


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The Buying TeamThe Buying Team

RolesRoles Likely PersonLikely Person

initiatorinitiator general managergeneral managerdeciderdecider controllercontroller

influencerinfluencer R&D engineerR&D engineer

purchaserpurchaser buyerbuyer

gatekeepergatekeeper purchasing managerpurchasing manageruseruser workerworker


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The Buying TeamThe Buying Team

Building theBuilding the

Value StackValue Stack

Beware: different units of a customer firm mayBeware: different units of a customer firm may

perceive or receive only a portion of an offeringsperceive or receive only a portion of an offerings

total value!total value!

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

11

22

33

44

5

manufacturinmanufacturin

gg

R&DR&D

purchasingpurchasing

ITIT

logisticslogistics

(Adapted from Narayandas(Adapted from Narayandas

2002)2002)


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The Buying TeamThe Buying TeamBuilding theBuilding the Value StackValue Stack

Marketers create aMarketers create a value stackvalue stackby educating all unitsby educating all units

on the total value of the offering to their firm!on the total value of the offering to their firm!

11

22

33

44

5

The ValueStack

(Adapted from Narayandas(Adapted from Narayandas2002)2002)


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Learning Customer RequirementsLearning Customer Requirements

Customer Understanding of Their Own NeedsCustomer Understanding of Their Own Needs

KnownKnown UnknownUnknown

SupplierSupplier


of Customerof Customer

NeedsNeeds

Known

Unknown


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Learning Customer RequirementsLearning Customer RequirementsMicrosoft CorporationMicrosoft Corporation

Customer Understanding of Their Own NeedsCustomer Understanding of Their Own Needs

Known Unknown

MicrosoftMicrosoft


of Customerof Customer

NeedsNeeds

KnownKnown

UnknownUnknown

CustomerCustomer

SatisfactionSatisfactionService UsageService Usage

Activity-BasedActivity-Based

CostingCosting

AB PlanningAB PlanningUsability TestingUsability Testing

Supportability TestingSupportability Testing

Beta TestingBeta TestingOffLine PlusOffLine Plus

WISH LinesWISH Lines

On-Site TrainingOn-Site Training

Online ServicesOnline ServicesMS MagazinesMS Magazines

Joint ProductJoint ProductDevelopmentDevelopment


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Buying Classes:Buying Classes:

Buying Phases:Buying Phases:

NewNew Modified StraightModified Straight

TaskTask Rebuy RebuyRebuy 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 ProcessDepicting the Buying ProcessThe BuyGrid FrameworkThe BuyGrid Framework


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Buying Classes:Buying Classes:

Buying Phases:Buying Phases:NewNew Modified StraightModified Straight

TaskTask RebuyRebuy RebuyRebuy

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 ProcessDepicting the Buying ProcessThe BuyGrid FrameworkThe BuyGrid Framework

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Ch3 Understanding Customers Lecture