Reports

Organizational Buying Contexts and the Procurement Process

Michele D. Bunn and William D. Perrault, Jr., 1993, 93-106

Background
Understanding purchase decisions is crucial for vendors and buyers alike. For vendors, it can mean the difference between building a long-term relationship with a customer or losing that customer to a competitor. For buyers, managing their clout as purchasers can allow them to arrange the terms of vendor relationships to achieve strategic-level procurement objectives. Because of the importance of purchase decisions to buyers and sellers, marketing managers and scholars have devoted much attention to the subject. Most empirical research has explained the inputs into, or the outputs of, a particular buying decision. This paper takes a new perspective, considering the elements of the decision-making process itself and the relationships among those elements. By helping sellers better understand the purchase from the buyer's point of view, this perspective can help sellers identify purchasing situations in which they can influence the decision outcome and develop a competitive advantage.

Methodology
The authors begin by describing a model of organizational buying. At its heart are two independent variables that are central to the purchasing task: purchase importance, the customer's assessment of the strategic significance of the purchase, and task uncertainty, the discrepancy between the information that is available and the information that is needed to be sure that the purchase decision is being handled effectively.

The model also contains four underlying variables of the procurement decision: (1) procedural control, the extent to which buyers are guided by established policies and procedures when evaluating sources of supply; (2) search for information, the purchaser's effort to scan the internal and external business environment for data relevant to the purchase decision; (3) proactive focusing, the extent to which the buyer's evaluation and selection of a source of supply is based on the firm's long-range needs and objectives; and (4) formal analysis, the extent to which the buyer uses formal analytical tools to evaluate supply alternatives.

Finally, the model includes two variables that help us understand the procurement market: extensiveness of the choice set, the number of alternative products or services available to meet the purchasing need, and buyer power, the purchasing firm's ability to command a favorable outcome in negotiating with a vendor.

Drawing on relevant theory and previous empirical data, the authors develop hypotheses about the relationships among the variables in the model. To begin with, the authors conducted in-depth interviews with purchasing managers to identify the topics to include in the questionnaire. Then to test the research hypotheses, the authors sent a total of 1,855 questionnaires to a randomly selected sample of purchasing managers; of these, 636 were completed and returned. The study sample included managers from various-sized organizations-from large to small organizations-and the purchase decisions studied included a wide variety of transactions-from major to minor purchases. All the questions pertained to a single purchase decision and were designed to reveal how, and under what conditions, buying firms approach buying decisions.

Findings
Data analysis yielded both expected and unexpected findings about the relationships among the variables in the model. Here are some highlights:

  1. The research confirms the long-held notion that buyers focus more effort on important purchases. The results, however, show in particular how buyers distinguish between more important and less important purchase decisions and, consequently, treat them differently. For important purchases, for example, they conduct more background research, employ formal analytical techniques, and consider the decision in the context of long-range strategic goals. For less important purchases, they dispense with such activities, relying instead on routine procedures. But the relationships are not straightforward. The results indicate that other characteristics of the situation are also operating.

  2. Task uncertainty strongly influences how buyers approach and carry out purchase decisions. Not surprisingly, when buyers are confident in making their purchase decisions, as in a standard rebuy situation, they will usually rely on routine procedural controls and avoid spending time searching for information or conducting formal analysis of their alternatives. Yet task uncertainty does not necessarily motivate buyers to seek more information or employ formal tools and techniques to clarify the purchasing situation. Instead, uncertainty may discourage information seeking, a reaction known as the "threat rigidity" effect.

  3. The firm's buying power plays an important role in shaping its behavior in the procurement market. When many suppliers are competing for a company's business, for example, the buyer can more easily obtain information from suppliers that they can use to conduct formal analyses. In addition to using these procedures more extensively, powerful buyers are more likely to focus on long-term strategic issues and to encourage supplier practices that improve their cost advantage in the market.

Opportunities for Managers
These findings suggest a number of ways that alert sellers can identify and carve out competitive opportunities for themselves. For example, the study results show that customers are less likely to search for information and more likely to follow routine procedures if the purchase is less important. A purchase that is "unimportant" to a customer, however, may be crucial to a seller. Obviously, a seller who "has the business" enjoys an advantage in this situation. The chances are, though, that this customer knows little about either changes in the market or the abilities of competing vendors. This firm may thus represent a competitive opportunity for an enterprising seller offering more timely or more economical products and services than the current supplier.

The research results show, moreover, that task uncertainty can discourage companies from searching for information. By taking the initiative to provide information to reduce the customer's uncertainty, a seller may be able to capture long-term business. For example, in an unstable market, a vendor whose sales presentations analyze different contingencies may be providing valuable information that the customer had not developed internally. These suppliers may also help buyers cope with uncertainty by developing contracts that plan for contingencies.

As buyers seek more power and adopt a more strategic approach to vendor selection, they look for more information and rely more heavily on formal analytical techniques. Vendors who can help customers understand market trends and develop analytical expertise will have a decided advantage in the market. In addition, a vendor who deals with many customers is likely to enjoy share cost economies in developing the needed analytical tools. By providing such support to customers, particularly with the aid of computer-to-computer communications, sellers can gain yet another source of competitive advantage.

Opportunities for Researchers
This study opens up a number of possibilities for future research. For example, the authors found a rather large (.29) product moment correlation between buyer power and purchase importance-suggesting that over time buyers making important purchases try to gain more power in the market. Researchers may want to explore how firms develop buyer power. In searching for information, for example, buyers may be seeking to make not only the best vendor choice in the current situation but also to develop a strong information base of alternative vendors. Another path to pursue would be to study procurement strategies that evolve as new customers firms enter growth industries.

More research is needed on the relationship between task uncertainty and information search. A better understanding of the types of information that buyers rely on and need in uncertain conditions can help vendors shape promotion efforts aimed at business customers.

Finally, the sampling approach and measures developed in this study can be used in other types of research. For example, the strategy and industrial organization literatures deal extensively with the impact of buyer power on buyer-seller relationships and industrial competition. There has been little research that looks at these issues from an industrial marketing perspective. More research in this area could provide a basis for gaining a better understanding of how business-to-business marketers can deal effectively with powerful buyers-especially when these buyers are evaluating vendors from a long-term strategic point of view.

Michele D. Bunn is Assistant Professor of Marketing at the School of Management, State University of New York at Buffalo. William D. Perreault, Jr. is Kenan Professor at the Kenan-Flagler Business School, University of North Carolina at Chapel Hill.

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