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CLO 1 : Describe Business Marketing, Business Buying Behaviour And Business Marketing Mix In Planning Marketing Strategy. (C2)

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Page 1: CLO 1 : Describe Business Marketing, Business Buying Behaviour And Business Marketing Mix In Planning Marketing Strategy. (C2)

TOPIC 2 Business Buying

Behavior

Page 2: CLO 1 : Describe Business Marketing, Business Buying Behaviour And Business Marketing Mix In Planning Marketing Strategy. (C2)

Course Learning Outcomes (CLO) :

CLO 1 :Describe Business Marketing, Business Buying Behaviour And Business Marketing Mix In Planning Marketing Strategy. (C2)

Page 3: CLO 1 : Describe Business Marketing, Business Buying Behaviour And Business Marketing Mix In Planning Marketing Strategy. (C2)

2.1 THE BUYING OBJECTIVES

FOR BUSINESS MARKETING

 

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INTRODUCTIONFor developing effective marketing strategy, BUSINESS marketers need to understand not only the nature of business buying but also the BUSINESS buying behavior.

The buying objectives for business marketing : i) Delivery / Availability ii) Product Quality iii) Lowest Price iv) Services

v) Supplier Relationship vi) Personal objectives

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The buying objectives for business marketing

The purchase/materials management objective is defined as buying the right items in the right quantity, at the right price, for delivery at the time and place. It is the management’s problem to define what is ‘right’ for each dimension.

The objective of purchasing function are briefly stated as follow :

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(1) Delivery / Availability

• One of the prime objectives is to ensure that purchased goods and services are available or delivered when and where needed. If not, the work will come to a grinding halt. This will reflect badly on the perfomance of the purchase function. The corollary to this is that the vendor/supplier reliability in delivery is the most important criterion while evaluating vendors in most of the cases.

PURCHASING OBJECTIVES

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(2) Product Quality

• The product quality should be consistent with the specification and use of the product. It is important to ensure consistency in product quality to reduce the cost of inspection, interruption, in production process to rejections and arranging replacements of rejected material. Hence, product quality of considered as one of the important objectives of purchasing.

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(3) Lower Price

• The buyers would like to buy at the lowest price consistent with availability and quality of the product. The buyers consider price as an important objective if delivery and quality objectives are met, because low price is meaningless, if the product is not delivered when needed or if the quality of the product is unacceptable.

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(4) Services

• The industrial buyers need many types of services accompanying the purchase of good. The services include:

• (i) Prompt and accure information from supplier.

• (ii) Application or technical assistance• (iii) Spare parts availability• (iv) Repairs and maintenance capability• (v) Training ir required

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(5) Supplier Relationship

• To develop a good long-term supplier/vendor relationship and to develop new sources of supply. The importance of achieving these purchasing objectives can be understood the fact that manufacturing firms generally spend more than 50 percent of their sales revenue on purchases.

• Industrial marketers need to understand that purchasing objectives described above are based on the company objectives of the firm and personal objectives

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(6) Personal Objectives• Industrial buyers or members of buying centre include

:

• (a) Higher status • (b) Job security • (c) Salary increments • (d) Promotions social considerations ( friendship,

mutually beneficial relationship and personal favours)

• The industrial buyers try to achieve both organizational purchase objectives and personal objectives. The industrial marketers should realize that it is important to satisfy not only the purchasing objectives of an industrial firm but also the personal objectives of the buying members.

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2.2 THE phases in buying decision process

 

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(7) Purchasing Activities

• The industrial purchasing ( buying ) activities consist of various phases ( stages ) of buying decision making process . The importance to be given to the various phases will depend upon the type of buying situations. The industrial marketers should understand both the phases of decision making process and the type of buying situations.

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Robinson, Faris and Wind develpoed eight phases of buying decision process in industrial market in 1967 and called the process Buyphases.

 

 

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PHASES IN BUYING DECISION PROCESS

Buying is an organisational- decision making process. There are eight phases or stages in the buying decision process, indicating the logical sequence of activities.

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Phase 1 : Recognition of a Problem (or Need) • The recognition of a problem or need may

originate within the buying firm or many may also be recognized by a smart marketer. When the quality of material supplied by the existing supplier is not satisfactory,or the material isnot available when required, or the machine supllied by the existing supplier breaks down too often, the buying organisation recognises the problem. If an marketer identifies a problem in the buying organisation and suggest how the problem could be solved, there will be a better possibility of it being selected as a supplier. Consider the case of material handling equipment manufacturing company :

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The sales executive of a material handling equipment company visited a car manufacturing company in India,and while taking a walk on the shop floor of the car manufacturer, he noticed a long queue of trucks waiting to unload the incoming components and parts. The operation of unloading was taking a long time, as it was in semi-manual way. He studied and then suggested that he could supply an automatic equipment (that is Hydroelectric lift-table),which could reduce the time of unloading substantially.

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Phase 2 : Determination of the Characteristic and Quantity of Needed Product

• Once the problem is recognised within or outside the buying organisation, the next phase is how to resolve the problem. The buying firm will try to answer questions such as :

• (a) What types of product or services to be consider?

• (b) What quantity of the product needed?.

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For technical product, the technical departments (R&D, industrial engineering, production,or quality control) will suggest general solutions of the needed product. For non-technical goods or servives, either the user department or purchase department may suggest product or services, based on experience and also the quantity required to solve problem. However, if the required information isnot available internally within the buying organisation, the same can be obtained from the outside sources.

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Phase 3 : Development of Specification of Needed Product

• Phases 2 and 3 are closely related. After the general solutions to the problem is determined in the second phases, the buying organisation,in the third stage, develop a precise statement of the specifications or characteristics of the product or services needed. During this stage the purchase department takes the help of their technical personnel, or if required,outside sources such as suppliersor consultans. Industrial marketers have a great opportunity to get involved at this stage by helping the buyer organisation to develop product specifications and characteristic.

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Early Supplier Involvement ( ESI ) Programme.Production or operations experts say that about 80 percent of a product’s total cost are decided before the commercial production. Once the commercial production starts, any change in the design or specification would become very costly. It is, therefore important that suppliers are involved in the early stages to develop specifications. In addition, the purchasing persons of the company should also be included in the design process.

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Phase 4 : Search for and Qualifications of Potential Suppliers

• In this phases the buying organisations searches for acceptable suppliers or vendors. The first step taken by the buyer is to obtain information on all the available suppliers and then into the second step,decide on the acceptable or qualifying suppliers. The search for potential suppliers is based on the various sources of information like trade journals, sales calls, word-of-mouth, catalogues, tradeshows and industrial directories.

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The qualifications of acceptable supplies will depend on :(a) The type of buying organisation (i.e: government undertaking,private sector commercial organisations,or institions)(b) The buying (described subsequently in this chapter) (c) The decision making members (also described subsequently in this chapter).

However, generally the factors such as quality of product or services,reliabilit in delivery,and service are considered in qualifications of suppliers.

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Phase 5 : Obtaining and Analysing Supplier Proposals• Once the quality suppliers are decided, the

buying organisation obtains the proposals by sending enquiries to the qualified suppliers. A supplier`s proposal can be in the form of a formal bid, submitted by he supplier to the buying organisation. It should include

• (a) the product specification• (b) Price• (c) Delivery period• (d) Payment terms• (e) Taxes and duties applicable• (f) Transportation cost• (g) Cost of transit insurance• (h) Any other relevant cost of free service

provided.

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For purchase of routine products or services, phases four and five may occur simultaneously, as the buyer may contact the qualified suppliers to get the latest information on price and delivery perinds.

For technically complex products and services, a lot of time is spent on analysing proposal in terms of comparisons on products, services, deliveries, and the landed costs (which includes the price after discount plus excise duty, sales tax, freight, and insurance).

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Phase 6 : Evaluation of Proposals and selection of Suppliers

• The buying organisations evaluates the proposals of competing suppliers and selects one or more suppliers. Further negotiations may continue with selected suppliers on prices, payment terms, deliveries, and so on. The decision makers in the buying organisations may evaluate each supplier on a set of agreed-upon attributes or factors. For instance, each supplier is evaluated on each attribute by giving a weightage (or importance) to each attribute and using a rating scale of 100% point, as shown in table 3.1;

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In table, the supplier total score or rating of 57 is worked out for one supplier. This process is separeted for other supplier also. The supplier who get the highest total score received the business or the order from the buying organisations.

If a buying firm faces a make-or-buy decision,the supplier`s proposals are compared with the cost ofproducing the needed item within the buying organisation. If it is decided to make the item within the buying organisations, the buying process is stopped at this stage.

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Table : 3.1

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Evaluating Supplier Perfomance by using “Balanced Scorecard” TechniqueThe Balanced Scorecard (BCS) is a new technique or framework that can be used to evaluate supplier perfomance in information age companies. It translates a company`s missions and strategy into a set of perfomance measurements. The framework is organised intofour parts;(a) Financial(b) Customer(c) Internal Business(d) Learning growth

As shown in Fig.3.1..

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Out of the four parts shown in Fig. 3.1, the internal-business –process is relevant for evaluating supplier perfomance. In the internal-business-process, company executive should identity the key internal processes in which the company must excel, in order to;(i) Deliver superior customer value(ii) Satisfy shareholders with excellent financial perfomance

The internal-business-process includes operations and innoavtion processes as shown in Fig. 3.2;

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Buying products/services from suppliers is a part of operations processes, as shown in Fig. 3.2. In addition to the traditional measurement of cost (or price) for measuring the offers of varoius supplies, the balanced scorecard approach is used to find additional measurements or factors that create value to customers and that are specific to a company. For instance, an electrical engineering company manufacturing and marketing electric motors to OEMs (original equipment manufactures) of pumps and compressors identified shorter and timely deivery time as key customer needs, in additation to usual perfomance evaluation factors of cost and quality. The company informed their suppliers of components that perfomance evaluation factors will consist of quality, cost, as well as, shorter and timely delivery.

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Fig : 3.1

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Fig : 3.2

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• The mechanics of exchange of goods and services between a buyer and a seller is worked out.

• The activities include :• a) Placement of orders ( i.e purchase orders)

with the selected suppliers.• b) The quantity to be purchased from each

supplier.• c) Frequency of order placement by buyers

and delivery schedules to be adhered to by the supplier.

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d) Levels of inventory needed.e) Follow up of actual delivery to ensure it to be as per delivery schedule, andf) The payment terms to be adhered to by the buyer.

The user (or indenting) department would not be satisfied until the supplier delivers the required item as per delivery schedule, and with acceptable quality.

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Phase 8 : Perfomance feedback and Post-purchase Evaluation

• In this final phase, a formal or informal review regarding the perfomance of each supplier or vendor takes place. The user department gives a feedback on wether the purchased item solved the problem or not. If not the members of the decision making unit review their earlier decision and decide to give a chance to the previously rejected supplier.

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TYPES OF PURCHASES OR BUYING SITUATIONS

There are three common types of buying situations, called buyclasses;

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(i)New

Purchase (or

New Task)

•In this situation the company is buying the item for the first time. The need for a new purchase may be due to internal or external factors. For instance, when a firm decides to diversify intonew products or services, it necessitates the purchases of a new machine, materials, or parts. In the new purchase situations, the buyers have limited knowledge and lack of previous experience. Hence, they have to obtain a variety of information about the product, the suppliers,the prices and so on.

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•In the new task decisions;

•(a) The risks are more•(b) Decisions may takelonger time,

and morepeope are involved in decision making.

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(ii)Chang

e inSuppli

er (or

modified

Rebuy)

•A modified rebuy situations accurs when the organisation is not satisfied with the perfomance of the existing suppliers,or the need arises for cost reduction or quality improvement. The change in supplier may also be necessary if technical people in the bunying organisations ask for changes in the product specification, or making department asks for additional features in the product to gain some competitive advantage.

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•As a result, search information about an alternative source of supply becomes necessary. Although certain attributes, or factors can be used to evaluate the suppliers, there may be uncertainty regarding which supplier can best meet the needs of the buying firm. However, the modifiedrebuy situations occurs mostly when the buying firm are not satisfied with the perfomance of the existing suppliers.

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•Consider the following example;

•A large multi-product,multi-location company took a decision to change the existing marketing research firm because the company was not satisfied with the quality of report submitted by the marketing research firm on a chemical product. The compan was planning to diversify and was keen to get the information of the competition, potential customers, long term demand-forecasting, and so on, from the market survey report.

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•However, the information given in the report by the marketing research firm was vague and inaccurate. The senior executice of the company, therefore, took a decision to change the supplier.

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(iii)Repea

t Purchase(or

straight

Rebuy)

•This situation occurs when the buying organisation requires certain products or services continuously and when such product/services had been purchased in the past. In such a situation, the buying organisation reorders/places repeat orders with the suppliers who are currently suppling suhv items. This means that a product, the price, the delivery period, and the payment terms remain the same in the reorder,as per the original purchase order.

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•This is a routine decision with low risk and less information needs, taken by a jumior executive in the purchase department. Generally, the buying firms do not change the existing suppliers if their perfomance (on the previously establised perfomance criteria) is satisfactory.

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THE ROLES OF BUYING CENTRE

Initiatorsbuyers

users

influencers

deciders

gatekeepers

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The Initiators

This is the person who initiates the whole buying process. This category includes individuals who first recognise a problem or a need, which could be resolved by purchase of a product or a service. The initiators could be any individuals in the buying firm. Often the users of a product/service play the role of the initiators.

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Example :

When a machine is not working properly and downtime becomes unaceptable, the plant manager may write a memorandum to the chief executive officer or

finance director asking for funds to purchase a new machine.The plant manager is playing the role of initiator.

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The buyers This is the person or department that executes the formal purchase. This role is usually performed by people from the purchasing department and involves issuing legal documents to suppliers to complete the purchase.The major roles or responsibilities of buyer are;

(a) Obtaining quotations or offer from suppliers(b) supplier evaluation and selection

(c) negotiation(d) processing purchase orders

(e) expediting deliveries, and generally(f) implementing policies of the organisations

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The users

This is the person or department that will be using the product to be purchased. This includes individuals who use the product or services that is to be purchased. Often users play the role of the initiators. The influence of the users in purchasing decisions may vary from minor to major. They may define the specifications of the needed product. They mat be shopfloor workers, maintenance engineers, or R&D engineers.

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The influencers

This is the person or department which provides advice or exerts influence on the purchase decision.They are individuals who could influence the buying decision. Influence can come from expertise and knowledge.Generally, technical people (such as design engineers, quality control engineers) have a substantial influence on purchase decisions. Sometimes individuals outside the organisation, who are experts or consultants, play the role of influencers, by drawing specifications of products or services.

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The decider This is the person who gives the final approval to go ahead with the purchase. The approver often takes the recommendations of the influencer and other members of the buying centre. The actual buying decisions are made by the deciders. The deciders may be on or more individuals involved in the buying decision. It its very important to identify the deciders, although at times it may be a difficult task. Generally, for routine purchase the buyer (or purchase executive) may be the decider. But, for high-value and technically complex products, senior executive are the deciders.

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The gatekeepers

This role can be intended or unintended. They are the individuals who could control or filter the flow of the information regarding products and services to the members of the buying center. Sometimes the gatekeepers may control sales people`s meetings with the members of the buying center. Gatekeepers are often the assistants or junior persons attached to purchase or materials manager.

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Business marketers, after understanding the roles of the buying-center members, must identify the individuals and groups who are the members of buying center.

The emphasis in the buying center is on the organisational groups, that is, the

functional areas, which participate in the buying decision process. These areas are

explained in the following section.

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Identifying Key Members of Buying Centre in Buying Organisation

1. •Top Management Persons

2. •Technical Persons ( or Functions)

3. •Buyers/Purchasers ( or Purchase/Material Department)

4 •Accounts/Finance Persons (or Department)

5 •Marketing Function

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TUTORIAL EXERCISE ( CLO 3 , PLO 8)

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QUESTION:

1. For the following scenarios, comment on the buying situations and suggest appropriate strategies for these situations.

2.Identify the model of the organizational buying behavior that the company use.

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Susan is a senior marketing manager of a five star hotel in Singapore. The hotel has a contract with an important Japanese customer which provides for suites for for the latter’s guests. One early morning (2 a.m) a guest of the Japanese company arrives at the hotel but was turned away by the front desk. All the suites were taken that morning. The Japanese guest had to carry his luggage himself to a neighbouring hotel to get a suite. A senior manager from the Japanese company called later that day to express outrage. They had booked a suite that day, but a hotel staff forgot to record the booking. They threatened to terminate the contract.

What should Susan do?

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THE MODELS OF ORGANIZATIONAL BUYING

BEHAVIOR

THE WEBSTERS

ANDWIND

MODELS

THESETH

MODELS

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Page 66: CLO 1 : Describe Business Marketing, Business Buying Behaviour And Business Marketing Mix In Planning Marketing Strategy. (C2)

THE WEBSTER AND WIND MODEL OF ORGANISATIONAL

BUYING BEHAVIOUR

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This is quite a comprehensive model. it considers four sets of variables which affect

the buying-decision making process in a firm. These are;

1. Environmental variables2. Organisational variables3. Buying Center variables

4. Individual variables

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!. Environmental variables include ;

(a)Physical(b) technological(c) economic(d) political(e) legal(f) labour unions(g) cultural(h) customer demands(i) competition(j) supplier information

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For example, in a recessionary economic condition, business firms minimise the

quantity of item purchased. The environment factors influence the buying

decisions of individual organisations.

The organisational variables include;

(a)Objectives(b) goals

(c)Organisation structure(d) purchasing policies and procedures

(e) degree of centralisation in purchasing(f) evaluation and reward system.

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These variables particulary influence the composition and functioning of the buying

centre, and also, the degree of centralisation or decentralisation in the

purchasing function in the buying organisation.

The functioning of buying centre is influenced by the organisational variables,

the environmental variables, and the individual variables. The output of the group decision making process of the

buying centre includes solutions to the buying problems of the organisation and also the satisfaction of personal goals of individual members of the buying centre.

.

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The strengths of the model, develop in 1972, are that it is comprehensive,

generally applicable, analytical, and that it identifies many key variables which could be considered while developing

marketing strategies by industrial marketers. However, the models is weak

in explaining the specific of the variables.

.

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Component (1)

Component (2)

Component (3)

Situational

Factors

Differences among

individual buyers

caused by factors ;

- Background of individual

- their information

surces- active

search- perceptual- satisfaction

with past purchase

Variables that determine if the buying decision

is autonomous or joint.

(A) Product specific;

-Time pressure-Perceived risk

-Type of purchase

(B) Company specific factors,

including;-company size

-company orientation

-degree of centralisation

Methods used for conflict

resolution in joint-decision

making process;

-problem solving

-persuasion-bargaining-politicking

SupplierOr

brandchoice

THE SETH MODEL OF INDUSTRIAL

BUYING BEHAVIOR

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Profesor Jagdish N Sheth developed the Sheth model in 1973. This model,

emphasises the joint decision-making by two or more individuals, and the

psychological aspects of the decision making individuals in the business buying

behavior.

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The model includes three components and situational factors, which determine the choice of a supplier ar a band in the buying decision

making process in a organisation. The difference among the individual buyers

expectations (Component 1) are caused by the factors;

(a)The background of individuals(b) their information sources

(c) active search(d) perceptual distortion

(e) satisfaction with past purchase

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The background of individuals depend upon their education, role in the organisation, and

life style. The factor perceptual distortion means the extent to which each individual participant modifies information to make it

consitent with his existing belief and previous experience. It is difficult to measure perceptual distortion, although techniques such as factor analysis and perceptual mapping are available

for this purpose.

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In Component (3), in the model indicates the methods used for conflict resolution in joint-

decision making process. Problem-solving and persuasion methods are used when there is an agreement about the organisational objective. If there is no such agreement, bargining takes

places. Conflict about the style of decision making is resolved by politicking.

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In Situation factors, can be varied like economic conditions, labour disputes, mergers and

acquisitions. The model does not explain their influence on

the buying process.

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FLASHBACK

Pre Test

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Refleksi Kendiri

Sigma is in the steel productions business and is based in China.

Rhema is in electronic component manufacturing and is based in Taiwan.

What are the environmental factors that would have a major impact on the business of the two companies?

How are the factors similar or different for the companies?

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THAT ALL, GOOD LUCK