Analyzing Business Markets Part 2

54) A supplier signs an agreement with a customer that states that $350,000 in savings will be earned by the customer over the next 18 months in exchange for a tenfold increase in the customer's share of supplies ordered by the customer. If the supplier achieves less than this promised savings, it will make up the difference. If the supplier achieves substantially more than promised, it participates in the extra savings. This is an example of ________. A) solution selling B) price fixing C) demand shifting D) systems buying E) risk and gain sharing Answer: E 55) GM employees work at large customer facilities to reduce materials-management spending. This is an example of the ________ form of solution selling. A) solutions to encourage partnerships B) solutions to alter corporate culture C) solutions to enhance customer revenues D) solutions to decrease customer risks E) solutions to reduce customer costs Answer: E 56) Through its dedicated research team, CISCO Systems Inc. has developed new value-added business solutions which enable its variant class-II capacitors to provide incremental productivity of 10 to 20 percent over its competitors. This is an example of the ________ form of solution selling. A) solutions to reduce customer costs B) solutions to decrease customer risks C) solutions to alter corporate culture D) solutions to enhance customer revenues E) solutions to partnerships Answer: D 57) Praxair Limited is a supplier of synthetic graphite to a number of electrode manufacturers in the U.S. Its customers have shifted their ordering responsibilities to Praxair and the company regularly monitors its customer's inventory levels and has taken responsibility for replenishing the supplies automatically through continuous replenishment programs. Which of the following systems do Praxair and its customers follow with respect to order-routine specification? A) Supplier Added Value Effort ($AVE) B) Vendor Managed Inventory (VMI) C) Direct Concentrated Buying (DCB) D) Supplier Performance Management (SPM) E) Product Value Analysis (PVA) Answer: B 58) Which of the following methods is most likely to be used by buyers to review the performance of chosen suppliers? A) the buyer may contact different suppliers and ask for their evaluations B) the buyers may rate the end-users on several criteria using a weighted-score method C) the buyer might aggregate the cost of poor performance to come up with adjusted costs of purchase, including price D) the buyers may aggregate the opinions of various competitors and come up with the adjusted cost of supply E) the buyers might adopt the Supplier Added Value Effort technique to calculate supplier efficiency Answer: C 59) A ________ establishes a long-term relationship in which the supplier promises to resupply the buyer as needed, at agreed-upon prices, over a specified period of time. A) stockless purchase plan B) direct stock purchase plan C) defined contribution plan D) stock purchase plan E) share purchase plan Answer: A 70) The ________ market consists of schools, hospitals, nursing homes, prisons, and other institutions that must provide goods and services to people in their care. A) vertical B) nonprofit C) spot D) secondary business E) institutional Answer: E 71) In most countries, ________ are the major buyers of goods and services. They typically require suppliers to submit bids and often award the contract to the lowest bidder. A) consumer packaged-goods companies B) government organizations C) health services vendors D) educational institutions E) households Answer: B 72) Organizational buying is the decision-making process by which formal organizations establish the need for purchased products and services and identify, evaluate, and choose among alternative brands and suppliers. Answer: TRUE 73) The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others. Answer: TRUE 74) Commoditization strengthens customer loyalty. Answer: FALSE 75) The business market is essentially the same market as the consumer market. Answer: FALSE 76) Business buyers often select suppliers who also buy from them. Answer: TRUE 77) The business marketer normally deals with far fewer, much larger buyers than the consumer marketer does. Answer: TRUE 78) An increase in the demand for plant and equipment can lead to a much larger increase in consumer demand. This is known as the acceleration effect. Answer: FALSE 79) The demand for business goods is ultimately derived from the demand for raw materials. Answer: FALSE 80) The total demand for many business goods and services is inelastic that is, not much affected by price changes. Answer: TRUE 81) In the straight rebuy, "out-suppliers" try to get a small order and then enlarge their purchase share over time. Answer: TRUE 82) The buyer in a straight rebuy usually changes product specifications, prices, delivery requirements, or other terms. Answer: FALSE 83) The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situation. Answer: TRUE 84) Most business buyers reject what is called systems buying from one seller. Answer: FALSE 85) Systems selling is a key industrial marketing strategy in bidding to build large-scale industrial projects such as dams or pipelines. Answer: TRUE 86) Sellers benefit from systems contracting through lower operating costs as a result of steady demand and reduced paperwork. Answer: TRUE 87) The buying center is where consumers go to purchase their goods and services. Answer: FALSE 88) With respect to the buying center, approvers are people who have the power to prevent sellers or information from reaching members of the buying center. Answer: FALSE 89) Initiators are those who authorize the proposed action of deciders or buyers. Answer: FALSE 90) Influencers influence the buying decision by helping define specifications and providing information for evaluating alternatives. Answer: TRUE 91) In the buying center, several people can occupy a given role such as user or influencer, and one person may play multiple roles. Answer: TRUE 95) A performance review is the first step in the buygrid framework. Answer: FALSE 96) The buying process begins when someone places an order with a sales representative. Answer: FALSE 97) Product value analysis is an approach to efficiency that studies whether components can be redesigned or made by more efficient methods of production without adversely impacting product performance. Answer: FALSE 98) On spot electronic markets, prices of products or commodities change by the minute. Answer: TRUE 99) In buying alliances, participants offer to trade goods or services. Answer: FALSE 100) With respect to assessing customer value, in conjoint analysis customers are asked to rank their preference for alternative market offerings or concepts. Answer: TRUE 101) One of the forms of solution selling is to provide solutions to enhance customer revenues. Answer: TRUE 102) Risk and gain sharing can offset price reductions that customers request. Answer: TRUE 110) A good illustration of a member of the institutional market would be Boeing because it is a member of the aviation institution structure. Answer: FALSE 111) The U.S. government is the largest customer in the world. Answer: TRUE 112) Business markets have several characteristics that contrast sharply with those of consumer markets. Name and briefly characterize five of those characteristics. Answer: The characteristics of business markets as compared to consumer markets are: (1) fewer, larger buyers, (2) close supplier-customer relationship, (3) professional purchasing, (4) multiple buying influences, (5) multiple sales calls, (6) derived demand, (7) inelastic demand, (8) fluctuating demand, (9) geographically concentrated buyers, and (10) direct purchasing. See chapter section for brief characterizations. 113) Explain how fluctuating demand impacts business markets differently from consumer markets. Answer: The demand for business goods and services tends to be more volatile than the demand for consumer goods and services. A given percentage increase in consumer demand can lead to a much larger percentage increase in the demand for plant and equipment necessary to produce additional output. Economists refer to this as the acceleration effect. 114) Illustrate the differences between a straight rebuy, modified rebuy, and a new-task purchase. Answer: In a straight rebuy, the purchasing department reorders on a routine basis and choose from suppliers on an approved list. In a modified rebuy, the buyer wants to modify product specifications, prices, delivery requirements, or other terms. Lastly, in the new-task purchase, a purchaser buys a product or service for the first time. 115) What are the three different types of buying situations faced by a typical business buyer? Answer: The business buyer faces many decisions in making a purchase. Three types of buying situations are the straight rebuy, modified rebuy, and new task. Straight rebuy- In a straight rebuy, the purchasing department reorders supplies such as office supplies and bulk chemicals on a routine basis and chooses from suppliers on an approved list. The suppliers make an effort to maintain product and service quality and often propose automatic reordering systems to save time. "Outsuppliers" attempt to offer something new or exploit dissatisfaction with a current supplier. Their goal is to get a small order and then enlarge their purchase share over time. Modified rebuy- The buyer in a modified rebuy wants to change product specifications, prices, delivery requirements, or other terms. This usually requires additional participants on both sides. The in-suppliers become nervous and want to protect the account. The out-suppliers see an opportunity to propose a better offer to gain some business. New task- A new-task purchaser buys a product or service for the first time (an office building, a new security system). The greater the cost or risk, the larger the number of participants, and the greater their information gathering, the longer the time to a decision. 116) Describe the practices of systems buying and systems contracting. Answer: Systems buying involves buying a total solution to a problem from one seller. Systems contracting is a variant of systems selling in which a single supplier provides the buyer with his entire requirement for maintenance, repair, and operating supplies. During the contract period, the supplier manages the customer's inventory. 118) List the seven roles of people in a buying center. Answer: 1. Initiators—Users or others in the organization who request that something be purchased. 2. Users—Those who will use the product or service. In many cases, the users initiate the buying proposal and help define the product requirements. 3. Influencers—People who influence the buying decision, often by helping define specifications and providing information for evaluating alternatives. Technical personnel are particularly important influencers. 4. Deciders—People who decide on product requirements or on suppliers. 5. Approvers—People who authorize the proposed actions of deciders or buyers. 6. Buyers—People who have formal authority to select the supplier and arrange the purchase terms. Buyers may help shape product specifications, but they play their major role in selecting vendors and negotiating. In more complex purchases, buyers might include high-level managers. 7. Gatekeepers—People who have the power to prevent sellers or information from reaching members of the buying center. For example, purchasing agents, receptionists, and telephone operators may prevent salespersons from contacting users or deciders. 119) Explain with examples, the concept of solution selling. Answer: Student answers may vary. Solution selling approaches buyers from a solutions-to-problems approach rather than a product-purchase approach. Three forms include: (1) solutions to enhance customer revenues, e.g., Hendrix UTD has used its sales consultants to help farmers deliver an incremental animal weight gain of 5 percent to 10 percent over competitors, (2) solutions to decrease customer risks, e.g., ICI Explosives formulated a safer way to ship explosives for quarries, and (3) solutions to reduce customer costs, e.g., W.W. Grainger employees work at large customer facilities to reduce materials-management costs. 120) What are the methods available to the buyer to review the performance of the chosen supplier? What advantage does performance review offer to the buyer? Answer: The buyer periodically reviews the performance of the chosen supplier(s) using one of three methods. The buyer may contact end users and ask for their evaluations, rate the supplier on several criteria using a weighted-score method, or aggregate the cost of poor performance to come up with adjusted costs of purchase, including price. The performance review may lead the buyer to continue, modify, or end a supplier relationship. Many companies have set up incentive systems to reward purchasing managers for good buying performance, in much the same way sales personnel receive bonuses for good selling performance. These systems lead purchasing managers to increase pressure on sellers for the best terms. 122) The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others. List the major industries that make up the business market. Answer: The major industries making up the business market are agriculture, forestry, and fisheries; mining; manufacturing; construction; transportation; communication; public utilities; banking, finance, and insurance; distribution; and services. 123) Define organizational buying. Answer: Organizational buying is the decision-making process by which formal organizations establish the need for purchased products and services and identify, evaluate, and choose among alternative brands and suppliers. 124) Explain the concept of derived demand. Answer: The demand for business goods is ultimately derived from the demand for consumer goods. Consumer demand for business' end products drives their production. Production of those end products drives business demand for the inputs to those production processes. 125) If you were a purchasing agent facing a modified rebuy situation, how would you describe that situation? Answer: The buyer wants to modify product specifications, prices, delivery requirements, or other items. The modified rebuy usually involves additional participants on both sides. 133) E-procurement Web sites are organized around two types of e-hubs. If you were in the advertising business and were seeking to take advantage of e-procurement, what type of e-hub should be constructed by your company? Answer: The two types of hubs are vertical hubs (centered on industries such as plastics) and functional hubs (centered on functions such as advertising). Therefore, you would construct a functional hub. 134) KEK is a supplier of paper and paper products to several businesses. Name some contract restrictions that KEK can use to protect its margins when dealing with price-oriented buyers. Answer: KEK can handle price-oriented buyers by setting a lower price but establishing restrictive conditions, such as: (1) limited quantities, (2) no refunds, (3) no adjustments, and (4) no services. 135) Explain risk and gain sharing with the help of an example. Answer: Student answers may vary. Risk and gain sharing can offset price reductions that customers request. Suppose Medline, a hospital supplier, signs an agreement with Highland Park Hospital promising $350,000 in savings over the first 18 months in exchange for getting a tenfold increase in the hospital's share of supplies. If Medline achieves less than this promised savings, it will make up the difference. If Medline achieves substantially more than promised, it participates in the extra savings. 136) What do you understand by vendor-managed inventory (VMI)? Answer: Some companies go further and shift the ordering responsibility to their suppliers in systems called vendor-managed inventory (VMI). These suppliers are privy to the customer's inventory levels and take responsibility for replenishing automatically through continuous replenishment programs. 137) As part of the buyer selection process, buying centers must decide how many suppliers to use. What might motivate a buyer to use multiple sources? Answer: Companies that use multiple sources often cite the threat of a labor strike as the biggest deterrent to single sourcing. Another reason companies may be reluctant to use a single source is that they fear they'll become too comfortable with the relationship and lose their competitive edge.