Business-to-Business (B2B) exchanges take place between two or more companies. The overall size of sales revenues attributed to business-to-business transactions is much larger than that of the consumer market. Sectors that are traditionally characterized as business-to-business are institutional, such as healthcare and education, the government, and various commercial enterprises. The products represented are typically intended for use as a manufacturing intermediate, support service, or in the day-to-day business operation.
A powerful segment of commercial enterprises is represented by original equipment manufacturers (OEMs) such as General Motors, John Deere, and Hewlett Packard. Original equipment manufacturers typically make large purchases and may have developed detailed product and vendor specifications. A second commercial enterprise consists of users, who typically purchase products for use in manufacturing other products for sale. They purchase products that support the operations necessary to manufacture their products. John Deere becomes a user when it purchases lubricants for use in its production facilities. It is also a user when it purchases copy machines for use in its corporate offices. Industrial dealers or distributors constitute a third category of commercial enterprises that operate in the business-to-business environment. John Deere may use dealers and distributors who are responsible for handling materials sold directly to the end-user. It is also a consumer supplier when it sells directly online to residential customers.
International business-to-business transactions are defined by the nature of interaction that takes place, the participants involved, and the intended use of the product that is the focus of the trade, while being carried out across country boundaries. Companies may sell to both business-to-business and consumer markets. For example, BP sells products directly to the consumer by selling fuel and motor oil through its retail gasoline outlets. It also sells fuel and lubricants for use in industrial applications such as aviation, mining, construction, and marine operations. GE sells appliances and consumer electronics. It also sells centrifugal compressors to the gas and oil industry and locomotives to the rail industry. John Deere sells residential mowers, along with commercial mowers for lawn services, mowers for golf courses, and agricultural, forestry and construction equipment.
The business-to-consumer market and business-to-business market require very different business and marketing strategies, especially pertaining to communication and sales activities. Business-to-business transactions may be very complex, depending on the size of the business, involving groups from various functional areas, who are very knowledgeable concerning required product performance. Due to the sophistication of business-to-business purchasers, it is necessary for the sales team supporting the customer to also be knowledgeable, not only with the direct customer, but also with the final consumer industry being served.
Business-to-business interactions typically are more complex than business-to-consumer because the expenditures represent large financial outlays and mistakes may result in costly delays or product failures that negatively impact the final end-user performance. For example, the purchase of an automobile from a retail dealer is generally a business-to-consumer transaction. The purchase of the constant velocity joints, used in front-wheel drive vehicles, by the manufacturer for use in the assembly of the automobile is a business-to-business transaction.
Before the automobile manufacturer makes the purchase, a purchasing manager or group of managers may initiate vendor reviews to qualify preferred suppliers, develop product quality and part specification guidelines, and make arrangements for the engineering lab to test parts from various suppliers; a production manager may be involved in the decision as it relates to delivery times and packaging requirements. Environmental health and safety personnel will be notified to ensure the safety and proper environmental protocols are followed. Detailed shipping and pricing requirements are developed. There may be a bidding process, in which a number of qualified suppliers provide quotes for pricing and service. Business-to-business transactions may occur across many company borders. The rubber for the constant velocity joints may be made in China, the metal made in Japan, the lubricants made in the European Union, for use in a car assembled in Mexico and then shipped to the United States for final distribution.
The consumer purchasing the car may be focused on price, quality, reliability, fuel economy, image, and resale value. The promotional campaign to the consumer may rely on emotional appeals. In the business-to-business transaction, the manufacturer is concerned about conformance to specifications, vendor reliability, shipping options, delivery times, meeting safety requirements, environmental regulations, not just on the finished car, but on every component that goes into manufacturing each part of the product from a variety of suppliers representing a large number of cross-border transactions. The purchaser evaluating a vendor for a multimillion-dollar contract must be more rational and knowledgeable about the product that is being considered. The value of the product to the buyer is an essential part of determining the perceived risk associated with the purchase. The vendor’s promotional activities generally revolve around product quality, meeting specification requirements, and support with supply chain issues.
Drivers of Business-to-Business Markets
As they gain more power in the marketplace, consumers are demanding value and quality at an appropriate price. This is a common trend throughout the economy and the business-to-business environment is not immune to this consumer mindset. The key phrase is overall cost. There are many hidden costs associated with using a product. The first is obviously the amount paid for the product, but this is only one aspect. As a product is developed for market introduction, business-to-business suppliers are aware of not only the amount paid for the product, but also the costs to use, store and dispose, the time consumed in the purchasing transaction and usage pattern, and the amount of inconvenience that the customer tolerates throughout the entire process.
Current business market drivers include requirements for extended life, economic benefits, environmental and societal issues, and international product stewardship. In the future, globalization, industry consolidation, and customer-supplier relationships will also impact the manner in which new products are developed and introduced to the business market.
Advancements in technology and the reduction in trade barriers are contributing to the integration and interdependency of businesses, increasing the competitive intensity among businesses that operate in the current economy, therefore elevating the importance of understanding business-to-business transactions as companies build strategy to meet the long-term needs of their global customers. International expansion offers a potential way for companies to increase growth, especially when facing a saturated domestic environment.
The major incentive that motivates businesses to expand into international markets is the saturation of their domestic market; the need to reduce manufacturing costs through either sourcing in cheaper production facilities overseas or increasing volume in the domestic manufacturing facility through exporting is also driving international expansion. External incentives are market driven and are a response to the need to grow beyond the domestic market. Internal incentives focus more on creating a competitive advantage. As the global marketplace increases in size and competitiveness, the initial route to internationalization may be a necessity in order to supply components to a customer that has engaged in foreign direct investment.
The resource-based view of internationalization emphasizes the importance of the accumulation of resources, focusing on the way in which firms can combine resources and create a sustainable competitive advantage. The company begins to feel competitive pressure due to saturation and maturity within its domestic market and starts to consider production offshore to allow cost minimization in many internal areas of operation. Emerging economies, such as those represented by India, China, Brazil, central and eastern Europe as well as other countries in southeast Asia, provide opportunities to improve manufacturing efficiencies due to reduced labor costs and increased resource availability. Cost advantages are achieved through global integration of research and development activities, procurement coordination, and production cost reductions.
Fast-growing emerging markets are also very important to companies operating in the business-to-business arena because, as they develop, there are many infrastructure development needs. Firms operating in the construction, heavy equipment industry, manufacturing consultants, and those in environmental services and technology support represent important business-to-business participants. Companies will also follow their key customers as the larger firms move into emerging markets. For example, as large automobile manufacturers move into China, their component part suppliers may follow in order to meet the production needs of their customer, while maintaining the customer-supplier relationship, creating barriers to competitive entry.
Information technology makes a large contribution to the global expansion of business-to-business activities. The ease of electronic exchange of information across country borders is responsible for improved efficiencies in the coordination of production operations, product development, and purchasing activities. The use of the internet allows suppliers and purchasers to quickly exchange information concerning product performance, industry requirements, and unmet needs. Product development and innovation is improved and the time to market is shortened.
Promotional Activities
The majority of the budget for business-to-business marketing is typically spent on personal selling activities. Face-to-face contact is necessary in order to establish the trust and familiarity necessary to build customer relationships. The majority of promotional activity expenditures for business-to-business promotions are on trade show participation requirements, followed by internet and electronic media costs. There are also costs associated with providing dealer/distributorship support materials. Business consumers are characterized as being educated about their product purchases and therefore seek specification-based information. There is a need for rational justifications and therefore it seems more likely that attributes relating to service, quality, price, reliability, and performance would be stressed in the advertising for a product or company.
However, advertising in specialized trade journals is an important tactic that is playing a greater role in the overall business-to-business marketing communication plan. Business-to-business advertising tends to feature people less often, be less emotional, be facts and features-focused, and have more informational content than typical consumer ads. The industrial ad has been described as being more rational than the consumer ad. Ads for industrial products also contained more copy discussing product benefits and performance. Informational appeals found in business-to-business advertising center around the needs for removing problems, avoiding problems, reducing incomplete satisfaction, or alleviating normal depletion. Informational advertising seeks to change attitudes or beliefs based on the rational presentation of information concerning the product.
- Lohtia, W. J. Johnston, and L. Aab have identified four dimensions of a successful business-to-business ad. The dimensions identified were characteristics of the ad, the reader’s feelings about their relationship with the ad, the selling proposition, and the company’s visibility. The importance of explaining the product and the benefits of using the product in the industrial ad are stressed, as well as providing information concerning product performance and quality. For example, if the product is one that clearly has technical performance advantages, such as a computer, and the audience is an engineering community, then the advertising should encourage information and arguments that make the consumer actively think about that product over the alternative.
On the other hand, if marketing the computer to an audience that does not understand the technical differences, then the advertisement should focus on peripheral cues, such as the spokesperson and the image of computer ownership. For example, Nike uses Tiger Woods as a spokesperson for its golf balls so that the consumer buys Nike golf balls because they want to play golf like Tiger. The golf balls may be made of the same materials, same compression, and same hardness as other balls, but Nike wants the consumer to buy without too much thinking. The golf ball manufacturer is concerned about whether the raw materials it is purchasing will provide the performance necessary to meet the needs of Nike. Given the reported sophistication of industrial buyers and the high financial and operational risk associated with purchasing decisions, one would expect an advertising strategy for industrial products to consist of producing high involvement, informational messages.
The Buying Process
Overall, the buying process in the industrial setting is more complex and generally more conservative, with a greater reliance on group decision making. The initial step in the buying process consists of need recognition, usually as a result of identification of a problem. For example, specification changes may dictate a change in a raw material that requires investigation into a new supplier.
A decision-making group may form, consisting of production personnel, engineering and product development managers, purchasing representatives, and environmental health and safety members. This group will develop detailed specifications concerning product performance and vendor support requirements. Identification of potential suppliers will be made, and proposals and samples from the qualified vendors will be evaluated. The supplier of choice is then contacted and the supply details relating to delivery, storage, packaging, and pricing are negotiated. A review of supplier and product performance is continually made. The formation of the decision-making unit contributes to the complexity of the business-to-business exchange. Each member brings a different perspective to the purchase decision. The complexity of the decision requires close monitoring by potential suppliers and a focus on personal selling.
Relationship Management
The evolution of competition in a global business arena has led to an increase in the importance placed on interorganizational relationships involving customers, suppliers, competitors, and government agencies. An important factor in establishing the foundation for building customer-supplier relationships is an analysis of the value chain associated with the product. The value chain is defined as the collection of all activities involved in designing, manufacturing, marketing, delivering, and supporting a product.
Value chain analysis considers not only internal linkages, such as the coordination between research and development and marketing, but also external activities, such as relationships with suppliers, agents, or customers across and between countries. Each step in the value chain offers an opportunity for analysis and modification, allowing the firm to increase utility to customers. An extended breakdown of the primary interactions and processes involved at each link of the chain, assessing the responsibilities among all the entities involved is necessary to reach the root activities where modifications can be made to improve the entire process. A thorough analysis of the value chain focuses on answering the question of how customer value will be created. Participants up and down the supply chain are considered important members of the product supply team. Integration is necessary to improving costing and innovative efforts.
Traditionally, customer relationship management developed in the business-to-consumer transactional environment. This may due to the nature of the purchase transaction. As previously noted, the business-to-business purchase appears, on the surface, to be straightforward and technically oriented. Typically, the transaction is handled through the use of personal selling. A salesperson, or a team consisting of a salesperson and a technical support representative, calls on the customer directly. The buyer and seller are very knowledgeable of product requirements. If the product meets the pricing and performance requirements and the vendor is an approved supplier, the decision would appear to be simple. Even though the business-to-business market represents a smaller customer base, the customer purchases are much larger in scale, giving the business-to-business customer more power in the relationship.
The transaction may seem straightforward, void of any personal relationships, but the truth is that people, personalities, cultural aspects, and personal agendas are very important aspects that must be taken into account. The purchaser may be buying for an organization and therefore be more objective in making their decision, but subjective issues will also play a role.
Because of the increase in global competitive intensity, suppliers must find new ways to differentiate and encourage customer loyalty. There is currently a shift in business focus toward recognizing the competitive advantage of strong customer-supplier relationships. Building close customer-vendor relationships is an important strategy to employ while building a competitive advantage, especially when the customer base is small in number but large and powerful in terms of financial importance.
Advancements in information technology have led to the introduction of cost savings processes such as vendor-managed inventory (VMI) and online order processing, all under the umbrella of customer relationship management. The maintenance of two-way communication between the customer and supplier is necessary to ensure the goods and services offered fit the needs of the consumer. Moving the focus from providing products to providing solutions to customers’ problems, in some cases, provides value to the customer that may be translated into better profitably, or, in the least, an advantage in the vendor decision process. Working together provides an advantage to the purchaser and the vendor as unmet needs may be discovered earlier and better solutions developed. This improves efficiencies, resulting in lower costs, for both sides of the business equation.
Ethics
With the close working relationship that may develop between the buyer and supplier in business-to-business transactions, breaches in ethical conduct are a serious concern. Ethics are problematic in that there is a general lack of agreement concerning the definition of ethical behavior versus unethical behavior across country borders, especially when there are no clear-cut legal ramifications. In order to create a successful relationship between supplier and purchaser, there has to be an element of trust and freedom to share information.
Shared information concerning product development, pricing, and future plans represent areas in which ethical dilemmas can form. In some cases, proprietary information may be transferred from company to company. It is important to have controls in place to ensure confidential information that is shared does not fall into competitors’ hands. In international relationships, this problem may become more pronounced as there may cultural differences with respect to confidentiality. There are also differences in business practices allowed between countries.
Ethics is also an issue concerning product supply and environmental responsibility. Questions arise concerning the quality of products that are sent to unsophisticated markets. The temptation arises to send products of lesser quality to areas where they will not be detected. This is a problem in dealing with underdeveloped countries. Concerns also develop when two countries have different requirements related to the safety and environmental impact of products that enter or leave their borders.
Many companies have developed an internal code of ethics that they require their employees and vendors to follow. For example, international trade within the chemical industry exceeds $500 billion annually, second only to automobiles. The chemical industry is one of the largest and most technically advanced manufacturing sectors engaged in world trade. As such, the industry exerts a positive influence on the health of the world economy only as it maintains its trade performance and strong global competitiveness. The increasing speed of industrialization, urban development, and international growth has placed heavy demands upon antiquated and informal systems of managing environmental and ethical issues. Chemical producers have focused on establishing programs aimed at creating the perception that they are establishing and complying with domestic voluntary environment risk management programs.
Dupont voluntarily spends millions of dollars annually above and beyond the legal requirements on environmental projects. It has a published code of ethics. The company has established a multilingual ethics and compliance hotline, with a specialist, not employed by Dupont, available to discuss with the caller any lack of compliance with the ethical guideline issue around the clock, every day.
Strategic Perspectives
As emerging markets grow and competitive intensity increases, players in business-to-business markets will need to adapt. Two areas that are evolving are building brands and utilizing e-commerce to facilitate global reach. Branding can be defined as the strategy utilized to create a position in the customer’s mind. The position provides information to consumers concerning the attributes the product or company represents. The brand relates not only to the naming, symbols, slogans, or other physical aspects associated with the company or product, but also includes psychological factors, such as trust within the relationship and reputation within the industry. The brand represents value to the customer and can be a point of differentiation in a complex, competitive, international business environment.
As discussed earlier, advancements in information technology and e-commerce represent an opportunity for improving supply chain communication and coordination. It allows products and services to be marketed across borders, creating a business environment seemingly without boundaries. It provides another support tool to build customer relationships as teams can conference across borders and exchange information without time constraints in secure sites. E-commerce also acts as an extension to the business-to-business distribution channel. Integration of ordering and supply logistics allows both the supplier and customer to reduce transaction costs. Improvements in international security and the expansion of technology infrastructure will increase the importance of e-commerce in global business-to-business transactions.
The success of any strategy relies on the premise that only a healthy competitive industry can continue to develop and improve its performance and that strategies will be developed based on the needs of the corporation and the geographic location in which it is operating. The customer must find value in purchasing from companies possessing strong integrated customer management programs.
Bibliography:
- C. Anderson and J. A. Narus, Business Market Management: Understanding, Creating, and Delivering Value, 2nd ed. (Prentice Hall, 2004);
- D. Hult and T. W. Speh, Business Marketing Management: B2B, 9th ed. (Thompson, 2007);
- D. Lichtenthal, “Business-to-Business Marketing in the 21st Century,” Journal of Business-toBusiness Marketing (v.5/1,2, 1998);
- Lohtia, W. J. Johnston, and L. Aab, “Business-to-Business Advertising: What Are the Dimensions of an Effective Print Ad?” Industrial Marketing Management (v.24, 1995).
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