7.2 How Organisations Make Purchase Decisions
7.2.1 Types of Buying Situations
7.2.2 The Purchase Decision Making Process


  • spot contracts vs long term purchasing contracts
  • on going informal relationship based on cooperation and trust
  • preferrence for long term contracts
    • concentrate on very few suppliers
    • reduce transaction costs
    • gain economies of scale through quality discounts
    • issue with the inflexibility of long term contracts
  • internet companies
    • impact on the organisational purchasing behaviour
    • support defining the request for proposal

  • logistical alliances
    • sharing of sales and inventory data and
    • computerised reordering
    • example : Consumer package goods manufacturers such as Procter & Gamble have formed supply chain management alliances with mass merchandisers such as Wal-Martand Target
    • Such paperless exchanges
      • reduce sales and
      • purchasing expenses,
      • cut mistakes and
      • bill backs,
      • minimise inventories,
      • decrease out-of-stocks, and
      • improvecash flow. The PurchaseThe purchase agreement between a supplier and an organisational customer cantake several forms, ranging from individual spot contracts on the open market, tolong-term purchasing contracts covering a year or more, to ongoing informal relationshipsbased on cooperation and trust rather than legal agreements. In the past,long-termpurchasing contractswere popular because they enabled an organisationto concentrate its purchases with one or a few suppliers, reduce transaction costs,and gain scale economies through quantity discounts and the like. For example,an annual requirements contract obligated a supplier to fill all of a buyer’s needsfor a specific product at a consistent, usually discounted, price over a year.One problem with long-term legal contracts, though, is that they must preciselyspecify all the details of a purchase agreement, including technical specifications,prices, credit terms, and so on. But in today’s rapidly changing economic andtechnical environments, it can be difficult for the parties to foresee what their needsand market conditions will be like months or years into the future. It can bedifficult to adjust the terms of a formal contract in response to unforeseen technicalimprovements, cost changes, or market conditions. This inflexibility of long-termcontracts is a major reason their popularity has declined in favour of increasedreliance on spot market contracts, or auctions, on one hand and less formal longtermrelationships between customers and suppliers on the other.12 The increasedreliance on both of these approaches has been facilitated by a common factor: thegrowth of telecommunications technology and the Internet.

Over the past few years, a number of Internet firms have emerged to help organisationscut their purchasing costs. The earliest entrants, such as Commerce One andAriba, focused on improving the efficiency of organisations’ search for informationand evaluation of alternative products and suppliers. They developed electroniccatalogs that reduced clients’ transaction costs by automating the collection ofproduct information, orders, and payments.More recently, sellers’ auction websites have emerged in a number of industries.These provide lively global spot markets for standard processed materials such assteel, chemicals, and plastics. On MetalSite (, for instance, asteelmaker such as LTV can offer a block of sheet or rolled steel whenever its plantshave excess capacity. Buyers then enter bids for the steel over two or three days,and the highest bid wins.Thewebsites that may have the greatest future impact on organisational purchasingbehaviour, however, are those that facilitate buyers’ auctions. Such auctionsinvite qualified competing suppliers to submit bids to win a contract where thebuyer has specified all of the purchase criteria in great detail, except the price. Byenabling all suppliers to see what the competition is bidding in real time, theseauctions have the potential to greatly increase price competition and lower buyers’acquisition costs in some cases by as much as 30 or 40 per cent.13However, because buyers’ auctions are feasible only when the buyer is able tospecify all its requirements except price – including all technical and performanceattributes of the good or service, delivery schedules, inventory arrangements,payment schedules, and the like – they work best for purchases where thebuyer has experience to draw upon, and where those requirements are unlikelyto change rapidly. One service offered by auction sites such as FreeMarkets( is to help clients examine their needs and clearly spellout every aspect of their request for quotes (RFQs) so potential suppliers will knowexactly what they’re bidding for. Thus, buyers’ auctions are like ‘modified rebuy’situations where the buyer knows the physical requirements of the purchase butwants to see whether an alternative supplier might offer a better price.Because auctions throwevery purchase up for grabs among alternative suppliers,they work against the development of a cooperative long-term relationship witha given supplier. And they are unlikely to replace such relationships where theproduct or service being purchased is very technically complex or innovative,is highly customised to the buyer’s unique requirements, or requires specialisedequipment or other investments to produce. Auctions are also unlikely to replacelong-term cooperation between a buyer and a trusted supplier where there aresubstantial savings to be gained from logistical alliances, as discussed in the nextsection. Consequently, while the proportion of global business-to-business onlinesales volume accounted for by auctions or e-exchanges is predicted to increasesteadily through the first decade of the 21st Century,14 other forms of purchasingarrangements, including long-term alliances and partnerships, will continue todominate.

Logistical AlliancesTechnology also has changed organisational purchasing over the past decade byfacilitating logistical alliances involving the sharing of sales and inventory data andcomputerised reordering. Initially, such systems involved electronic data interchangethrough dedicated telephone or satellite links and were mainly limitedto large firms. More recently, software for developing such systems on the Weband protecting the security of proprietary data has improved substantially, therebylowering costs and increasing their availability to smaller firms.Consumer package goods manufacturers such as Procter & Gamble have formedsupply chain management alliances with mass merchandisers such as Wal-Martand Target. Sales information from the retailer’s checkout scanners is shared directlywith the supplier’s computers, which figure out when to replenish the stock ofeach item and schedule deliveries to appropriate distribution centers or even individualstores. Such paperless exchanges reduce sales and purchasing expenses, cutmistakes and billbacks, minimise inventories, decrease out-of-stocks, and improvecash flow. Another example involving much smaller retail partners is described inExhibit 7.6.

  1. client contact systems
  2. collector bias
  3. competitive advantage
  4. competitive intelligence
  5. computerised reorder system
  6. consumer behaviour
  7. data sources
  8. evidence based forecast
  9. experienced user
  10. internal records
  11. just in time
  12. logistical alliance
  13. market potential
  14. market segmentation
  15. market segments
  16. marketing program
  17. marketing research
  18. mass market
  19. mass market strategy
  20. michelin; us west;
  21. micro segmentation
  22. middleman
  23. modified rebuy
  24. multi-functional sales teams
  25. multilevel selling
  26. multiple buying
  27. multiple level relationships
  28. mutual trust
  29. narrow market segment
  30. narrow niche
  31. nationalisation of producers
  32. nerve center
  33. new task buy
  34. nine west group
  35. observation;direct observation' tanzania mobile;
  36. on-time delivery
  37. opportunity; research
  38. order handling
  39. organisation market
  40. organization marketing behaviour
  41. organizational behaviour
  42. organizational customers
  43. organizational demand
  44. organizational market
  45. organizational purchasing behaviour
  46. organizational purchasing process
  47. paperless exchange
  48. parity pricing
  49. personal selling
  50. personal use
  51. political risk
  52. potential market; penetrated market
  53. pre-delivery inspection
  54. pre-sale service
  55. prestige buyer
  56. pretender
  57. primary data
  58. procurement costs
  59. purchasing criteria
  60. qualitative data
  61. qualitative research
  62. quality assurance
  63. quality standards
  64. quantitative data
  65. quantitative research
  66. research objectives
  67. retention programme
  68. routine purchase
  69. sales forecast
  70. semantic differentiation scale
  71. sequence of information
  72. shared costs
  73. short term contracts
  74. social construction
  75. status oriented consumers
  76. stock availability
  77. straight rebuy
  78. supplier bargaining power
  79. supplier performance
  80. supplier reputation
  81. survey
  82. tabulation errors
  83. tanzania mobile
  84. target customers
  85. target market
  86. target marketing
  87. technical experts;
  88. test markets
  89. transaction cost
  90. trend forecasting
  91. trusting patron
  92. underlying consumer demand
  93. unethical demands
  94. unstated but implicit assumptions
  95. users
  96. value analysis
  97. value shopper
  98. vertical integration
  99. visceral thing that cannot be trained
  100. wild guess