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C.M. Sashi: Florida Atlantic University, Davie, Florida, USA
Vaman S. Kudpi: ARBOR, Inc., Media, Pennsylvania, USA
Introduction
The intense pressure to improve the efficiency and effectiveness of marketing and procurement efforts in business-to-business (B2B) markets requires new approaches to old problems (Cannon and Perreault, 1999). Strategic decisions in business markets can benefit from the development and use of analytical approaches derived from industrial organization economics theory. This article examines the nature of the market selection decision in business markets and then develops an analytical approach to facilitate market selection and procurement decisions. Market selection decisions in business markets are shown to encompass choice of vertical and horizontal markets, and involve make or buy decisions as well as segmentation decisions. Transaction cost analysis and market structure analysis can help guide these decisions and facilitate group decision making when people from different departments and at different levels in the organizational hierarchy are involved in these decisions.
In consumer markets, transactions are final because buyers, usually individuals and households, do not engage in subsequent market transactions. Market selection involves choosing the segments of consumers the organization will serve (see, e.g. Kotler, 2000). The stage in the value-adding chain where final transactions take place is fixed and only choice of horizontal market segments is involved. In business markets, on the other hand, transactions are intermediate because the buyers, usually organizations, use the goods and services purchased as inputs to their value-adding processes and subsequently sell the output (Sashi, 1990). Thus organizations in business markets must precede choice of horizontal market segments with choice of the stage to which they will sell in the value-adding chain.
In business markets a firm's choice of the organizational buyers whose needs it will seek to satisfy depends both on choice of the stage in the value-adding chain where its buyers are located and the market segments selected. Based on its choice of buyers, the firm must decide the extent of value adding it will perform internally and the inputs to the value-adding process that will be acquired through market transactions. The market levels (i.e. stages of the value-adding chain) at which a firm will sell output, the value-adding performed internally, and the input markets selected by the firm constitute its vertical market choice...