Institutional and Government Markets

The overall business market includes institutional and government organizations in addition to profit-seeking companies. The institutional market consists of schools, hospitals, and other institutions that provide goods and services to people in their care. Many of these organizations have low budgets and captive clienteles. For example, hospitals must decide what quality of food to buy for patients. The objective is not profit because the food is part of the total service package; nor is cost minimization the sole objective because poor food will draw complaints and hurt the hospital’s reputation. The hospital must search for vendors whose quality meets or exceeds a certain minimum standard and whose prices are low.

In most countries, government organizations are major buyers of goods and services. The U.S. government now spends more than $500 billion a year—or roughly 14 percent of the federal budget—on private-sector contractors, making it the largest customer in the world.45 Government buyers typically require suppliers to submit bids and often award the contract to the low bidder, sometimes making allowance for superior quality or a reputation for on-time performance. Governments will also buy on a negotiated-contract basis, primarily in complex projects with major R&D costs and risks and those where there is little competition.

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