Documente Academic
Documente Profesional
Documente Cultură
AND PURCHASING
Series Editor: Arch G. Woodside
Recent Volumes:
vii
viii LIST OF CONTRIBUTORS
No part of this book may be reproduced, stored in a retrieval system, transmitted in any
form or by any means electronic, mechanical, photocopying, recording or otherwise
without either the prior written permission of the publisher or a licence permitting
restricted copying issued in the UK by The Copyright Licensing Agency and in the USA
by The Copyright Clearance Center. No responsibility is accepted for the accuracy of
information contained in the text, illustrations or advertisements. The opinions expressed
in these chapters are not necessarily those of the Editor or the publisher.
ISBN: 978-1-84855-172-5
ISSN: 1069-0964 (Series)
Awarded in recognition of
Emerald’s production
department’s adherence to
quality systems and processes
when preparing scholarly
journals for print
ADVANCES IN BUSINESS MARKETING AND
PURCHASING VOLUME 14
CREATING AND
MANAGING SUPERIOR
CUSTOMER VALUE
EDITED BY
ARCH G. WOODSIDE
Boston College
FRANCESCA GOLFETTO
Bocconi University
MICHAEL GIBBERT
Bocconi University
ix
CUSTOMER VALUE: THEORY,
RESEARCH, AND PRACTICE
ABSTRACT
This first paper examines total benefits and total costs of product–service
designs as antecedents to customer value assessment. It introduces the
reader to all the papers in this volume. The first half of the paper offers a
model of customer value assessment. This section describes research
studies in industrial marketing contexts that illustrate the core proposi-
tions in the model. The second half of the paper provides brief
introductions to the papers in this volume; these papers offer further
evidence supporting the view that discontinuous innovations offer superior
customer value but customers tend to eventually become increasingly
comfortable with the status quo and move away from adopting superior
proven technologies. This paper advocates being mindful of the market-
place dynamics affecting value. The volume serves to increase knowledge
and understanding of the dynamic forces affecting changes in customer
value.
This first paper includes two objectives. First, the paper illustrates the use of
value theory and measurement in business-to-business (B-to-B) contexts.
Achieving highly useful sense making about value concept and value metrics
is important because of the substantial evidence that (1) customer
assessments of total value in a product–service offering strongly affect
acceptance and initial purchase, (2) customer evaluations of value
experiences relate strongly with retaining them and growing the share of
business that these customers award specific suppliers, and (3) increases in
delivered-value implemented strategies relate positively to increases in
profitability (Best, 2009).
Understanding and having the skill to apply useful value metrics are
useful steps in creating alternative product/service-implemented strategies
that offer high- versus low-value evaluations by customers. Also, such skill
helps reduce the value overconfidence bias that is prevalent among
marketing executives: ‘‘Only 8% of customers describe their experiences
as superior, yet 80% of companies believe the experience they provide is
indeed superior’’ (Meyer & Schwager, 2007). Dividing executive perception
of customer share by actual customer share of superior value provides an
overconfidence bias equal to 80/8, or 10.0. Certainly, this share varies
among a set of competing firms in a product market, but most firms can
expect to find an overconfidence bias greater than 1.0 for most of their
products–services.
Value, from the perspectives of customers and marketers, is a multi-
dimensional concept. Value as a concept represents a net score that includes
measurement of total benefits perceived or realized and total costs of
acquiring, using, and disposing of a product or service. Eqs. (1) through (4)
are example value metrics appearing in the B-to-B marketing literature:
Note that the numerator in Eq. (1) calls for measuring benefits perceived for
a given product–service design. Such measurement is often done in studies
probing customers’ acceptances of alternative product–service designs
before the marketer finalizes what designs to manufacturer and what
designs to reject. The objective of such studies is to collect customer
judgments useful for marketers in designing product–service prototypes for
further testing.
The numerator in Eq. (3) calls for measuring consequences experienced by
customers. Such measurement is often done in studies probing the reasons
for customer retention, customer decisions to eliminate suppliers, and
customers’ decisions to increase or decrease the shares of purchase
requirements among competing suppliers.
Eqs. (1) and (3) provide ratios indicating the relative value of competing
product–service designs – potentially new designs in the case of Eq. (1) and
existing competing designs in the case of Eq. (3). Assume for a moment that
a customer judges product–service design (say, design R) and concludes that
R has a weighted benefit sum equal to 120 and that the average among four
alternative product–service designs have a weighted benefit sum equal to 90.
Design R’s relative sum of weighted benefits perceived equals 120/90 ¼ 1.33.
The relative total benefit of R is quite high with respect to at least one of the
other three product–service designs – possibly all three of these alternatives.
(The calculations for the components of overall benefit appear later in this
chapter.)
6 ARCH G. WOODSIDE ET AL.
Assume that a customer has the following information available for four
alternative product designs. How might the customer go about assessing and
selecting among these four competing designs?
Using Eq. (1) to calculate the relative values of the four designs results in
design T having the highest ratio of total benefits to total costs. Using these
calculations indicates that design T is the design that the customer will
decide to buy. In real life, most customers will not select design T even when
using such an evaluation method; most customers will set a minimum level
of total benefits that a design must achieve and select the design that meets
or surpasses the minimum while offering cost savings – if such an alternative
exists (Woodside & Wilson, 2000). In this example, most customers are
likely to reject design T due to its low relative total benefits (.80) and select
design S. While design S has lower relative total benefits than design R,
design S has above-average relative total benefits in combination with
below-average relative total costs.
The price-benefit performance map in Fig. 1 illustrates four product–
service value locations. The dashed boundary region in Fig. 1 illustrates the
product–service design values that most customers are willing to buy, and
the three-dimensional box illustration depicts the ideal value location of
substantially above-average relative value and substantially below-average
relative total costs. The ‘‘fair-value line’’ represents location points where
total relative benefits equal total relative costs.
Discontinuous innovations offering exceptionally high total benefits
sought by a customer at exceptionally low total costs are examples of an
ideal product–service design – location I in Fig. 1. Possibly surprisingly to
read, some customers are unwilling to consider such designs for several
reasons. These reasons include inertia, status quo bias, and the primacy
effect (i.e., because prior purchases from existing suppliers are resulting in
acceptable outcomes, why change?). Fear of failure of the new product–
service design, additional work in examining test data, and search for
evidence supporting the superior value of the discontinuous innovation
work against its adoption by many customers.
Customer Value: Theory, Research, and Practice 7
150
Relative Total Costs
V
100
S
T
50
I
0
0 50 100 150 200
Relative Total Benefits
Acceptable value region Ideal value region I = Ideal product-service design
Fig. 1. Price-Benefit Value Map. Source: Adapted in part from Best (2009),
Fig. 4-17, p. 119, and Gale (1994).
Conflicts inside both the marketer and customer firms occur among the
forces (i.e., individuals and departments) favoring inertia versus the forces
favoring change – during strategic window instances when product–service
designs offering superior value become apparent (Huff, Huff, & Barr, 2001).
Eqs. (2) and (4) represent calculating difference scores for relative total
benefits or consequences versus relative total costs. The difference scores for
the four designs
Design Relative Total Benefits Relative Total Costs Value
vendor offers a low price is an example of one such simple heuristic. ‘‘Never
buy from a vendor that I do not know’’ is another simple heuristic.
Thus, while asking customers to estimate relative importance scores for
different benefits may have some research value, the value of such research
has severe limits. Multiplying relative importance by benefit ratings
and summing does not provide accurate or relevant assessment as to the
steps that customers take to estimating overall values of competing
product–service designs (Gigerenzer, Todd, & ABC Research Group, 2000;
Woodside, 2003).
As an example of possible benefits that customers may use to evaluate
product–service offerings, Fig. 2 includes four categories of possible
benefits. This example is for relatively new product–service: fiberglass-
reinforced plastic (FRP) lampposts for on-street and off-street lighting
applications. The benefit categories include product benefits, service and use
benefits, company and brand benefits, and emotional benefits for the buying
firm. Each product–service design under consideration by a buying firm has
some benefits relating to its physical components – its product benefits.
Service benefits include ease of use, ease of repair, and ease of installation,
among other processes. Company and brand benefits relate to the
reputation and industry awareness of the vendor. Emotional benefits relate
to personality traits, and summary gist executives in the buying firm attach
to the personalities of vendors. See Best (2009) for a full exposition.
• No painting
• ½ the concrete in base
compared to alternatives
• 30% longer lifespan Product Benefits
• Non life threat when hit
• Ease of installation:
two-person crew Service Benefits Overall
• 50% less time to install Customer
• Guaranteed delivery dates Benefits
In the United States, the customer segment buying the largest share of
lampposts are electrical utility firms. Among these firms, most standards
(lamppost requirements) specify a component material: aluminum. Such
requirements prevent consideration of FRP lampposts. Also, work to
rewrite and gain approval for new requirements among large customers
requires substantial time and involvement of several departments. The
results include higher acquisition costs of FRP versus aluminum lampposts,
at least for initial considerations of buying FRP lampposts.
Fig. 3 includes five categories of costs relating to buying product–service
designs. The categories include prices paid, acquisition costs (i.e., cost of
approving the vendor and product–service design as acceptable for
purchase), ownership costs (including inventory costs and internal firm
shipping costs), maintenance and usage costs, and disposal costs (e.g.,
damaged or deteriorating lampposts need replacing).
Fig. 4 illustrates the value creation process from the perspective of an off-
street building subcontractor who is considering the purchase of 24
lampposts for a shopping mall – a relatively small purchase requirement
in comparison to the annual purchase requirements of 1,500–4,000
Price
Paid
Acquisition
Costs
Overall Costs
Ownership
Costs
Maintenance and
Usage Costs
Disposal
Costs
Fig. 3. Perceived Benefits and Value Creation for New Lamppost Standard
(Fiberglass-Reinforced Plastic).
Customer Value: Theory, Research, and Practice 11
Product
Product Customer Value Benefits Customer Value
Benefits
Fig. 4. Customer Value Analysis for Two Competing Products Built on Two
Different Platforms.
among almost all large customers during the first 10 years of purchase
availability of FRP lampposts. While most marketers of FRP lampposts
directed sales calls to large electrical utility firms, only one of these firms
placed a sizeable order for these lampposts. Most large firms continued to
view total costs to be greater than total benefits for FRP lampposts, even
though the price quotes were lower for FRP versus aluminum lampposts
(Woodside, 1988).
service in the early 1980s. The positive features of the new service include the
following: (1) scale as well as coke removal; (2) no need to remove furnace
plugs, if present; (3) an entire pass is cleaned in one operation (thus, furnace
downtime is substantially less compared to the time required using
competing cleaning methods); and (4) cleaning is conducted in a
nonflammable, dry nitrogen environment. A negative feature of the new
service was the high operator skill and attention required to balance the flow
of propellant in the nitrogen carrier gas to prevent tube damage.
price
cleaning time required
energy efficiency achieved by the cleaning
tube damage that may result from the cleaning
Shotblasting
Price $13,000, $18,000, $22,500
Cleaning time 4, 7, 14 h
Energy efficiency 75, 90, 100%
Tube damage o.005v, .005–.020v, W(1/16)v metal loss
Turbining
Price $20,000
Cleaning time 120 h
Energy efficiency 95%
Tube damage W(1/16)v metal loss
T R S
(A) $13,000 (A) $18,000 (A) $22,500
U V W
(A) $13,000 (A) $18,000 (A) $22,500
Key:
A: price paid
(B) 14 hours (B) 14 hours (B) 14 hours
B: Cleaning time
C: Energy efficiency
(C) 75% (C) 100% (C) 90%
by cleaning
D: Tube damage
(D) .1/16* (D) .005* to .020* (D) < 005*
X Y Z
(A) $13,000 (A) $18,000 (A) $22.500
Assume that you are faced with the potential need to decoke a 2 pass. 6" OD, Direct
Fired Furnace. From the information presented below. distribute 100 points among the
three processes based on the likelihood that you would use that process to decoke the
above furnace
• Price .. $6.000
Shotblasting
• Price .. $18.000
Turbining
• Price .. $20.000
Table 2. (Continued )
Service Pricea Time in Tube Energy Market Share (%)
Design Hour Damage Efficiency
SADb Shotblasting Turbining
42 Medium 7 .0125 75 77 19 4
43 Medium 7 .0625 100 58 39 3
44 Medium 7 .0625 90 61 36 3
45 Medium 7 .0625 75 85 11 4
46 Medium 14 .005 100 52 45 3
47 Medium 14 .005 90 55 42 3
48 Medium 14 .005 75 74 22 4
49 Medium 14 .0125 100 55 42 3
50 Medium 14 .0125 90 58 39 3
51 Medium 14 .0125 75 78 18 4
52 Medium 14 .0625 100 60 37 3
53 Medium 14 .0625 90 65 32 3
54 Medium 14 .0625 75 87 9 4
55 Low 4 .005 100 44 53 3
56 Low 4 .005 90 47 50 3
57 Low 4 .005 75 68 28 4
58 Low 4 .0125 100 45 52 3
59 Low 4 .0125 90 49 48 3
60 Low 4 .0125 75 74 22 4
61 Low 4 .0625 100 49 48 3
62 Low 4 .0625 90 54 43 3
63 Low 4 .0625 75 79 17 4
64 Low 4 .005 100 45 52 3
65 Low 7 .005 90 48 49 3
66 Low 7 .005 75 68 28 4
67 Low 7 .0125 100 46 51 3
68 Low 7 .0125 90 50 47 3
69 Low 7 .0125 75 71 25 4
70 Low 7 .0625 100 50 47 3
71 Low 7 .0625 90 55 42 3
72 Low 7 .0625 75 80 16 4
73 Low 14 .005 100 47 50 3
74 Low 14 .005 90 50 47 3
75 Low 14 .005 75 69 27 4
76 Low 14 .0125 100 49 48 3
77 Low 14 .0125 90 52 45 3
78 Low 14 .0125 75 73 23 4
79 Low 14 .0625 100 54 43 3
80 Low 14 .0625 90 57 40 3
81 Low 14 .0625 75 82 14 4
a
High=$22,500; medium=$18,000; low=$13,000.
b
SAD ¼ steam air decoking.
Customer Value: Theory, Research, and Practice 19
dramatic increases in market share occur for steam air decoking. The
market shares for shotblasting with 75 energy efficiency levels fall
below 10% when this energy efficiency level is combined with a .0625 tube
damage level.
The results of this study vary substantially among different groups of
customers segmented by current share of business and by industry type
(chemical versus petroleum customers). Consequently, adjustments to
marketing strategies based on the results of the study varied substantially.
The key finding in Table 2 noted by the marketing manager for shotblasting
was the strong influence of tube damage on market share when tube damage
reached a high level (1/16v) but not when it increased from less than .005v to
a range of .005–.020v. He provided two implications from these results:
(1) severe tube damage had to be prevented from occurring with
shotblasting applications and (2) a guarantee of a low amount of tube
damage would not have to be set prohibitively low to possibly influence
market share positively for shotblasting.
Fig. 7 summarizes the much of the discussion in the first half of this paper.
This exhibit shows the two forces of total benefits and total costs that affect
customer assessments of the value of a product–service design. Increases in
total benefits cause increases in customer value assessments. Increases in
total costs cause decreases in customer value assessments.
The consequences of increases in customer value assessments include
increases in customer acceptance of a product–service design, purchases,
share of business awards, and continuing purchases. These consequences
lead to increases in the customer’s comfort level and preference toward
maintaining the status quo (Christensen, 2003; Huff et al., 2001; Woodside,
1996). Increasing preference for the status quo reduces the customer’s stance
toward and acceptance of new product–service designs built on proven
superior new technological platforms. Executive leadership/stance favoring
change serves as a countervailing force to reduce the customer’s comfort
level and increase customer acceptance of proven superior technologies;
Huff et al. (2001) offer brilliant research illustrating the continuing battle
between the forces favoring inertia versus change.
20 ARCH G. WOODSIDE ET AL.
+
Customer’s
Comfort Level
with Status Quo
Consequences
− Total Benefits
+ Assessment + Customer
Customer
by Customer Value Acceptance of
+ Product-Service
Proven Assessment
Superior of
Discontinuous − − Product-Service Customer’s
Innovation Total Costs Design Purchase
Assessment
by Customer Share of Business
Awarded by
Customer
− +
Executive Customer
Leadership/Stance Retention
favoring Change
of assessing the intangible part of the value, particularly the part that derives
from the human aspects of the relationship.
In the third paper, Stephan C. Henneberg and Stefanos Mouzas explore the
value of the final customer in business networks. The preferences of the final
customer define the concept of the network customer. The central argument
of this paper is that companies within networks of value-creating relation-
ships can act as integrators, which, by interlocking limited value
perspectives, can approximate an absolute value horizon that includes
network customer considerations. Such interlocking activity constitutes a
managerial challenge.
In the fourth paper, Thomas Ritter and Achim Walter analyze functions of
business relationships and their impact on value perception. Applying a
customer perspective, direct relationship functions are concerned about
payment, quality, and volume. Indirect functions include innovation, access,
and scouting. The study includes trust and the number of alternative
suppliers. The empirical results illustrate the important role of direct and
indirect functions for value creation.
The sixth paper explores the use of the total cost of ownership (TCO)
approach from the business marketing perspective. Gabriela Herrera
Piscopo, Wesley Johnston, and Dan N. Bellenger describe how TCO
provides a method to estimate all costs associated with the acquisition, use,
and disposal of a good or service over the lifetime of the purchase.
Organizational buyers can employ TCO analysis to evaluate alternative
offerings from suppliers, to assess ongoing supplier performance, and to
drive process improvement. Sellers can use TCO models to measure,
document, and communicate the value that their offering represents to a
customer in the way of lower costs relative to the next best alternative. TCO
analysis can be a powerful selling tool to demonstrate concrete customer
value creation for alternatives that deliver comparable benefits.
In the eighth paper, Enrico Baraldi and Torkel Strömsten identify that
the role of management control receives insufficient attention in the
Customer Value: Theory, Research, and Practice 23
In the ninth paper, Bernard Cova and Robert Salle draw on the experiences
of project marketing and solution selling to improve the understanding of
how to create superior value for customers. Project marketing and solution
selling have both developed approaches to deal with complex marketing
situations for a number of years now. The upstream mobilization of
customer network actors and the downstream enlargement of the content
and scope of the offering are the key features of these approaches.
The 10th paper shows how business suppliers set up processes allowing the
translation of their competencies into value for the customers. The authors,
Francesca Golfetto, Fabrizio Zerbini, and Michael Gibbert, seek to
complement the dominant view in which competencies are seen mainly as
valuable for the firm owning the competencies, but not for that firm’s
customers. In so doing, the paper contributes to two bodies of research: the
notion of core competencies in strategic management and the notion of
value for customer in business marketing. These two bodies of research
interact infrequently thus far, leaving the how question largely unanswered.
This question is relevant because competencies are immaterial, tacit, and
non-tradable assets.
24 ARCH G. WOODSIDE ET AL.
CONCLUSION
Certainly, this volume does not offer the definitive body of work in describing
and understanding value in business markets. The volume provides a number
of useful insights and in-depth case reports on how executives in business
markets define and use value concepts in planning and implementing
strategies. While working separately in preparing their papers for this
volume, the authors offer a surprisingly cohesive collective perspective of the
antecedents, processes, and outcome of value in B-to-B contexts. The editors
hope that the reader concurs with this overall assessment.
Customer Value: Theory, Research, and Practice 25
REFERENCES
Best, R. J. (2009). Market-based management. Upper Saddle River, NJ: Pearson–Prentice Hall.
Christensen, C. M. (2003). The innovator’s dilemma. New York: Harper Collins.
Gale, B. T. (1994). Managing customer value. New York: Free Press.
Gigerenzer, G., & Todd, P. M.ABC Research Group. (2000). Simple heuristics that make us
smart. New York: Oxford University Press.
Huff, A. S., Huff, J. O., & Barr, P. (2001). When firms change direction. New York: Oxford
University Press.
Kim, W. C., & Mauborgne, R. (2005). Blue ocean strategy: How to create uncontested market
space and make competition irrelevant. Cambridge, MA: Harvard University Press.
Louviere, J. J., & Islam, T. (2008). A comparison of importance weights and willingness-to-pay
measures derived from choice-based conjoint, constant sum scales and best–worst
scaling. Journal of Business Research, 61, 903–911.
Meyer, C., & Schwager, A. (2007). Understanding customer experience. Harvard Business
Review, 85(2), 116–126.
Teas, R. K. (1993). Expectations, performance evaluation, and consumers’ perceptions of
quality. Journal of Marketing, 57, 18–34.
Tufte, E. R. (2001). The visual display of quantitative information (2nd ed.). Cheshire, CT:
Graphics Press.
Woodside, A. G. (1988). Marketing success and failures of new lamp post technologies.
Unpublished industry report. Tulane University, New Orleans.
Woodside, A. G. (1996). Theory of rejecting, superior new technologies. Journal of Business &
Industrial Marketing, 11(3/4), 25–43.
Woodside, A. G. (2003). Middle-range theory construction of the dynamics of organizational
marketing-buying behavior. Journal of Business & Industrial Marketing, 18(4/5),
309–335.
Woodside, A. G., & Pearce, W. G. (1989). Testing market segment acceptance of new designs of
industrial services. Journal of Product Innovation Management, 6, 185–201.
Woodside, A. G., & Wilson, E. J. (2000). Constructing thick descriptions of marketers’ and
buyers’ decision processes in business-to-business relationships. Journal of Business &
Industrial Marketing, 15(5), 354–369.
INTANGIBLE VALUE IN
BUYER–SELLER RELATIONSHIPS
Roger Baxter
ABSTRACT
The provision of value, as a marketing issue, is receiving increasing
attention from managers and scholars. This attention, in combination with
strong calls for better quantification and stronger measures in marketing,
has lead to increased interest in the assessment, quantified where possible,
of the provision of value through buyer–seller relationships. This paper
identifies dimensions of value provision through relationships in business
markets with specific emphasis on the intangible aspects of value, which
are important to long-term competitive advantage. The provision of
value to the seller is the prime focus in this paper. The paper discusses
the meaning of both tangible and intangible relationship value and
the interplay between them and notes the importance of assessing the
intangible part of the value, particularly the part which derives from the
human aspects of the relationship. Despite their importance, the human
aspects of relationships and their contribution to value is a sparse topic
among researchers. The paper compares and evaluates potentially useful
relationship and value conceptualizations. The paper discusses studies of
relationship value and then outlines the results of a recent line of empirical
research into the provision of value by a buyer to a seller that utilizes a
framework synthesized from the intellectual capital literature. This recent
research conceptualizes the potential for a seller’s relationship with a
buyer to provide intangible value to the seller in terms of, first, the
resources available in the buyer and second, the capabilities of the buyer’s
boundary personnel to aid in facilitating the flow of those resources to the
seller. The paper also includes the softer human aspects in the dimensions
of value. These latter aspects are important to a full assessment of value.
The paper concludes with a discussion of aspects of intangible relationship
value that need further elucidation and will thus provide opportunities for
future research.
1. INTRODUCTION
The marketing literature expresses concern about the weakness of the
marketing paradigm and the consequent lack of involvement of marketing
professionals in the firm’s strategy formulation process (e.g., Cravens, 1998;
Doyle, 2000; Gummesson, 1998; Piercy, 1998). At least a partial explanation
of this weakness lies in the inability of sales and marketing managers to
value the outcomes of their actions. Tools to assess value outcomes are
therefore essential for sales and marketing managers, including tools to
assess outcomes of relationship management strategies. The relationships
a firm has with its customers are among the key providers of value to the
firm and are prime concerns of sales and marketing personnel. In fact, they
‘‘contribute to its organizational capital’’ (Hunt, 1997) and comprise an
important part of a firm’s shareholder value (Payne, Holt, & Frow, 2000).
The building and maintenance of networks and relationships for competi-
tive advantage and hence for performance is therefore a key task for firms
(Doyle, 1995) and in particular for their sales and marketing managers.
These assets need valuation in such a way that they are seen as a critical
contribution to the firm and their value needs clear definition.
Managers need to be able to clearly demonstrate the value they
create (Doyle, 2000) in order to argue for a sufficient share of the firm’s
resources to develop these market-based assets (Srivastava, Shervani, &
Fahey, 1998) for competitive advantage (Barney, 1991). They also need to
be able to design relationship strategies for performance (Varadarajan &
Jayachandran, 1999), and to be able to manage their portfolio of customer
relationships effectively (Srivastava, Fahey, & Christensen, 2001). To take
these actions, they need, in turn, to be able to understand the dimensions
of relationship value so that they can assess the worth of individual
relationships. Identification of the dimensions of relationship value and their
relative importance and of scales to measure these dimensions is thus a
Intangible Value in Buyer–Seller Relationships 29
view of the firm (Barney, 1991) and the application of the resource-based
view in the marketing literature (Morgan & Hunt, 1999).
Because relationships provide value to the partners, the assessment of
that value is important so they can be managed effectively. As in other
disciplines, techniques are available for the value assessment of resources
in marketing-related fields. For example, techniques for the dollar value
assessment of brands (Keller, 1998) and communications campaigns (Ehling,
1992) are available. In these cases the techniques assess the intangible as well
as the tangible aspects of the resource in order to comprehensively assess the
value. Assessment of the intangible value aspects requires knowledge of the
attributes or dimensions of the intangible value of the resource. Identification
of intangible value dimensions for relationships is therefore essential to
developing a comprehensive assessment technique for relationship value.
A limited, but growing, body of research specific to the value of relation-
ships or relationship partners exists. For example, techniques for assessment
of ‘‘customer lifetime value’’ (Gupta, Lehmann, & Stuart, 2004; Kumar,
Ramani, & Bohling, 2004; Venkatesan & Kumar, 2004) are developing
rapidly. This set of techniques is principally focused on consumer relation-
ships, so given the ‘‘arms length’’ nature of consumer relationships, the
techniques generally consider relationships in an aggregated sense, rather than
relationship-by-relationship. These techniques also strictly do not have the
relationship as the unit of analysis. They therefore do not provide a basis for
the development of a set of dimensions of intangible relationship value.
In the business-to-business relationship literature, however, which is
the focus of this paper, some recent studies research the nature of
intangible value in some depth. For example, Walter, Ritter, and Gemünden
(2001), Walter and Ritter (2003), and Ryssel, Ritter, and Gemünden (2004)
research value from the perspective of the seller in a business-to-business
buyer–seller relationship. Ulaga (2003) and Ulaga and Eggert (2003, 2006a)
do the same from the buyer’s perspective. However, in all these studies, the
measures appear to be of drivers of value rather than of manifestations of
value and although they do include the intangible aspects of value, the
inclusion is limited in its extent. Also, these studies do not provide in-depth
assessment of the human aspects of relationship value creation. Hence further
research is necessary for identifying dimensions of intangible relationship
value. This necessity leads to the research question for this study:
what are the dimensions and structure, from the seller’s perspective, of the
intangible value which a buyer provides through a business-to-business
buyer–seller relationship?
Intangible Value in Buyer–Seller Relationships 31
This paper describes the study that deals with two related issues in order
to answer the research question:
what are the dimensions of the manifestations of intangible relationship
value?
what is the structure of this value and what might the outcome be?
The paper proposes a set of dimensions and a structure that both utilize
a novel synthesis of a framework from the intellectual capital literature
(Roos, Roos, Dragonetti, & Edvinsson, 1997). The paper also proposes
future financial performance of the relationship as an outcome. The study
takes the seller’s perspective, as will be discussed later.
The study contributes to the relationship marketing literature and to the
broader business literature by providing a sound theoretical basis for
development of a set of dimensions of the intangible value that is provided
through a business-to-business buyer–seller relationship, grounded in the
resource-based view of the firm (Barney, 1991; Morgan & Hunt, 1999) and
grounded also in the synthesis of a framework from the intellectual capital
literature. The study also contributes by providing some indication of
the relative importance of each of the value dimensions, by helping to
elucidate the structure of intangible relationship value, and importantly,
by accounting for the human dimensions (Varey, 2002) of relationship
value provision much better than do existing conceptualizations. Once the
dimensions and structure of this value provision are understood, the
development of techniques to assess value manifestations will become a real
potential. The availability of such assessment techniques will be a valuable
addition to the marketing manager’s toolbox for strategy formulation and
hence for resource management.
The study provides, in turn, support for the conceptualization, seen in the
relationship literature, of a relationship as a value provider (e.g., Hakansson &
Snehota, 1982; Morgan & Hunt, 1999). By demonstrating that managers see
relationship financial performance as an outcome of relationship value, the
study links the results to the broader performance and strategy literature
(Srivastava et al., 2001). The study also provides support for the
conceptualization of the flow of information and value through a relationship
as seen in the intellectual capital literature (Roos & Roos, 1997; Roos et al.,
1997) and in the broader management literature (Dierickx & Cool, 1989). The
study thereby makes a contribution to the body of knowledge concerning the
management of the performance of the firm as a whole.
The study has some additional theoretical implications. For example,
some controversy exists in the literature as to whether a relationship is an
32 ROGER BAXTER
entity with value in its own right or is simply a conduit for value transfer
between the relationship partners (e.g., Ambler & Styles, 1998). The study is
based on a conduit conceptualization and establishes empirical support for
that conceptualization, but later discussion in the paper notes that the entity
versus conduit argument is more complex than can be covered by this study.
This issue thus provides an avenue for further research.
This research makes a contribution to the intellectual capital literature
because this study and the work of Bontis (1998) and Bontis, Chua, and
Richardson (2000) appear to represent the few attempts currently to
operationalize the intellectual capital concepts and test them empirically.
The application of intellectual capital constructs to assess the value of
intangible value appears to have the potential to be extended into contexts
other than relationships, so when further support for the validity is
available, the operationalization of the constructs assists the development of
research in this field.
The constructs used as the basis for this research are intangible in nature,
and intangibles are a representation of future performance and worth
(Contractor, 2001). The study therefore illustrates the linkage between
current intangible value in the form of information flows and future tangible
value in the form of future financial performance.
Although this research contributes to the wider literature, data for the study
come from a specific context. The scope is as follows. The primary
contribution is to the business-to-business relationship marketing literature,
and the study is conducted in that context because, as has been noted in
earlier sections of this chapter, researchers see a need for tools to assess
intangible relationship value in that context.
The research problem asks what the ‘‘structure’’ of intangible value is. In
this paper structure means the dimensions of intangible value and the paths
between these dimensions and relevant higher-order mediating constructs.
A consequence of the need to model the dimensions is the need to
measure them, so a set of scales for the dimensions is developed. The study
hypothesizes future financial performance as an outcome of intangible
value, so the paper defines this construct and develops a set of indicators.
The linkage of value to future financial performance is tested and this testing
provides an indication of nomological validity of the model.
Intangible Value in Buyer–Seller Relationships 33
To aid understanding of the paper, Table 1 defines some of the key concepts
used in the paper. The following paragraphs briefly discuss some of these
concepts.
In an assessment of definitions, Harker (1999) concludes that the
‘‘coverage of the underlying conceptualizations of relationship marketing
and its acceptability throughout the RM ‘community’ ’’ are best stated in
Gronroos’ (1994) definition. This definition clearly states a profit outcome
for relationship marketing, which is a critical point for the conceptualization
of this study.
The aim of this study is to go beyond the simple definition of value as
benefits less sacrifices and to identify dimensions of intangible value to the
seller in a business-to-business buyer–seller relationship. In this paper,
dimensions are interpreted as attributes of a construct. Hair, Anderson,
Tatham, and Black (1998) refer to a dimension as an ‘‘[a]ttribute of a data
element’’ (p. 669), and give the ‘‘age or gender of a customer’’ as an example.
Similarly, in physics, a dimension is a property of an object, such as length
or mass. Drivers of intangible value are, in contrast, seen as causal
antecedents of value. For example, Lapierre’s (2000) study of drivers of
customer value includes such constructs as the responsiveness, flexibility,
and reliability of the seller, which will help create value. The distinction
between dimensions and drivers of relationship value is fundamental to the
study’s conceptualization.
The focus of the paper is intangible relationship value, which is viewed
as the intellectual capital that is provided by the relationship. In the
intellectual capital literature (e.g., Roos et al., 1997), on which this research
draws extensively, intellectual capital is defined as all that capital that is
not physical or monetary capital. Contractor’s (2001) categorization of
intangible value into three groups helps to further clarify the concept. The
first of these groups is intellectual property, which is formally registered
in the form of patents or brand names. The second group comprises
intellectual assets, which are both the registered intellectual property and
‘‘codified but unregistered corporate knowledge’’ such as ‘‘drawings,
software, data bases, blueprints, formulae, manuals, and trade secrets.’’
Intangible Value in Buyer–Seller Relationships 35
The third category is intellectual capital, which includes both of the first two
categories as well as ‘‘Uncodified Human and Organizational Capital,’’
such as ‘‘expertise that resides in the thinking of employees and
organizational routines.’’ The intellectual capital literature (e.g., Roos
et al., 1997) further divides intellectual capital into subcategories which
36 ROGER BAXTER
A sound basis in theory is required to achieve the aim of this study, which is
the identification of a set of dimensions and a structure for the manifestation
of relationship value. From among the theoretical frameworks commonly
used to describe relationships, the study principally uses the resource-based
view of the firm. But many theoretical frameworks can describe and analyze
relationships, so as a comprehensive theoretical basis for later discussion of
value assessment, this section of the paper outlines a number of these.
Relationship marketing theory appears to be in an early stage of develop-
ment. In a bibliometric study of the relationship marketing field, where
citations were analyzed, Cooper, Gardner, and Pullins (1997) conclude that
clusters exist in the literature, but that ‘‘Relationship marketing is in
transition’’ and that ‘‘sources for theory building are not on solid ground.’’
Lehtinen (1996) makes a similar point, as do Moller and Halinen (2000)
who argue that ‘‘we do not yet have any developed theory of relationship
marketing.’’ Their contention is that no one single relationship marketing
theory exists; nor is a single one likely. The paper therefore broadly reviews
relationship theories to develop a sound conceptual background for this
study. The following sections deal first with the theories that are of
particular interest to this research, such as transaction cost economics, the
IMP approaches, and the resource-based view of the firm. Discussion of
other theories follows in somewhat less depth.
The resource-based view of the firm sees a strong link between sustained
competitive advantage for the firm and the resources that are available to it.
Resource-based theory traditionally focuses on the internal characteristics
of the firm, rather than on its environment, but more recent discussion has
extended the theory to include resources external to the firm.
Barney (1991) defines firm resources as including ‘‘all assets, capabilities,
organizational processes, firm attributes, information, knowledge, etc.
controlled by a firm that enable the firm to conceive of and implement
strategies that improve its efficiency and effectiveness.’’ Barney believes that
when a firm puts in place a strategy which is different from its competitors
the firm gains competitive advantage. This competitive advantage is
sustainable when the benefits of this strategy cannot be duplicated by its
competitors. In order to provide sustainable competitive advantage to
a firm, a resource must be valuable, be rare, be not perfectly imitable and
not have ‘‘strategically equivalent substitutes.’’ Barney (2002) and other
writers include relationships among the resources that may bring sustainable
competitive advantage.
There are some questions in the literature about the resource-based view.
In an extensive review of progress in the development of resource-based
theory since the work of Wernerfelt (1984), Barney and Arikan (2001)
note some of these issues that need to be resolved in its further development
and testing. They see the need to develop theory to generate strategic
alternatives, to explain the rent appropriation process, and to successfully
implement resource-based strategies.
On one hand, Barney and Arikan, as proponents of resource-based
theory, present these as issues that will be resolved by further theoretical
and empirical development. On the other hand, authors who favor other
theoretical approaches see issues in the resource-based theory as serious
problems. For example, Bromiley and Fleming (2002) note that while
resource-based theory ‘‘has contributed to our understanding of firm
heterogeneity, it is plagued by contradictory assumptions, unclear con-
structs, and poorly articulated causal processes’’ and they propose
evolutionary theory (Nelson & Winter, 1982) as a more sound starting
point for strategic management thinking. Also, despite the listing of a
substantial number of empirical studies that relate to resource-based theory
by Barney and Arikan (2001), Hoskisson, Wan, Yiu, and Hitt, (1999) note
that ‘‘empirical testing of the resource-based theory faces great challenges.’’
As the result of difficulties in measuring rate, inimitable and firm-specific
resources, which are usually intangible, ‘‘researchers have used proxies
as measures of intangible constructs.’’ This measurement difficulty with
Intangible Value in Buyer–Seller Relationships 45
advantage in terms of the assets of a firm, and even more so in terms of the
capabilities of a firm (Day, 1994). Thus Day offers a theoretical explanation
of capabilities in terms of the resource-based view and applies the view to
marketing activities and distinguishes (p. 36) between assets and capabilities.
Assets are ‘‘the resource endowments the business has accumulated
(e.g., investments in the scale, scope, and efficiencies of facilities and
systems, brand equity, and the consequences of the location of activities for
factor costs and government support).’’ Capabilities are ‘‘the glue that
brings these assets together and enables them to be deployed advanta-
geously.’’ Because organizations embed capabilities so deeply, firms cannot
trade them and competitors cannot imitate them (Dierickx & Cool, 1989).
The importance of capabilities in providing long-term sustainable compe-
titive advantage when utilized in combination with the assets of the
organization derives from the lack of tradability and the inimitability and
thus from the fact that they cannot be easily duplicated, if they can be
duplicated at all.
Organizational learning to incorporate new knowledge is an essential
part of gaining competitive advantage (Slater & Narver, 1995, p. 66) and an
essential part of this organizational learning is externally oriented toward
learning about customers’ requirements by way of a customer orientation
and the development of the relevant capabilities (Day, 1994; Slater &
Narver, 1995). This knowledge about customers’ requirements, and how to
satisfy those requirements, is a key resource and hence its development
creates value in business relationships, such as the buyer–seller relation-
ships that are the subject of this study. In particular, as a justification
of the research described in this study, relationships that allow the seller
to gain knowledge of its immediate downstream customers or through
these immediate customers, the markets further downstream, are valuable
relationships to the seller.
The literature of the resource-based view notes relationships as valuable
resources of a firm (Barney, 1991, 2002). Through relational exchanges in
partnership with other firms, a firm can gain access to resources and by way
of a set of core competencies (Prahalad & Hamel, 1990) combine these with
existing resources to achieve competitive advantage, thus creating value.
Hunt and Morgan (1995) have classified the types of resources that a firm
can access in this manner through relationships. These resource types are
the following: financial, legal, physical, human, organizational, relational,
and informational resources. Morgan and Hunt (1999) take these classes
of resources and describe them in detail. As will be discussed in more
depth later, the Morgan and Hunt resource categorizations and domain
Intangible Value in Buyer–Seller Relationships 47
way in which a principal and agent interact. The concepts used to build the
theory, such as goal conflict, uncertainty, information asymmetry, bounded
rationality and cooperative behavior, are similar to those used to build other
relationship theories, so agency theory does not appear to add a lot to this
research.
This section of the paper discusses the use of the theories reviewed above for
their effective application to the goal of the paper, which is to develop a
model and measures of intangible relationship value. Although the literature
uses many theories for the description and analysis of relationships, and
despite the lack of a unifying theory as noted above, many overlaps and
linkages occur between these theories. The review above notes some of
these. For example, similarities are present in the work of the IMP Group,
the ‘‘Nordic School’’ of marketing and those who apply resource-based
theory to marketing. But some major differences also arise in the theories.
One difference, noted by both Donaldson and O’Toole (2002) and by Varey
(2002), is between those that are regarded as economic-based and those that
can be regarded as behaviorally based or socially based. Economic benefits
are the focus of transaction cost economics, agency theory and the channel
literature. Behavioral benefits are the focus of the social exchange literature.
In view of the overlaps between theories, and despite the dichotomy
between economic-based and behaviorally based theories, much of the
recent work on relationships, particularly that concerned with performance
and value, has combined a range of theories, both economic- and
behaviorally based. Examples are the work of Donaldson and O’Toole
(2002), Werani (2001), Mandjak and Durrieu (2000), and Ulaga and Eggert
(2003). In fact, in the present state of relationship marketing theory,
when no one conceptualization is clearly superior or all-encompassing,
Donaldson and O’Toole (2002) suggest adopting a ‘‘meta’’ approach and
thus a ‘‘blend’’ of these theories is best.
This study identifies constructs as potential dimensions of intangible
relationship value. The meta-view of the relationship literature that is noted
above would at first sight suggest assessing the many variables that emerge
from that literature, as components of the relevant nomological net, in terms
of their potential usefulness for the construction of a model of those
dimensions. Wilson (1995, p. 337, Table 1) identifies a number of these
constructs. Examples are commitment, trust, cooperation, mutual goals,
Intangible Value in Buyer–Seller Relationships 51
With respect to the domain coverage issue, the resource-based view does
appear to have promise as a conceptual basis for relationship value dimen-
sions, based on the discussion of the work of Morgan and Hunt (1999) above
and the discussion again later in the paper. The resource-based view has a
focus on value creation rather than cost reduction, which fits with the aim of
this study. At the same time, the resource-based view can span the dichotomy,
noted above, between the more adversarial and economically focused theories
such as transaction cost economics and the more behaviorally focused
theories such as appear in the social exchange literature.
The resource-based view deals with ‘‘economic’’ resources such as
financial, legal, and physical resources, which comprise a large part of the
resources that flow between the parties to a buyer–seller relationship. But
the resource-based view also deals in depth with, for example, human,
relational, and informational resources (Morgan & Hunt, 1999). Varey
(2002) notes that in relationship marketing, ‘‘we must consider relational
process and outcome indicators’’ and also notes the need, in moving to a
more relationship-based view of marketing, to consider that relationship-
based marketing ‘‘thrives on insight, constant change, creativity, and
humanistic values.’’ These behavioral aspects and other intangible aspects
are an important part of the resource-sharing and value-creating facility of
the relationship and as the paper details later, the resource-based view gives
good domain coverage of these aspects of relationship value.
Considering the issue of operationalization noted above, the problem
generally presented by the theories reviewed earlier in this chapter is that
their empirical testing and the understanding of their operationalization are
still very limited. However, although the resource-based view does require
conceptual development in order to be useful because of difficulty with
theoretically sound operationalization (Hansen, Perry, & Reese, 2004), this
study proposes a conceptualization that can achieve this operationalization.
The study uses a framework synthesized from the intellectual capital
literature for this purpose, on the basis that the latter closely relates
theoretically to the resource-based view.
Also in favor of the resource-based view approach to relationship
marketing is that its operationalization provides a set of dimensions of value
manifestations, rather than a set of drivers. This is in contrast to other
published studies of business-to-business relationship value, which appear to
have tested the following types of constructs: antecedents or facilitators
of value provision; or drivers of value provision through relationships; or
both (e.g., Walter & Ritter, 2003). But they do not appear to have tested
dimensions of value manifestation, in the form that this paper defines
Intangible Value in Buyer–Seller Relationships 53
very generally as the excess of benefits received from the resource by the
entity over the cost of, or sacrifice for, the resource to the entity. This is fine
as a basic definition, but the definition describes neither how the dimensions
of value can be assessed nor what the issues are that require to be considered
in assessing the intangible value that this study addresses. The following
paragraphs will therefore discuss issues that need to be considered in
operationalizing intangible relationship value. These include the following
points: the level of tangibility versus intangibility of relationship resources;
issues of the time dependence of value realization; issues of the manifesta-
tion of value versus its drivers; and the way in which relationship value is
appropriated by the relationship parties.
The discussion first considers intangibility of value. Considered broadly,
market-based assets (Guilding & Pike, 1990; Srivastava et al., 1998, 2001)
fall into the category of intangible assets when considered from an
accounting point of view. However, the ‘‘tangible–intangible’’ classification
needs clarification. There are different levels of intangibility that describe
a relationship. At a more tangible level, the dollar value a relationship
provides helps describe that relationship; or at a less tangible level, the
assistance a relationship provides in giving information about downstream
markets is part of the description. Taking the conduit view of a relationship,
as this study does, the tangible aspects of the relationship’s value provision
include the flows of goods and money back and forth across it. The
intangible aspects include tacit and explicit knowledge (Nonaka, 1991) that
flows over time between the relationship partners.
Well-established techniques for the value to the seller of a customer or
segment such as ‘‘customer profitability analysis,’’ can assess the more
tangible part of the value of a relationship, in terms of more readily
identifiable and quantifiable cash flow streams, as noted earlier. The
identifiable cash flow streams are, for example, inflows such as revenue and
outflows such as product costs, salespeople’s’ direct costs, bonuses and
merchandizing costs, and direct warehousing and distribution costs.
The intangible part of the value cannot similarly be assessed in terms of
readily identifiable and quantifiable cash flow streams. But comprehensive
assessment of the value of relationships requires that the intangible and
human aspects (Varey, 2002) as well as the tangible aspects be assessed and
quantified as far as possible. This is particularly so given the increasing
emphasis on the intangible aspects of marketing activities (Vargo & Lusch,
2004). The value dimensions identified must therefore include in their
domains as much of the more intangible value as possible, which is the aim
of this research.
56 ROGER BAXTER
The issue of the time at which the value of an asset is realized in the form
of a cash flow, which is noted above, is closely related to the issue of
intangibility. On one hand, the capital flows from physical resources such as
buildings and machinery are fairly immediate and generally classified as
tangible. They can be relatively easily forecast into the future using the
discounted cash flow technique, which recognizes and accounts for the ‘‘time
value of money’’ in the discount rate. However, much of the future value
that may be realized from a market-based asset such as a buyer–seller
relationship or a brand is potential and strategic in nature and this is
especially true for the human aspects of value. Because the firm largely
realizes the cash flows from these substantially intangible resources in the
future (Srivastava et al., 1998; Srivastava, Shervani, & Fahey, 1999) they are
much more difficult to quantify. The ‘‘most intangible’’ resources such as
tacit know-how and personal relationships are realized entirely in the future
and are the most difficult to quantify. An attempt to quantify the intangible
part of the value of a resource, as in the case of this research, must account
for this issue.
As the focus of this study is on the assessment of the value in business
relationships from a management perspective and the strategic use of this
information for optimization of these assets, the concern is therefore with
value on a ‘‘value-in-use’’ or ‘‘going concern’’ basis (Barth & Landsman,
1995; Srivastava et al., 1998; Wilson & Jantrania, 1994), rather than on the
appraisal value at a time of sale or acquisition. Value in use, which is
of critical concern to the marketing discipline (Vargo & Lusch, 2004), is a
measure of the relative value of a resource in comparison with other
resources that are possible substitutes.
The distinction between sources or drivers of value and its manifestations
also needs to be clearly made for this study, as they are quite different issues.
This distinction is made by Srivastava et al. (2001) for market-based assets
in general and by Keller (1998) for brands as a more specific example. In the
Srivastava et al. discussion, relationships are seen as ‘‘relational market-
based assets’’ that have value, because they are integral to the creation of
customer value through such creation processes as product innovation
management, potentially resulting in financial performance outcomes for
the firm. Relationships thereby contribute to the firm’s shareholder value
and have major strategic significance. In the specific case of brand equity,
Keller discusses the measurement of its sources, such as awareness by
way of recall and recognition whereas he discusses as a distinct issue the
measurement of outcomes of brand equity in terms of the absolute dollar
Intangible Value in Buyer–Seller Relationships 57
The basis for, and meaning of, value provision through relationships
requires discussion to aid understanding of the model and measures
proposed later. Two conceptualizations of value provision by relationships
are viable. The first conceptualization is of a relationship as an entity in itself
that possesses value, which the partner firms can access. Madhavan, Koka,
and Prescott (1998) present the view that interfirm relationships ‘‘can be
considered to be resources in their own right.’’ In contrast, another view is
of a relationship as a nexus or conduit that allows resources to flow to
the partners rather than as a separate entity. Only a few researchers seem
to overtly recognize the distinction between these views. However the
distinction is discussed in the following paragraphs for clarity of the
development of reflective paths in the intangible relationship value model
tested in this study.
Classically, the resource-based view of the firm includes buyer–seller
relationships (Amit & Schoemaker, 1993, p. 36) among firm resources. This
classical resource-based view appears to regard relationships as entities with
value. In the transaction cost economics conceptualization of a relationship
as a hybrid governance form, with some of the characteristics of a firm
(Borys & Jemison, 1989), hybrids lie between markets, which are at one
end of a spectrum of governance forms, and hierarchies or firms, which
are at the other end. They have properties of both markets and firms.
This conceptualization appears again to regard a relationship as an entity
with some of the properties of a firm and hence as a resource or entity that
possesses value (Anderson, 1995; Wilson, 1995). The literature thus
establishes the concept of interfirm relationships as entities with value.
But Wilson (1995) builds further on the work of Borys and Jemison
(1989), and of Dwyer et al. (1987), to describe a process model for relation-
ship development with five stages, including one of value creation. This
paper by Wilson seems to take more of a conduit view of a relationship.
Wilson’s first three stages of relationship development, which are search and
selection, defining purpose, and boundary definition, have a strong focus on
developing the structure of the relationship. The fifth stage is where the
stability of the relationship is cemented in place by way of structural bonds,
cooperation and commitment that start to form in the fourth value creation
stage. Value creation in the fourth stage, which is the stage of interest to this
study, is ‘‘founded on the hybrid structure that has evolved from the earlier
stages’’ (Wilson, 1995). The establishment of mutual goals, the input of non-
retrievable investments and of relationship-specific adaptations to processes
Intangible Value in Buyer–Seller Relationships 59
processes that take place in the relationship, rather than the transactional
outcomes. This is the view that appears to best fit the relationship
marketing perspective. As Varey (2002, p. 73) has pointed out, a relational
approach logically perceives ‘‘the unit of analysis to be relational processes.’’
This study, in seeking to add to knowledge of the structure of intangible
buyer–seller relationship value and hence to improve the theoretical base for
the development of techniques to assess that value, takes the nexus or
conduit view of these relationships and proposes a model accordingly. The
application of the resource-based view to relationships (Morgan & Hunt,
1999) and its operationalization using a framework from the intellectual
literature by this study, adopts the provision process as the unit of analysis.
The study thus models the value of relationships in terms of how well
they facilitate the flow of resources from buyers to sellers and what the
resources are that flow, with the dimensions of relationship value seen as its
reflections. This modeling will be detailed in the model conceptualization
section.
Total value
Financial Intellectual
capital capital
Structural
Human capital
capital
Human capital
Competence
Human resources Attitude
Intellectual agility
Structural capital
Organizational
Informational Organization
Legal
Relational Relationships
Renewal and development
Competence
Human
Attitude Intangible
Value
Intellectual
Agility
Intangible Future
Relationship Financial
Value Performance
Relationships
Structural
Organization Intangible
Value
Renewal
and
Development
Fig. 2. Theoretical Model of Relationship Value. Source: Baxter and Matear (2004).
new training programs, and research and development. For this study, these
are resources in the planning stages, from which the seller gains benefit by
accessing them or their benefits from the buyer.
The value dimensions in the Fig. 2 model have reflective paths between
them. This expresses the conceptualization of the relationship as a conduit,
which provides the path through which the buyer can get access to the
seller’s resources. Thus, a good relationship is one which can provide good
resources from the buyer of the form represented as ‘‘structural intangible
value’’ in the model. A good relationship is also one through which the
buyer provides human resources, in the form of their boundary personnel,
who are good facilitators of the flow of resources to the seller. The construct
‘‘human intangible value’’ represents this aspect of the buyer’s resources
in the model. The level of usefulness of the resources that provide the
intangible relationship value results from the quality of the relationship.
The ‘‘causal’’ direction is therefore reflective, from intangible relationship
value to the set of proposed dimensions.
In assessing the path directions, the criteria of Law, Wong, and Mobley
(1998) are applied, as an addition to the conceptual arguments provided
earlier in the paper titled ‘‘Value Provision by Relationships.’’ The criteria of
the taxonomy proposed by Law et al. depend on whether or not the sub-
dimensions of a multidimensional construct exist at the same level as the
dimension itself. For example, considering the structural intangible value
second-order dimension, its three first-order dimensions are all aspects of the
structural value, but they are quite different from one another for the reasons
that follow, so they fit the Law et al. criteria for reflective paths. The domain
of the dimension named as ‘‘relationships’’ comprises relationships that are
external to the buying firm. The other two dimensions are both internal to
the buying firm, but are also distinct from one another. The ‘‘organization’’
domain comprises developed resources, whereas the ‘‘renewal and develop-
ment’’ domain comprises resources that are still in development. Considera-
tion of the other paths between value constructs in the model similarly shows
that they fit the Law et al. criteria for reflective paths.
In this study a ‘‘future financial performance’’ outcome has been included
in the model, to assess nomological validity of the proposed intangible
relationship value construct. In presenting their ‘‘Framework for analysis of
market-based resources,’’ Srivastava et al. (2001), note that investments in
68 ROGER BAXTER
Competence 0.75
Please think about your chosen customer’s personnel whom you
encounter in the relationship. Using the scales at the right,
how would you rate their competency on the following aspects
in their work with your firm?
Technical skills including IT skills 0.57
Professional skills 0.65
Practical know-how in the work they do with you 0.53
Personal relationship skills
Knowledge that they apply to the work they do with you
Training which is specifically applicable to the work they do with
you
Attitude 0.87
Now thinking about the attitude of your chosen customer’s
personnel whom you encounter in the relationship, to what
extent do you disagree or agree with the following statements
about them?
They demonstrate a strong commitment to their relationship 0.73
with your firm
They show enthusiasm for their work with you 0.74
They share their ideas with you 0.74
They are ethical in their dealings with you 0.68
They are fun to work with
They are difficult to please
They show vision in their work with you
They create a dynamic environment in their work with you
They are professional in their dealings with you
They are highly motivated to reach goals that are set in their work
with you
They show strong leadership in their work with you
Intellectual agility 0.90
And how would you rate your chosen customer’s personnel in
their work with you in terms of the following statements?
They are innovative in their approach 0.73
They can adapt ideas from one situation to another 0.82
They can adapt products/services to new situations 0.82
They can successfully imitate existing concepts/products 0.73
They are not receptive to new ideas
They can create new products/services
70 ROGER BAXTER
Table 3. (Continued )
Scale Dimensions and Items Cronbach Item-Total
Alpha Correlation
Relationships 0.84
To what extent does your relationship with your chosen
customer allow you to utilize the relationships your customer
has with the following?
Members of a product or service user group to which your 0.65
customer belongs
Your customer’s alliance or joint venture partners 0.62
Key opinion leaders in your customer’s field 0.71
Business networks or other networks to which your customer 0.74
belongs
Your customer’s network of contacts, including their customers
and suppliers
Members of a buying group to which your customer belongs
Other business units within your customer’s organization
Your customer’s research and development partners
Organization 0.78
To what extent does your relationship with your chosen
customer allow you to gain benefits from the following in their
organization?
Their intellectual property, including patents, trademarks, and 0.61
copyrights
Their brands 0.66
Their information in databases and other documentation 0.59
Their internal networks
Their processes and systems
Renewal and development 0.81
To what extent does your relationship with your chosen
customer assist you in preparing for the future by helping with
the following?
By helping to develop training programs 0.56
By reporting and forecasting the trends in their markets 0.57
By helping to develop new systems, including IT systems 0.65
By helping to develop new networks or strategic partnerships 0.72
By helping with research and development work (e.g., on products
and processes)
By helping with the restructuring that is needed to prepare for the
future
The items used for the six value dimensions are all reflective indicators. As
the literature expresses concern about the misspecification of indicators in
marketing research, the paper now discusses this reflective operationaliza-
tion, using a set of decision rules that Jarvis, Mackenzie, Podsakoff,
Mick, and Bearden (2003) note. Table 4 provides these rules, together with
the decisions made for this study’s value indicators. As Table 4 shows, the
decisions based on the Jarvis et al. rules suggest that the correct specification
for the indicators is reflective.
The paper now discusses the basis for the decisions in Table 4. As noted
earlier, a relationship is conceptualized in this study as a conduit for value,
so the relationship’s value arises from the ability to make resources in the
buyer (structural intangible value) available, and from the facilitation of
the flow of resources from the buyer to the seller (human intangible value).
The discussion applies the decision rules in Table 4 to the ‘‘organization’’
value dimension, which is one of the dimensions of structural intangible
value, as one example. The individual items for ‘‘organization’’ in the
1. Direction of causality
Are the indicators (items) (a) defining characteristics or (b) Reflective
(b) manifestations of the construct?
Would changes in the indicators/items cause changes in No Reflective
the construct or not?
Would changes in the construct cause changes in the Yes Reflective
indicators?
5.3. Analysis
5–9 9
10–19 16
20–49 32
50–99 19
100–199 9
200–499 11
500–999 3
1000 or more 1
Intangible Value in Buyer–Seller Relationships 77
First-order model 286.5 194 0.00 1.48 0.04 0.04 0.97 0.93
Second-order model 297.3 202 0.00 1.47 0.04 0.04 0.97 0.93
1 Competence
2 Attitude 0.50
3 Agility 0.49 0.61
4 Relationships 0.18 0.25 0.17
5 Organization 0.18 0.27 0.21 0.47
6 Renewal and development 0.25 0.30 0.18 0.55 0.61
7 Human intangible value 0.75 0.87 0.86 0.24 0.27 0.29
8 Structural intangible value 0.25 0.33 0.22 0.83 0.79 0.87 0.32
9 Relationship intangible value 0.56 0.68 0.60 0.72 0.70 0.77 0.74 0.87
Notes: Correlations are between the summed scales of the constructs; minimum significance of
correlation is 0.002 (2-tailed): most are at 0.000.
78 ROGER BAXTER
proposed model shown in Fig. 2 and that the correlation patterns show that
the constructs in the model have convergent and discriminant validity. The
competence, attitude, and intellectual agility constructs correlate very well
with the human intangible value construct at 0.75, 0.87, and 0.86. They
correlate well with one another at 0.50, 0.49, and 0.61, but not so well that
they are not distinct, and they correlate much less well with the relationship,
organization, and renewal and development constructs. The relationship,
organization, and renewal and development constructs similarly correlate
well with one another, very well with the structural intangible value
construct and much less well with the competence, attitude, and intellectual
agility constructs. At a higher level in the model, the human and structural
intangible value constructs correlate only moderately with one another
at 0.32, suggesting discriminant validity, and very well with the relationship
intangible value construct at 0.74 and 0.87, respectively, suggesting
convergent validity.
Estimation of measurement and structural models more rigorously
assessed validity of the value constructs in the analysis. A second-order
measurement model assessed convergent and discriminant validity of the
first-order value constructs and discriminant validity of the second-order
value constructs modeled in Fig. 2.
For the first step in the validity assessment process, Table 9 shows the
information for judgment of convergent validity of the first-order value
dimensions. The first three columns indicate the paths in the measurement
model corresponding to the paths on the left of Fig. 2. The next columns
show the regression coefficient and its standard error for each of these paths.
The critical ratio that follows these is the ratio of the regression coefficient
Notes: ‘‘Regression Coefficient Estimate’’ of 1.00 indicates that this path was fixed at 1.
Indicates the probability of occurrence of the critical ratio is less than 0.001.
Intangible Value in Buyer–Seller Relationships 79
to the standard error. The ‘‘p-value’’ then gives the probability of such a
‘‘critical ratio’’ occurring. The last column provides the correlation between
the constructs as calculated in the SPSS package. The information in Table 9
shows that the regression coefficients for the paths from the second-order
constructs to the first-order constructs are all well in excess of double the
standard error, as recommended by Anderson and Gerbing (1988), they
are all significant at po0.001, and they correlate at greater than 0.5 with the
second-order constructs. These are good indications of convergent validity
of the first-order constructs.
The structural model, described later, provides the information for
judgment of convergent validity of the second-order constructs of the
model. In the structural model, significant paths between these pairs of
constructs shows their convergence: first, the second order human value
construct on the intangible relationship value construct and second, the
structural value construct on the intangible relationship value construct.
Table 11 shows the regression coefficients for these paths, which were both
significant at po0.001. In addition, the correlation is 0.74 between the
summed human intangible value scales and the summed intangible
relationship value scales and is 0.87 between the summed structural
intangible value scales and the summed intangible relationship value scales.
These correlations are both well above the suggested 0.50 minimum, further
strengthening support for convergence.
Bootstrapping in Amos assessed discriminant validity. Two hundred
replications calculated the correlations between the constructs as in Table 10.
The last two columns of Table 10 show the mean plus and minus two
standard errors for each pair of constructs, at both the lower and upper
levels of the value model. None of these value ranges overlaps the value of 1,
supporting discriminant validity of the constructs in the model (Anderson &
Gerbing, 1988) at both first- and second-order levels. The paragraphs
above show that both convergent and discriminant validity throughout the
proposed intangible relationship value model illustrated in Fig. 2 are well
supported and in turn provide support for the proposed model.
The study used a confirmatory factor analysis, which had good fit
statistics, to purify the scale for the future financial performance construct in
Fig. 2. The purified scale, after dropping one indicator to leave three, had
a Cronbach alpha of 0.81 and sound item-total correlations, as shown in
Table 5. Estimation of the Fig. 2 structural model in Amos resulted in good
fit statistics, as follows: CMIN, 398; degrees of freedom, 266; CMIN/Df, 1.50;
SRMR, 0.05; RMSEA, 0.04; TLI, 0.96; and GFI, 0.91. Paths in the
structural model were estimated as in Table 11 and are all significant at
80 ROGER BAXTER
6. DISCUSSION
Based on the synthesis from the intellectual capital literature, the study
proposes six dimensions of intangible relationship value. Three of these
dimensions, namely the competence, attitude, and intellectual agility of the
buyer’s boundary personnel, are reflections of a second-order dimension,
human intangible relationship value. The three other dimensions, namely
the relationships, organization, and renewal and development resources of
the buyer, are reflections of another second-order dimension, structural
intangible relationship value. The study in turn models the human and
structural intangible relationship value dimensions as reflections of a third-
order dimension, intangible relationship value. The analysis of the survey
data collected in the study supports the conceptualization and indicates that
the dimensions have good psychometric properties. The respondents, who
82 ROGER BAXTER
The study that this paper describes has raised and shed some light on several
issues. This section discusses these issues, which are: the issue of whether
86 ROGER BAXTER
relationships are conduits for resources or are resources in their own right;
the management of resources in and through relationships; the contribution
to the intellectual capital literature; the creation of relationship value versus
its manifestation; and time and tangibility issues.
With respect to the first of these issues, two views of relationships are
possible. One view is of the relationship as just a conduit for resources,
whereas the other is of the relationship as an entity in its own right, with
the ability to create and maintain value of its own. This study adopts the
conduit view to clarify its conceptualization and tested that conceptualiza-
tion, but an argument for taking the entity view is viable, as noted earlier in
the paper. This entity versus conduit issue is a broader concern than just
that of buyer–seller relationships. Perhaps a range of value perspectives can
apply to governance forms so that in more structured relationships, such as
alliances and joint ventures, the entity model is more appropriate, whereas
in the less structured relationships, such as buyer–seller relationships,
the conduit model is more appropriate. But even within the confines of
buyer–seller relationships, interesting research can be done, taking the entity
view, on how much value a relationship creates ‘‘inside’’ itself versus how
much the relationship simply transmits value in the way that the conduit
view assumes. And if substantial value creation takes place within the
relationship, how can we identify the processes by which creation occurs?
Madhavan et al. (1998) note that relationships between firms ‘‘represent
significant flows of knowledge and other resources that are crucial to
industry leadership.’’ This study contributes to the literature by conceptua-
lizing and testing a structure that models the way in which knowledge of
buyers is gained through a ‘‘good’’ relationship with a seller. This contribu-
tion to the literature is important because the management of knowledge
is critical to firm success and ‘‘knowledge is the fundamental source of
competitive advantage’’ (Vargo & Lusch, 2004). The study illustrates the
way that firms develop competitive advantage by capability-building and
resource-combining activities between them (Sanchez & Heene, 1997), such
as by use of information in the databases and the other documentation of
a partner. This has significance well beyond buyer–seller relationships.
The conceptualization of intangible relationship value developed and
tested in this study, and the dimensions of value the conceptualization
incorporates, derives from Morgan and Hunt’s (1999) categorization of the
resources a firm can gain through a relationship, which was in turn based on
the resource-based view of the firm. The testing of, and support for, a model
that is based on Morgan and Hunt’s categorizations therefore support
a resource-based view of the exchange that occurs through a relationship.
Intangible Value in Buyer–Seller Relationships 87
This study shows a very clear link between the flow of intangible resources
through a relationship and the performance of the relationship, so the study
gives a clear signal that these resources need to be managed carefully for
optimum firm performance. The study provides a set of dimensions that,
with further validation, can contribute toward building relationship
assessment tools as the basis for judging how to effectively manage a
relationship portfolio, because those dimensions are the ones that will
indicate the future relationship performance. Though the detail of the
88 ROGER BAXTER
This section discusses the limitations of, and avenues for future research
arising from this study. First, research needs to further establish the validity
of the scales used in the study and to assess their more generalized use.
Churchill (1979) and Flynn and Pearcy (2001) note that at least two studies
are required to develop a scale, so at least one close replication is required.
Preferably, different researchers require several replications (Nunnally &
Bernstein, 1994), initially with closely similar replications. Generalization
beyond a sample frame of New Zealand manufacturers requires testing in
Intangible Value in Buyer–Seller Relationships 89
have quite different perceptions of the value of the relationship so the links
between the two parties can be explored. Study of the possible differences in
the way value is provided by buyer–seller relationships, as distinct from the
more closely bound forms of relationship such as joint ventures, will
also provide theoretical insight of considerable value. Do relationships
that have more formal and/or closely bound structures than buyer–seller
relationships, such as alliances and joint ventures, manifest value
differently? This could shed more light on the issue of the conduit-versus-
entity conceptualization of relationships. The issue of how buyer–seller
relationships create value internally, rather than simply transmitting as
investigated in this study, is an interesting one that is closely related to the
entity-versus-conduit issue. These issues also relate to the interesting
questions that arise about how assets flow within and between organizations
(Dierickx & Cool, 1989), which probably require longitudinal study.
Investigation of these points will provide important information for
researchers and managers.
The paper earlier raises the question of whether and when reflective or
formative models are appropriate. This issue of model specification seems to
relate closely to the alternative conceptualizations of the value constructs
as either drivers of value creation or as dimensions of value manifestation.
Ulaga and Eggert (2006b) make a strong argument for specification as a
formative model, but their argument is for a set of drivers of relationship
value, rather than for a set of dimensions of manifestations of value. In their
case, the formative specification is therefore valid, but is not valid for
manifestations. This issue of specification needs clearer establishment in the
literature by further conceptual development and empirical testing.
The performance aspect of the study also raises some interesting issues.
How can this framework help understanding of the way in which the
performance of a relationship or a portfolio of relationships, in terms of
their intangible assets, link to the overall performance of the functions of a
firm such as sales, marketing and operations, and in turn to the performance
of the firm as a whole? If, in this study, the intangible relationship value
explains 29% of the variance of the relationship’s future financial
performance, what are the factors that determine the other 71%? These
factors will include those such as past financial performance, and clearer
establishment of how the factors work together will be interesting.
Another interesting issue concerning the path from intangible relationship
value to future financial performance, which shows this conversion
between the current value and its future realization, is what factors might
affect the effectiveness of this conversion. Testing the effect of relationship
Intangible Value in Buyer–Seller Relationships 91
REFERENCES
Ambler, T., & Styles, C. (1998). The future development of relationship marketing: Constructs
and conduits. Centre for Marketing Working Paper No. 99-903. London Business
School, London.
Ambler, T., & Styles, C. (2000). The future of relational research in international marketing:
Constructs and conduits. International Marketing Review, 17(6), 492–508.
Amit, R., & Schoemaker, P. J. H. (1993). Strategic assets and organizational rent. Strategic
Management Journal, 14(1), 33–46.
Anderson, J. C. (1995). Relationships in business markets: Exchange episodes, value creation,
and their empirical assessment. Journal of the Academy of Marketing Science, 23(4),
346–350.
Anderson, J. C., & Gerbing, D. W. (1988). Structural equation modeling in practice: A review
and recommended two-step approach. Psychological Bulletin, 103(3), 411–423.
Anderson, J. C., & Narus, J. A. (1990). A model of distributor firm and manufacturer firm
working partnerships. Journal of Marketing, 54(January), 42–58.
Armstrong, J. S., & Overton, T. S. (1977). Estimating nonresponse bias in mail surveys. Journal
of Marketing Research, XIV(August), 396–402.
Arndt, J. (1979). Toward a concept of domesticated markets. Journal of Marketing, 43(4),
69–75.
Arndt, J. (1983). The political economy paradigm: Foundation for theory building in
marketing. Journal of Marketing, 47(4), 44–54.
Axelsson, B., & Easton, G. (Eds). (1992). Industrial networks-a new view of reality. London:
Routledge.
Baker, G., Gibbons, R., & Murphy, K. J. (2002). Relational contracts and the theory of the
firm. Quarterly Journal of Economics, 117(1), 39–84.
Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of
Management, 17(1), 99–120.
Barney, J. B. (2002). Gaining and sustaining competitive advantage (2nd ed.). Upper Saddle
River, NJ: Prentice Hall.
92 ROGER BAXTER
Barney, J. B., & Arikan, A. M. (2001). The resource-based view: Origins and implications.
In: M. A. Hitt, R. E. Freeman & J. S. Harrison (Eds), The blackwell handbook of
strategic management (1st ed., pp. 124–188). Oxford: Blackwell Publishers Ltd.
Barth, M. E., & Landsman, W. R. (1995). Fundamental issues related to using fair value
accounting for financial reporting. Accounting Horizons, 9(4), 97–107.
Barwise, P., Marsh, P. R., & Wensley, R. (1989). Must finance and strategy clash? Harvard
Business Review, 67(September/October), 85–90.
Baxter, R., & Matear, S. (2004). Measuring intangible value in business to business buyer–seller
relationships: An intellectual capital perspective. Industrial Marketing Management,
33(6), 491–500.
Bellis-Jones, R. (1989). Customer profitability analysis. Management Accounting, 67(2), 26–28.
Blankenburg Holm, D., Eriksson, K., & Johanson, J. (1999). Creating value through mutual
commitment to business network relationships. Strategic Management Journal, 20(5),
467–486.
Blau, P. M. (1964). Exchange and power in social life. New York: Wiley.
Boisot, M. (1995). Information space. London: Routledge.
Bolton, R. N., & Drew, J. H. (1991). A multistage model of customers’ assessments of service
quality and value. Journal of Consumer Research, 17(4), 375–384.
Bontis, N. (1998). Intellectual capital: An exploratory study that develops measures and models.
Management Decision, 36(2), 63–76.
Bontis, N., Chua, W. C. K., & Richardson, S. (2000). Intellectual capital and business
performance in Malaysian industries. Journal of Intellectual Capital, 1(1), 85–100.
Booth, R. (1998). The measurement of intellectual capital. Management Accounting, 76(10), 26–28.
Borys, B., & Jemison, D. B. (1989). Hybrid arrangements as strategic alliances: Theoretical
issues in organizational combinations. Academy of Management Review, 14(February),
234–249.
Brealey, R. A., & Myers, S. C. (1988). Principles of corporate finance (3rd ed.). New York:
McGraw-Hill Book Company.
Bromiley, P., & Fleming, L. (2002). The resource based view of strategy: A behaviorist critique.
In: M. Augier & J. G. March (Eds), The economics of choice, change, and organization:
Essays in memory of Richard M. Cyert. Cheltenham: Edward Elgar.
Brooking, A. (1997). Intellectual capital: Core asset for the third millennium enterprise. Boston,
MA: International Thomson Business Press.
Buckley, P. J., & Chapman, M. (1997). The perception and measurement of transaction costs.
Cambridge Journal of Economics, 21(2), 127–145.
Churchill, G. A., Jr. (1979). A paradigm for developing better measures of marketing
constructs. Journal of Marketing Research, XVI(February), 64–73.
Coase, R. H. (1937). The nature of the firm. Economica, 4(November), 386–485.
Conner, K. (1991). A historical comparison of resource-based theory and five schools of
thought within industrial-organization economics: Do we have a new theory of the firm?
Journal of Management, 17(March), 121–154.
Conner, K., & Prahalad, C. K. (1995). A resource-based theory of the firm: Knowledge versus
opportunism. Paper presented at the Third International Workshop on Competence-
based Competition, Ghent.
Contractor, F. J. (2001). Intangible assets and principles for their valuation. In: F. J. Contractor
(Ed.), Valuation of intangible assets in global operations (1st ed., pp. 3–24). Westport, CT:
Quorum Books.
Intangible Value in Buyer–Seller Relationships 93
Cooper, M. C., Gardner, J. T., & Pullins, E. B. (1997). A benchmark bibliographic approach to
identifying the state of theory development in relationship marketing. Paper presented at
the American Marketing Association, Dublin, Ireland.
Cravens, D. W. (1998). Implementation strategies in the market-driven strategy era. Journal of
the Academy of Marketing Science, 26(3), 237–241.
Curran, P. J., West, S. G., & Finch, J. F. (1996). The robustness of test statistics to
nonnormality and specification error in confirmatory factor analysis. Psychological
Methods, 1(1), 16–29.
Das, T. K., & Teng, B.-S. (2000). A resource-based theory of strategic alliances. Journal of
Management, 26(1), 31–61.
Day, G. S. (1994). The capabilities of market-driven organisations. Journal of Marketing,
58(October), 37–52.
Day, G. S., & Montgomery, D. B. (1999). Charting new directions for marketing. Journal of
Marketing, 63(Special Issue), 3–13.
Dess, G. G., & Robinson, R. B., Jr. (1984). Measuring organizational performance in the
absence of objective measures: The case of the privately-held firm and conglomerate
business unit. Strategic Management Journal, 5, 265–273.
Dickson, P. R. (1992). Toward a general theory of competitive rationality. Journal of
Marketing, 56(January), 69–83.
Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive
advantage. Management Science, 35(December), 1504–1511.
Dillman, D. A. (1978). Mail and telephone surveys: The total design method. New York: Wiley.
Donaldson, B., & O’Toole, T. (2002). Strategic market relationships: From strategy to
implementation (1st ed.). Chichester: Wiley.
Dore, R. (1983). Goodwill and the spirit of market capitalism. The British Journal of Sociology,
34(4), 459–482.
Doyle, P. (1995). Marketing in the new millennium. European Journal of Marketing, 29(13),
23–41.
Doyle, P. (2000). Valuing marketing’s contribution. European Management Journal, 18(3),
233–245.
Dwyer, F. R., Schurr, P. H., & Oh, S. (1987). Developing buyer–seller relationships. Journal of
Marketing, 51(April), 11–27.
Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and sources
of interorganizational competitive advantage. Academy of Management Review, 23(4),
660–679.
Easton, G., & Araujo, L. (1986). Networks, bonding and relationships in industrial markets.
Industrial Marketing and Purchasing, 1(1), 8–25.
Edvinsson, L., & Malone, M. S. (1997). Intellectual capital: Realizing your company’s true value
by finding its hidden brainpower. New York: HarperBusiness.
Edvinsson, L., & Sullivan, P. (1996). Developing a model for managing intellectual capital.
European Management Journal, 14(4), 356–364.
Ehling, W. P. (1992). Estimating the value of public relations and communication to
an organization. In: J. E. Grunig, D. M. Dozier, W. P. Ehling, L. A. Grunig,
F. C. Repper & J. White (Eds), Excellence in public relations and communication
management (pp. 617–638). New Jersey: Lawrence Erlbaum Associates, Inc.
Eisenhardt, K. (1989). Agency theory: An assessment and review. Academy of Management
Review, 14(1), 57–74.
94 ROGER BAXTER
Flynn, L. R., & Pearcy, D. (2001). Four subtle sins in scale development: Some suggestions
for strengthening the current paradigm. International Journal of Market Research, 43(4),
409–423.
Ford, D. (1990). Understanding business markets: Interaction, relationships and networks.
London: Academic Press.
Ford, D., Hakansson, H., & Johanson, J. (1986). How do companies interact? Industrial
Marketing and Purchasing, 1(1), 26–41.
Ford, D., McDowell, R., & Tomkins, C. (1996). Relationship strategy, investments, and
decision making. In: D. Iacobucci (Ed.), Networks in marketing. Thousand Oaks, CA:
Sage Publications, Inc.
Fox, C. M., Robinson, K. L., & Boardley, D. (1998). Cost-effectiveness of follow-up strategies
in improving the response rate of mail surveys. Industrial Marketing Management, 27(2),
127–133.
Gattorna, J. L., & Walters, D. W. (1996). Managing the supply chain: A strategic perspective.
London: MacMillan.
Gronroos, C. (1994). From marketing mix to relationship marketing: Towards a paradigm shift
in marketing. Management Decision, 32(2), 4–20.
Gronroos, C. (1996). Relationship marketing logic. Asia-Australia Marketing Journal, 4(1), 7–18.
Guilding, C., & Pike, R. (1990). Intangible marketing assets: A managerial accounting
perspective. Accounting and Business Research, 21(81), 41–49.
Gulati, R., Nohria, N., & Zaheer, A. (2000). Strategic networks. Strategic Management Journal,
21, 203–215.
Gummesson, E. (1998). Implementation requires a relationship marketing paradigm. Journal of
the Academy of Marketing Science, 26(3), 242–249.
Gupta, S., Lehmann, D. R., & Stuart, J. A. (2004). Valuing customers. Journal of Marketing
Research, 41(1), 7–18.
Hair, J. F., Jr., Anderson, R. E., Tatham, R. L., & Black, W. C. (1998). Multivariate data
analysis (5th ed.). Upper Saddle River, NJ: Prentice Hall.
Hakansson, H. (Ed.) (1982). International marketing and purchasing of industrial goods: An
interaction approach. Chichester: Wiley.
Hakansson, H., & Snehota, I. (1982). Developing relationships in business markets. London:
Routledge.
Hakansson, H., & Snehota, I. (Eds). (1995). Developing relationships in business networks.
London: Routledge.
Hamel, G., & Prahalad, C. K. (1994). Competing for the future. Boston, MA: Harvard
University Press.
Hansen, M. H., Perry, L. T., & Reese, C. S. (2004). A Bayesian operationalization of the
resource-based view. Strategic Management Journal, 25(13), 1279–1295.
Harker, M. J. (1999). Relationship marketing defined? An examination of current relationship
marketing definitions. Marketing Intelligence and Planning, 17(1), 13–20.
Hausman, A. (2001). Variations in relationship strength and its impact on performance and
satisfaction in business relationships. Journal of Business and Industrial Marketing, 16(7),
600–616.
Heide, J. B. (1994). Interorganizational governance in marketing channels. Journal of
Marketing, 58(January), 71–85.
Hogan, J. E. (1998). Assessing relationship value in business markets. Unpublished Ph.D.,
The University of North Carolina at Chapel Hill, Chapel Hill.
Intangible Value in Buyer–Seller Relationships 95
Hoopes, D. G., Madsen, T. L., & Walker, G. (Eds). (2003). Guest editors’ introduction to the
special issue: Why is there a resource-based view? Toward a theory of competitive
heterogeneity. Strategic Management Journal, 24(10), 889.
Hoskisson, R. E., Wan, W. P., Yiu, D., & Hitt, M. A. (1999). Theory and research in strategic
management: Swings of a pendulum. Journal of Management, 25(3), 417–456.
Howell, R. A., & Soucy, S. R. (1990). Customer profitability: As critical as product profitability.
Management Accounting (US), 72(4), 43–47.
Hunt, S. D. (1997). Competing through relationships: Grounding relationship marketing in
resource-advantage theory. Journal of Marketing Management, 13, 431–445.
Hunt, S. D., & Morgan, R. M. (1995). The comparative advantage theory of competition.
Journal of Marketing, 59(2), 1–15.
Hunt, S. D., & Morgan, R. M. (1996). The resource-advantage theory of competition:
Dynamics, path dependencies, and evolutionary dimensions. Journal of Marketing,
60(October), 107–114.
Jarvis, C. B., Mackenzie, S. B., Podsakoff, P. M., Mick, D. G., & Bearden, W. O. (2003).
A critical review of construct indicators and measurement model misspecification
in marketing and consumer research. Journal of Consumer Research, 30, 199–218.
Jaworski, B. J., & Kohli, A. K. (1993). Market orientation: Antecedents and consequences.
Journal of Marketing, 57(July), 53–70.
Kaplan, R. S., & Norton, D. P. (1992). The balanced scorecard-measures that drive
performance. Harvard Business Review, 70(1), 71–79.
Keiningham, T. L., Rust, R. T., & Weems, M. M. (1994). The bottom line on quality. Financial
Executive, 10(5), 50.
Keller, K. L. (1998). Strategic brand management: Building, measuring and managing brand
equity. New Jersey: Prentice-Hall.
Kelley, H. H., & Thibaut, J. W. (1978). Interpersonal relations: A theory of interdependence.
New York: Wiley.
Kumar, V., Ramani, G., & Bohling, T. (2004). Customer lifetime value approaches and best
practice applications. Journal of Interactive Marketing, 18(3), 60–72.
Lambe, C. J., Spekman, R. E., & Hunt, S. D. (2002). Alliance competence, resources, and
alliance success: Conceptualization, measurement, and initial test. Journal of the
Academy of Marketing Science, 30(2), 141–158.
Lapierre, J. (2000). Customer-perceived value in industrial contexts. The Journal of Business &
Industrial Marketing, 15(2/3), 122.
Law, K. S., Wong, C.-S., & Mobley, W. H. (1998). Toward a taxonomy of multidimensional
constructions. Academy of Management Review, 23(4), 741–755.
Lee, C., Lee, K., & Pennings, J. M. (2001). Internal capabilities, external networks, and
performance: A study on technology-based ventures. Strategic Management Journal,
22(6/7), 615–640.
Lehtinen, U. (1996). Our present state of ignorance in relationship marketing. Asia-Australia
Marketing Journal, 4(1), 43–51.
Macneil, I. R. (1980). The new social contract. New Haven, CT: Yale University Press.
Madhavan, R., Koka, B. R., & Prescott, J. E. (1998). Networks in transition: How industry
events (Re)shape interfirm relationships. Strategic Management Journal, 19, 439–459.
Mandjak, T., & Durrieu, F. (2000). Understanding the non-economic value of business
relationships. Paper presented at the 16th IMP Conference, Bath, England. http://
www.bath.ac.uk/imp/tracke.htm
96 ROGER BAXTER
Metcalf, L. E., Frear, C. R., & Krishnan, R. (1992). Buyer–seller relationships: An application
of the IMP interaction model. European Journal of Marketing, 26(2), 27–46.
Moller, K., & Halinen, A. (2000). Relationship marketing theory: Its roots and direction.
Journal of Marketing Management, 16(1–3), 29–54.
Moller, K., & Wilson, D. T. (1995). Business relationships – An interaction perspective.
In: K. Moller & D. T. Wilson (Eds), Business marketing: An interaction and network
perspective (pp. 23–52). Boston, MA: Kluwer.
Morgan, R. M., & Hunt, S. D. (1994). The commitment-trust theory of relationship marketing.
Journal of Marketing, 58(July), 20–38.
Morgan, R. M., & Hunt, S. D. (1999). Relationship-based competitive advantage: The role of
relationship marketing in marketing strategy. Journal of Business Research, 46, 281–290.
Nelson, R. R., & Winter, S. G. (1982). An evolutionary theory of economic change. Cambridge,
MA: Harvard University Press.
Nonaka, I. (1991). The knowledge-creating company. Harvard Business Review, 69(November–
December), 96–104.
Nonaka, I., & Takeuchi, H. (1995). The knowledge-creating company. New York: Oxford
University Press.
Nunnally, J. C., & Bernstein, I. H. (1994). Psychometric theory (3rd ed.). New York: McGraw-Hill.
O’Guin, M. C. (1991). The complete guide to activity based costing. New Jersey: Prentice-Hall.
Parasuraman, A. (1997). Reflections on gaining competitive advantage through customer value.
Journal of the Academy of Marketing Science, 25(2), 154–161.
Payne, A., Holt, S., & Frow, P. (2000). Integrating employee, customer and shareholder value
through an enterprise performance model: An opportunity for financial services.
International Journal of Bank Marketing, 18(6), 258–273.
Penrose, E. T. (1959). The theory of the growth of the firm. Oxford: Basil Blackwell.
Peppard, J., & Rylander, A. (2001). Using an intellectual capital perspective to design and
implement a growth strategy: The case of APiON. European Management Journal, 19(5),
510–525.
Pfeffer, J., & Salancik, G. (1978). The external control of organisations: A resource dependence
perspective. New York: Harper and Row.
Piercy, N. F. (1998). Marketing implementation: The implications of marketing paradigm
weakness for the strategy execution process. Journal of the Academy of Marketing
Science, 26(3), 222–236.
Prahalad, C. K., & Hamel, G. (1990). The core competence of the corporation. Harvard
Business Review, 68(May/June), 79–91.
Roos, G., & Roos, J. (1997). Measuring your company’s intellectual performance. Long Range
Planning, 30(3), 413–429.
Roos, J., Roos, G., Dragonetti, N. C., & Edvinsson, L. (1997). Intellectual capital: Navigating
the new business landscape. London: Macmillan.
Rowe, W. G., & Morrow, J. L. J. (1999). A note on the dimensionality of the firm financial
performance construct using accounting, market, and subjective measures. Canadian
Journal of Administrative Sciences, 16(1), 58–70.
Rust, R. T., Zahorik, A. J., & Keiningham, T. L. (1995). Return on quality (ROQ): Making
service quality financially accountable. Journal of Marketing, 59(2), 58.
Ryssel, R., Ritter, T., & Gemünden, H. G. (2004). The impact of information technology
deployment on trust, commitment and value creation in business relationships.
The Journal of Business & Industrial Marketing, 19(3), 197.
Intangible Value in Buyer–Seller Relationships 97
Sanchez, R., & Heene, A. (1997). Reinventing strategic management: New theory and
practice for competence-based competition. European Management Journal, 15(3),
303–317.
Sanchez, R., Heene, A., & Thomas, H. (1996). Introduction: Towards the theory and practice of
competence-based competition. In: R. Sanchez, A. Heene & H. Thomas (Eds), Dynamics
of competence-based competition: Theory and practice in the new strategic management
(1st ed., pp. 1–35). Oxford: Elsevier Science Ltd.
Slater, S. F. (1997). Developing a customer value-based theory of the firm. Journal of the
Academy of Marketing Science, 25(2), 162–167.
Slater, S. F., & Narver, J. C. (1995). Market orientation and the learning organization. Journal
of Marketing, 59(July), 63–74.
Smith, M. (1993). Customer profitability analysis revisited. Management Accounting, 71(9), 26.
Spencer, R., Wilkinson, I., & Young, L. (1996). A cross-country comparative study of the
nature and function of interfirm relations in domestic and international industrial
markets. 1996 International Conference on Relationship Marketing, Humboldt-
Universitat zu Berlin.
Srivastava, R. K., Fahey, L., & Christensen, H. K. (2001). The resource-based view and
marketing: The role of market-based assets in gaining competitive advantage. Journal of
Management, 27(6), 777–802.
Srivastava, R. K., Shervani, T. A., & Fahey, L. (1998). Market-based assets and shareholder
value: A framework for analysis. Journal of Marketing, 62(1), 2–18.
Srivastava, R. K., Shervani, T. A., & Fahey, L. (1999). Marketing, business processes and
shareholder value: An organizationally embedded view of marketing activities and the
discipline of marketing. Journal of Marketing, 63(Special Issue), 168–179.
Stern, L. W., & Reve, T. (1980). Distribution channels as political economies: A framework
for comparative analysis. Journal of Marketing, 44(Summer), 52–64.
Stewart, T. A. (1997). Intellectual capital: The new wealth of nations. New York: Doubleday.
Sullivan, P. H. (1998). Profiting from intellectual capital: Extracting value from innovation.
New York: Wiley.
Sveiby, K. E. (1997). The new organizational wealth: Managing and measuring knowledge-based
assets. San Francisco, CA: Berrett-Koehler Publishers.
Thibaut, J. W., & Kelley, H. H. (1959). The social psychology of groups. New York: Wiley.
Turney, P. B. B. (1996). Activity based costing: The performance breakthrough. London: Kogan
Page.
Ulaga, W. (2003). Capturing value creation in business relationships: A customer perspective.
Industrial Marketing Management, 32(8), 677–693.
Ulaga, W., & Chacour, S. (2001). Measuring customer-perceived value in business markets:
A prerequisite for marketing strategy development and implementation. Industrial
Marketing Management, 30(6), 525–540.
Ulaga, W., & Eggert, A. (2003). Relationship value in business markets: Development of a
measurement scale. ISBM Report 2-2003, Institute for the Study of Business Markets,
The Pennsylvania State University.
Ulaga, W., & Eggert, A. (2006a). Relationship value and relationship quality: Broadening
the nomological network of business-to-business relationships. European Journal of
Marketing, 40(3/4), 311–327.
Ulaga, W., & Eggert, A. (2006b). Value-based differentiation in business relationships: Gaining
and sustaining key supplier status. Journal of Marketing, 70(1), 119–136.
98 ROGER BAXTER
ABSTRACT
This paper explores the value of the final customer in business networks.
The preferences of the final customer define the concept of the network
customer. The central argument of this paper is that companies within
networks of value-creating relationships can act as integrators, which by
interlocking limited value perspectives, can approximate an absolute value
horizon that includes network customer considerations. Such interlocking
activity constitutes a managerial challenge. As such, the interconnecting
activity extends companies’ value horizons and can be characterized as a
relationship capability, which is managerial knowledge capital that is not
residing within isolated organizational actors but within the interrelations
between them. Accordingly, such knowledge becomes a significant
resource that can be used by both the organizations to improve their
network position. By deconstructing the notion of value, this paper
demonstrates the need for greater conceptual clarity and operationaliza-
tion of value in the wider field of marketing, and specifically for business-
to-business marketing.
For this reason, Holmen and Pedersen (2003) introduce the notion of
‘‘network horizon’’ or ‘‘customer horizon’’ (Storer, Holmen, & Pedersen,
2003) as an entity that can be analyzed and influenced by different actors.
This notion relates to the relevant companies and customers and their
exchange interactions that focal actors are aware of and that are taken into
consideration. Analogously, in this paper the concept of ‘‘value horizon’’
refers to the actors and their relevant value perceptions adopted by
companies to manage their offerings. However, a qualification of the
existing customer horizon concept (Storer et al., 2003) is presented by, first,
adding the aspect of value, and second, by applying this concept to
upstream and downstream interactions. While the implied theoretical value
horizon incorporates constituent relationships within a business-to-business
context, this perspective does not normally incorporate final customers in its
definition of the relevant network. Not incorporating final customers
encompasses the foremost managerial challenge. Consequently, value
considerations of the final customer serve as the starting point to extend
traditional value models and provide better understanding of value
management in complex network constellations (Holmen & Pedersen,
2003; Henneberg, Mouzas, & Naudé, 2006). Value management comprises
the creation, as well as the appropriation, of value in networks of exchange
relationships (Mizik & Jacobson, 2003).
The challenge companies’ face is, therefore, that they cannot understand
all relevant actors involved in their networks of exchange relationships
(Prenkert & Hallen, 2006). A mere dyadic exchange horizon solely focuses
on interactions between selling and buying entities and their value
perceptions, irrespective where these are positioned in a value-creating
system (Parolini, 1999). A network perspective, on the other hand, explains
in a holistic way the overall interaction patterns as well as direct and indirect
relationships between companies. This perspective implies a focus on both
upstream and downstream exchanges and interactions (Ford & Håkansson,
2006a), even including final customers and their specific preferences.
Nevertheless, this construct is without a clearly defined network horizon
(Holmen & Pedersen, 2003). Which value exchanges are specifically relevant
for their managerial decisions and which are tangential remains unclear
conceptually to companies.
Are holistic networks and value horizons managerially naive and
unachievable? This paper is an exposé of which value exchanges are most
relevant for a company within a network and how a company can gain the
necessary knowledge regarding which value exchanges matter. How far a
company’s value horizon can reach in a network of exchange relationships,
102 STEPHAN C. HENNEBERG AND STEFANOS MOUZAS
what the implications of an extended value horizon are, and how companies
become integrators of different value horizons will be discussed below. The
challenge of managing in networks of exchange relationships depends
crucially on an understanding of the characteristics of value considerations
that final customers apply. The paper reintroduces the ‘‘network customer’’
to value considerations of all the companies irrespective of where they are in
the value-creating system. While an extended value horizon enriches the
management in networks, no company can grasp a truly holistic under-
standing of a value-creating system (i.e., an absolute value horizon).
Although a holistic network value concept can be introduced that
incorporates previously neglected notions of value exchanges, such a
complete value horizon is unachievable and practically naive.
Holistic value management, based on insights into the conceptual fabric
of the created value of an offering, in a specific context for final customers, is
necessary to optimize value within the overall network. Such holistic value
management does not manifest itself in the actions of one company in the
network, but rather lies within the interactions and the overlay of differing
value horizons (Möller & Svahn, 2003; Parolini, 1999). These extended
value horizons (which are nevertheless partial) cocreate a more holistic value
perspective if the relevant actors engage in exchanges around the value
facets that are visible within their value perspective. Therefore, specific
managerial requirements within a value-creating network exist that are
preconditions for value management, and which are built around an
understanding of the needs and preferences of the network customer, that is
the final customer. This perspective includes aspects of the relational
governance within the network that is the dissemination of a value
understanding throughout the organizations in the value-creating system.
By introducing an innovative and holistic value management concept
based on an extended value horizon, this argument adds to a recently noted
resurgence of interest within academia in the concept of value and its
strategic management (Eggert & Ulaga, 2002; Ulaga, 2001) as well as in the
managerial practitioner sphere (Bovet & Martha, 2000). Moreover, new
concepts of value and its measurement, for example in a relational context,
are increasingly being explored (Payne & Holt, 1999; Ulaga, 2003; Ulaga &
Chacour, 2001; Ulaga & Eggert, 2005, 2006a; van der Haar, Kemp, & Omta,
2001; Wilson & Jantrania, 1994).
The structure of this article is as follows. The first section describes
conceptually the challenge of managing in business networks. The next
section provides an overview of value and exchange concepts as employed in
marketing theory by concentrating on a juxtaposition of models of dyadic
Final Customers’ Value in Business Networks 103
and network value exchange. Following on, the introduction of a holistic but
theoretical perspective provides the context for value management through
focusing on incorporating final customers into value considerations of
business networks. The paper discusses the impossibility of such a construct
in value management and introduces the challenge of a partial value horizon.
The paper ends with a discussion of managerial and theoretical implications
of an overlay of partial value horizons and how these are achieved.
Table 1. (Continued )
Author(s) Perspective Description
Table 1. (Continued )
Author(s) Perspective Description
(Mouzas & Araujo, 2000). The conceptual foundation for these program-
matic initiatives will be discussed below.
Different value elements of an offering are visible and relevant to the final
customer, who may also be able to attribute them to a specific supplier (e.g.,
a Mercedes car customer might know and value the Recaro seats as part of
the offering). However, in most cases, value elements are not clearly
attributable, and the offer is associated exclusively with the relevant brand
and possibly the supplier (e.g., a retailer). The aggregation of value
constituents in a value-creating chain of many suppliers and buyers in
business-to-business exchanges remains obscured to most final customers.
For the following discussion of the management of value and an absolute
value horizon, the construct of the value chain in its abstract entirety serves
as a shorthand for a more complex network perspective (Evans & Berman,
2001; Porter, 1985; Tzokas & Saren, 1997; Wright, 2004).
While the dyadic view of value presupposes a partial value horizon, an
‘‘absolute value horizon’’ provides an alternative, that is, a strategic value
consideration that takes into account direct and indirect downstream
exchange partners. This includes final customers. In other words, every
actor within a value chain, wherever situated, has to know about final
customer value considerations and about the entirety of transition processes
of value exchanges that link the specific company to the final customer. This
absolute value horizon concept has implications for the strategic value
management of companies, by distinguishing different value aims and
Final Customers’ Value in Business Networks 111
chain, for example when a consumer goods company uses special packaging
material from a supplier that fits better onto the shelves of a retailer, that is,
functional benefits which optimize shelf space utilization for the retailer and
therefore decrease warehousing and handling costs.
This benefit represents ‘‘derived value,’’ that is, derived from managing
the ultimate aim of selling successfully to the final customer. The final
customer is oblivious to this value; neither perceiving nor benefiting directly
from this value. However, the derived value (in this case of the packaging
example the value is to the retailer) helps members of the value chain to
serve the final customer better by increasing their freedom to add value or to
instigate another derived value creation as another intermediate step in the
value creating chain. In the example above, the cost and flexibility benefits
to the retailer potentially increase the value of the offering to the final
customer, for example through the use of price promotions as logistic costs
have decreased, or through the elimination of out-of-stock situations.
However, the ultimate and determining value within a value chain remains
always in the form of the value delivered to the final customer, the only
value that is not derived but absolute (in a customer-subjective way).
Optimizing the derived value elements of a value chain is also a public
value to the members of the value chain: the overall offering value can be
increased by certain activities within the value chain with the results of these
activities benefiting all members of the value chain, for example through
more demand, better process efficiency, higher relationship benefits.
A)
Dyadic Supply Chain Dyadic Customer
Value Perspective Value Perspective
B)
Extended Supply Chain
Value Perspective
C)
Extended Customer
Value Perspective
D)
Indicates Indicates
Focal Final
Company Customer
Fig. 1. Schematic Value Chain and Different Value Horizons (Based on Henneberg &
Mouzas, 2007).
A)
Extended Supply Chain Extended Customer
Value Perspective Value Perspective
B)
Indicates Indicates
Focal Final
Company Customer
CONCLUSIONS
This section provides an overview of the main strands of the argument and
discusses some crucial implications of the network customer for manage-
ment in complex business networks. The preceding discussions concern the
notion of exchange and the pivotal aspect of value in exchanges. The
management of value falls into three distinct dimensions linked to final
customer considerations and an absolute value horizon. This multifaceted
value concept, incorporating a perspective spanning the whole value-
creating system, contrasts with existing (dyadic) marketing theory. Value
management aspects depend on a deep understanding of final customers’
value considerations.
However, such an absolute value horizon is a managerially naive
and a practically unachievable notion. Nevertheless, companies can
achieve extended value horizons. These are important for enhanced value
management considerations while not providing a full systemic perspec-
tive. An enhanced understanding of business-to-business networks derives
from interlocking several extended value horizons. A central argument is
that focal companies within a value-creating system can constitute
integrators, which by interlocking value perspectives, approximate an
absolute value horizon, including network customer considerations. This
interlocking activity builds on a deep relationship building between the
focal companies, and includes the exchange and amalgamation of
network pictures. The interlocking extended value horizons represent a
relationship capability, that is, the managerial knowledge capital that is
not residing within organizational actors but within the interrelations
between them. This knowledge capital becomes a sticky resource that is
used by both organizations to improve their network position (Gosh &
John 1999).
Final Customers’ Value in Business Networks 121
partners, including the final customer (Håkansson & Ford, 2002). To redress
the imbalance by focusing on dyadic intercompany exchanges, more
empirical studies of the network customer and the impact on value
realization and value management are necessary. Breaking down the
distinction between business-to-business and business-to-consumer markets
in research on value management is therefore inevitable. The network and
systems approach of research in marketing needs to be applied not only to
business markets but to final customers also (Anderson, 1995; Pels, 1999).
The notion of public value elements needs consideration when looking at
value-creating network relationships, specifically the condition that allows
for an optimization of these elements in contrast with typically private value
elements, that is value appropriation management. For example, a link of
the value horizon concept with different forms of value creation in chains,
shops, and networks contributes to a better understanding of strategic
positioning issues (Normann & Ramirez, 1993; Stabell & Fjeldstad, 1998).
Incorporating the final customer into the research agenda on value
management provides new insights regarding such enquiry as the process
and source of creating superior business rents or superior network positions.
Insights into the source and the process of value creation requires the
employment of more developed methodologies in network research such as
the use of experimental techniques that allow to operate on a higher
aggregation level (company clusters or value-creating systems) while
simulating practical and relevant results and outcomes. A greater under-
standing of customers’ considerations and a better understanding of how
organizations and individuals interact with each other to develop and
mobilize the ingredients of value realization, may deepen and extend the
conceptualization of interorganizational networks. Exploring the multiple
ways by which organizations and individuals develop their own value
representations is pivotal.
Considering how organizations manage the process of amalgamating
the inherent diversity of these considerations in networks of exchange
relationships is pivotal. The proposals here open new avenues of enquiry
that move away from narrow approaches and guides future empirical
research in this field.
REFERENCES
Aldersen, W. (1957). Marketing behavior and executive action: A functionalist approach to
marketing theory. Irwin: Homewood.
Final Customers’ Value in Business Networks 123
Flint, D. J. (2004). Strategic marketing in global supply chains: Four challenges. Industrial
Marketing Management, 33, 45–50.
Flint, D. J., Woodruff, R. B., & Gardial, S. F. (1997). Customer value change in industrial
marketing relationships. Industrial Marketing Management, 26(2), 163–176.
Flint, D. J., Woodruff, R. B., & Gardial, S. F. (2002). Exploring the phenomenon of
customers’ desired value change in a business-to-business context. Journal of Marketing,
66, 102–117.
Ford, D., Gadde, L.-E., Håkansson, H., & Snehota, I. (2003). Managing business relationships.
Chichester: Wiley.
Ford, D., & Håkansson, H. (2006a). The idea of interaction. The IMP Journal, 1(1), 4–27.
Ford, D., & Håkansson, H. (2006b). IMP – Some things achieved: Much more to do. European
Journal of Marketing, 40(3/4), 248–258.
Fournier, S., & Mick, D. G. (1999). Rediscovering satisfaction. Journal of Marketing, 63, 5–23.
Foxall, G. R. (1992). The behavioral perspective model of purchase and consumption: From
consumer theory to marketing practice. Journal of the Academy of Marketing Science,
20(2), 189–198.
Foxall, G. R., & Goldsmith, R. E. (1994). Consumer psychology for marketing. London:
Routledge.
Garbarino, E., & Johnson, M. S. (1999). The different roles of satisfaction, trust, and
commitment in customer relationships. Journal of Marketing, 63, 70–87.
Ghemawat, P. (1991). Commitment. New York: The Free Press.
Gnyawali, D. R., & Madhavan, R. (2001). Cooperative networks and competitive dynamics:
Structural embeddedness perspective. Academy of Management Review, 26(3), 431–445.
Gosh, M., & John, G. (1999). Governance value analysis and marketing strategy. Journal of
Marketing, 63(Special Issue), 131–145.
Grönroos, C. (1997). Value-driven relational marketing: From products to resources and
competencies. Journal of Marketing Management, 13, 407–419.
Håkansson, H., & Ford, D. (2002). How should companies interact in networks. Journal of
Business Research, 15, 133–139.
Hamel, G., & Prahald, C. K. (1996). Competing for the future. Boston: Harvard Business Press.
Helfert, G., Ritter, T., & Walter, A. (2002). Redefining market orientation perspective:
Theoretical considerations and empirical results. European Journal of Marketing, 36(9),
1119–1140.
Henneberg, S. C., & Mouzas, S. (2007). Managing the customer horizon. Thexis (3), 7–10.
Henneberg, S. C., Mouzas, S., & Naudé, P. (2006). Network pictures – Concepts and
representations. European Journal of Marketing, 40(3/4), 408–429.
Hogan, J. E. (2001). Expected relationship value. Industrial Marketing Management, 30(4),
339–352.
Holbrook, M. B. (1995). Consumer research. Thousand Oaks: Sage.
Holmen, E., & Pedersen, A. C. (2003). Strategizing through analyzing and influencing the
network horizon. Industrial Marketing Management, 32, 409–418.
Homans, G. C. (1961). Social behaviour: Its elementary forms. New York: Harcourt Brace.
Houston, F. S., & Gassenheimer, J. B. (1987). Marketing and exchange. Journal of Marketing,
51, 3–18.
Hunt, S. D. (1976). The nature and scope of marketing. Journal of Marketing, 40, 17–28.
Hunt, S. D. (1983). General theories and the fundamental explananda of marketing. Journal of
Marketing, 47, 9–17.
Final Customers’ Value in Business Networks 125
Hunt, S. D., & Lambe, C. J. (2000). Marketing’s contribution to business strategy: Market
orientation, relationship marketing and resource-advantage theory. International Journal
of Management Reviews, 2/1, 17–43.
Hymen, M. R. (2004). Revising the structural framework for marketing management. Journal
of Business Research, 57, 923–932.
Kothandaraman, P., & Wilson, D. T. (2001). The future of competition. Industrial Marketing
Management, 30, 379–389.
Kotler, P. (2003). Marketing management. New Jersey: Pearson.
Kumar, N. (1997). The revolution in retailing: From market driven to market driving. Long
Range Planning, 30(6), 830–835.
Lapierre, J. (2000). Customer-perceived value in industrial contexts. Journal of Business and
Industrial Marketing, 15(2), 122–140.
Levy, S. J. (2002). Revisiting the marketing domain. European Journal of Marketing, 36(3),
299–304.
Miller, R. L., & Lewis, W. F. (1991). A stakeholder approach to marketing management using
value exchange models. European Journal of Marketing, 25(8), 55–68.
Mizik, N., & Jacobson, R. (2003). Trading off between value creation and value appropriation:
The financial implications of shifts in strategic emphasis. Journal of Marketing, 67, 63–76.
Möller, K., & Svahn, S. (2003). Managing strategic nets. Marketing Theory, 3(2), 209–234.
Möller, K., & Törrönen, P. (2003). Business suppliers’ value creation potential: A capability-
based analysis. Industrial Marketing Management, 32, 109–118.
Möller, K. K., & Halinen, A. (1999). Business relationships and networks. Industrial Marketing
Management, 28, 413–427.
Mouzas, S., & Araujo, L. (2000). Implementing programmatic initiatives in manufacturer-
retailer networks. Industrial Marketing Management, 29(4), 293–303.
Mouzas, S., Henneberg, S., & Naudé, P. (2008). Developing network insight. Industrial
Marketing Management, 37(2), 166–179.
Nauman, E. (1995). Creating customer value. Cincinnati: Thomson.
Normann, R., & Ramirez, R. (1993). From value chain to value constellation: Designing
interactive strategy. Harvard Business Review, 71(July/August), 65–77.
O’Malley, L., & Tynan, C. (2000). Relationship marketing in consumer markets. European
Journal of Marketing, 34(7), 797–815.
O’Shaughnessy, J. (1992). Explaining buyer behavior. New York: Oxford University Press.
Pardo, C., Henneberg, S. C., Mouzas, S., & Naudé, P. (2006). Unpicking the meaning of value
in key account management. European Journal of Marketing, 40(11), 1360–1374.
Parolini, C. (1999). The value net. Chichester: Wiley.
Payne, A., & Holt, S. (1999). A review of the ‘Value’ literature and implications for relationship
marketing. Australasian Marketing Journal, 7(1), 41–51.
Payne, A., Holt, S., & Frow, P. (2001). Relationship value management: Exploring the
integration of employee, customer and shareholder value and enterprise performance
models. Journal of Marketing Management, 17, 785–817.
Pels, J. (1999). Exchange relationships in consumer markets. European Journal of Marketing,
33(1/2), 19–37.
Perks, H., & Easton, G. (2000). Strategic alliances: Partner as customer. Industrial Marketing
Management, 29, 327–338.
Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance.
New York: The Free Press.
126 STEPHAN C. HENNEBERG AND STEFANOS MOUZAS
Prenkert, F., & Hallen, L. (2006). Conceptualising, delineating and analysing business
networks. European Journal of Marketing, 40(3/4), 384–407.
Ravald, A., & Grönroos, C. (1996). The value concept and relationship marketing. European
Journal of Marketing, 3(2), 19–30.
Ritter, T. (1999). The networking company. Industrial Marketing Management, 28, 467–479.
Ritter, T., Wilkinson, I. F., & Johnston, W. J. (2002). Measuring network competence: Some
international evidence. Journal of Business and Industrial Marketing, 17(2), 119–138.
Rust, R. T., Zeithaml, V. A., & Lemon, K. N. (2000). Driving customer equity. New York: The
Free Press.
Sharma, A., Krishnan, R., & Grewal, D. (2001). Value creation in markets. Industrial
Marketing Management, 30, 391–402.
Shaw, E. H., & Jones, D. G. B. (2005). A history of schools of marketing thought. Marketing
Theory, 5(3), 239–281.
Sheth, J. N., Gardner, D. M., & Garrett, D. E. (1988). Marketing theory: Evolution and
evaluation. New York: Wiley.
Shiv, B., & Huber, J. (2000). The impact of anticipating satisfaction on consumer choice.
Journal of Consumer Research, 27, 202–216.
Simpson, P. M., Siguaw, J. A., & Baker, T. L. (2001). A model of value creation. Industrial
Marketing Management, 30, 119–134.
Slater, S. F. (1997). Developing a customer value-based theory of the firm. Journal of the
Academy of Marketing Science, 25, 162–167.
Spreng, R. A., MacKenzie, S. B., & Olshavsky, R. W. (1996). A reexamination of the
determinants of consumer satisfaction. Journal of Marketing, 60, 15–32.
Stabell, C. B., & Fjeldstad, Ø. D. (1998). Configuring value for competitive advantage: On
chains, shop, and networks. Strategic Management Journal, 19, 413–437.
Stern, L. W., & Weitz, B. A. (1997). The revolution in distribution: Challenges and
opportunities. Long Range Planning, 30(6), 823–829.
Storer, C. E., Holmen, E., & Pedersen, A.-C. (2003). Exploration of customer horizons to
measure understanding of netchains. Supply Chain Management: An International
Journal, 8, 455–466.
Thompson, J. D. (1967). Organizations in action. New York: McGrawHill.
Turnbull, P., Ford, D., & Cunningham, M. (1996). Interaction, relationships and networks in
business markets: An evolving perspective. Journal of Business and Industrial Marketing,
11(3), 44–62.
Tzokas, N., & Saren, M. (1997). Building relationship platforms in consumer markets: A value
chain approach. Journal of Strategic Marketing, 5, 105–120.
Tzokas, N., & Saren, M. (1999). Value transformation in relationship marketing. Australasian
Marketing Journal, 7(1), 52–62.
Ulaga, W. (2001). Customer value in business markets. Industrial Marketing Management, 30,
315–319.
Ulaga, W. (2003). Capturing value creation in business relationships: A customer perspective.
Industrial Marketing Management, 32, 677–693.
Ulaga, W., & Chacour, S. (2001). Measuring customer-perceived value in business markets.
Industrial Marketing Management, 30, 525–540.
Ulaga, W., & Eggert, A. (2005). Relationship value in business markets: The construct and its
dimensions. Journal of Business-to-Business Marketing, 12(1), 73–99.
Final Customers’ Value in Business Networks 127
Ulaga, W., & Eggert, A. (2006a). Value-based differentiation in business relationships: Gaining
and sustaining key supplier status. Journal of Marketing, 70(1), 119–136.
Ulaga, W., & Eggert, A. (2006b). Relationships value and relationship quality. European
Journal of Marketing, 40(3/4), 311–327.
Uzzi, B. (1996). The sources and consequences of embeddedness for the economic performance
of organizations: The network effect. American Sociological Review, 61, 674–698.
Uzzi, B. (1997). Social structure and competition in interfirm networks: The paradox of
embeddedness. Administrative Science Quarterly, 42, 35–67.
van der Haar, J. W., Kemp, R. G. M., & Omta, O. (2001). Creating value that cannot be copied.
Industrial Marketing Management, 30, 627–636.
Whiteoak, P. (1994). The realities of quick response in the grocery sector: A supplier viewpoint.
International Journal of Physical Distribution and Logistics Management, 24(10), 33–39.
Wikstroem, S. (1996). Value creation by company-consumer interaction. Journal of Marketing
Management, 12, 359–374.
Wilkie, W., & Moore, E. (2003). Scholarly research in marketing: Exploring the ‘Four Eras’ of
thought development. Journal of Public Policy and Marketing, 22(Fall), 116–146.
Wilson, D. T., & Jantrania, S. (1994). Understanding the value of a relationship. Asia-
Australian Marketing Journal, 2(1), 55–66.
Woodruff, R. B., & Gardial, S. F. (1996). Know your customer – New approaches to
understanding customer value and satisfaction. Oxford: Blackwell.
Wright, R. (2004). Business-to-business marketing. Harlow: Pearson.
Zajac, E. J., & Olsen, C. P. (1993). From transaction cost to transactional value analysis:
Implications for the study of interorganizational strategies. Journal of Management
Studies, 30(1), 131–145.
Zeithaml, V. A. (1988). Consumer perceptions of price, quality, and value: A means-end model
and synthesis of evidence. Journal of Marketing, 52, 2–22.
FUNCTIONS, TRUST, AND VALUE
IN BUSINESS RELATIONSHIPS
ABSTRACT
Managers and academics alike focus on value creation in business
relationships. This paper adds to existing literature by analyzing functions
of business relationships and their impact on value perception. Applying a
customer perspective, direct relationship functions are concerned about
payment, quality, and volume. Indirect functions include innovation,
access, and scouting. Furthermore, trust and number of alternative
suppliers are included in the study. The empirical results illustrate the
important role of direct and indirect functions for value creation.
Understanding these functions is instrumental for driving customer value,
both for the supplier and the seller. Direct functions do have a much
stronger impact on value than indirect functions that still do have a
significant impact. Thus, increasing direct function fulfillment is much
more effective in order to gain key supplier status than relying only on
indirect functions. But indirect functions may offer ample differentiation
opportunities. Being a strong driver of relationship value, trust is also
driven by function fulfillment. Thus, relationship value depends on
rational elements (functions) and social elements (trust). Availability
of alternative suppliers increases the importance of relationship function
fulfillment on customer value and customer trust. In highly competitive
INTRODUCTION
RELATIONSHIP FUNCTIONS
Several models and theories on relationship functions emerged over the past
two decades (Anderson, Håkansson, & Johanson, 1994; Cunningham &
Homse, 1986; Håkansson & Johanson, 1993; Ulaga & Eggert, 2006; Walter
et al., 2001). Functions of supplier relationships are areas of supplier’s
contribution to customer business in this study. The fulfillment of these
functions is valuable for a customer if the customer is appreciative and
perceptive of these contributions. Functions are potential drivers of
customer relationship value; they are the reasons why a customer should
be interested in exchange with a supplier.
132 THOMAS RITTER AND ACHIM WALTER
CUSTOMER TRUST
The importance of trust in relationships increased over the last 20 years
(Andaleeb, 1992). Consequently, trust is one of the major determinants
of models explaining business relationships (Wilson, 1995). Therefore,
this study explicitly studies the influence of customer trust on relationship
value.
Moorman, Zaltman, and Deshpandé (1992) define trust as ‘‘( . . . ) a
willingness to rely on an exchange partner in whom one has confidence.’’
Generally, trust involves not only the belief in the benevolence in the
partner’s actions, but also the vulnerability against the partner (Morgan &
Hunt, 1994, p. 23). An organization that trusts their partners expects ‘‘( . . . )
that another company will perform actions that will result in positive
outcomes for the firm, as well as not take unexpected actions that would
result in negative outcomes for the firm’’ (Anderson & Narus, 1990, p. 45).
Trust involves the capability to delegate responsibility so that the own area
of responsibility is reduced, hereby creating free capacities for other tasks.
A trusting partner assumes to receive a good offer or a fair deal. Reduced
control and higher flexibility (Dwyer, Schurr, & Oh, 1987; Morgan & Hunt,
1994; Ring & Van de Ven, 1994) leave the customer in a position to perceive
high relationship value, at least to assume such a perception.
EMPIRICAL STUDY
RESULTS
Tables 1 and 2 show the results of the regression analyses. The data supports
all hypotheses. Furthermore, the model explains a substantial portion of the
Functions, Trust, and Value in Business Relationships 137
Main effects
Direct functions (H1) 0.28 0.26
Indirect functions (H2) 0.17 0.16
Customer trust (H3) 0.31 0.29
Interaction effects (H5)
Availability of alternative suppliers X
Direct functions 0.07w
Indirect functions 0.08
Moderating variable
Availability of alternative suppliers 0.41 0.27 0.26
R2 (adjusted R2) 0.17 (0.16) 0.47 (0.47) 0.49 (0.48)
DR2 0.17 0.30 0.02
F 59.88 66.56 46.54
Note: n ¼ 303.
po0.05.
po0.001.
w
po0.10 (one-tailed test).
Moderating variable
Availability of alternative suppliers 0.23 0.15 0.14
R2 (adjusted R2) 0.05 (0.05) 0.20 (0.20) 0.22 (0.21)
DR2 0.05 0.16 0.02
F 16.27 25.94 17.04
Note: n ¼ 303.
po0.05.
po0.01.
po0.001.
138 THOMAS RITTER AND ACHIM WALTER
This study shows that relationship functions and customer trust explain a
considerable amount of the customer-perceived relationship value. Direct
relationship functions have a much stronger impact on perceived value than
indirect ones. As such, highlighting its direct value contributions in order to
gain key supplier status is important for a supplier firm. However, this
highlighting should not lead to neglecting indirect relationship functions.
Functions, Trust, and Value in Business Relationships 139
REFERENCES
Andaleeb, S. S. (1992). The trust concept: Research issues for channels of distribution. Research
in Marketing, 11, 1–34.
Anderson, J. C. (1995). Relationships in business markets: Exchange episodes, value
creation, and their empirical assessment. Journal of the Academy of Marketing Science,
23, 346–350.
Anderson, J. C., & Gerbing, D. (1988). Structural equation modeling in practice: A review and
recommended two-step approach. Psychological Bulletin, 103, 411–423.
Functions, Trust, and Value in Business Relationships 141
Anderson, J. C., Håkansson, H., & Johanson, J. (1994). Dyadic business relationships within a
business network context. Journal of Marketing, 58, 1–15.
Anderson, J. C., Jain, D. C., & Chintagunta, P. K. (1993). Customer value assessment in
business markets: A state-of-practice study. Journal of Business-to-Business Marketing, 1,
3–29.
Anderson, J. C., & Narus, J. A. (1990). A model of distributor firm and manufacturing firm
working partnerships. Journal of Marketing, 54, 42–58.
Anderson, J. C., & Narus, J. A. (2004). Business market management: Understanding, creating,
and delivering value (2nd ed.). Upper Saddle River, NJ: Prentice Hall.
Blau, P. M. (1964). Exchange and power in social life. New York: John Wiley & Sons.
Cannon, J. P., & Homburg, C. (2001). Buyer-supplier relationships and customer firm costs.
Journal of Marketing, 65, 29–73.
Cannon, J. P., & Perreault, W. D. J. (1999). Buyer-seller relationships in business markets.
Journal of Marketing Research, 36, 439–460.
Cunningham, M. T., & Homse, E. (1986). Controlling the marketing-purchasing interface:
Resource development and organisational implications. Industrial Marketing and
Purchasing, 1, 3–27.
Day, G. S. (1994). The capabilities of market-driven organizations. Journal of Marketing, 58,
37–52.
Dwyer, F. R., Schurr, P. H., & Oh, S. (1987). Developing buyer-seller relationships. Journal of
Marketing, 51, 11–27.
Flint, D. J., Woodruff, R. B., & Gardial, S. F. (1997). Customer value change in industrial
marketing relationships: A call for new strategies and research. Industrial Marketing
Management, 26, 163–175.
Fornell, C., & Larcker, D. F. (1981). Evaluating structural equation models with unobservable
variables and measurement error. Journal of Marketing Research, 18, 39–50.
Ganesan, S. (1994). Determinants of long-term orientation in buyer-seller relationships. Journal
of Marketing, 58, 1–19.
Geyskens, I., Steenkamp, J.-B., & Kumar, N. (1999). A meta-analysis of satisfaction in
marketing channel relationships. Journal of Marketing Research, 36, 223–238.
Håkansson, H. (1982). International marketing and purchasing of industrial goods: An interaction
approach. Chichester: John Wiley & Sons.
Håkansson, H., & Johanson, J. (1993). Industrial functions of business relationships. Advances
in International Marketing, 5, 13–29.
Håkansson, H., & Snehota, I. (1995). Developing relationships in business networks. Boston:
International Thomson Press.
Heide, J. B., & John, G. (1988). The role of dependence balancing in safeguarding transaction-
specific assets in conventional channels. Journal of Marketing, 52, 20–35.
Homans, G. C. (1961). Social behavior: Its elementary form. London: Routledge & Kegan Paul.
Kumar, N., Scheer, L. K., & Steenkamp, J.-B. (1995). The effects of supplier fairness on
vulnerable resellers. Journal of Marketing Research, 32, 54–65.
Moorman, C., Zaltman, G., & Deshpandé, R. (1992). Relationships between providers and
users of market research: The dynamics of trust within and between organisations.
Journal of Research in Marketing, 29, 314–328.
Morgan, R. M., & Hunt, S. D. (1994). The commitment-trust theory of relationship marketing.
Journal of Marketing, 58, 20–38.
142 THOMAS RITTER AND ACHIM WALTER
APPENDIX A. INDICATORS
Relationship Functions
Cost Function
Products that are good value for money.
Low purchasing prices.
Volume Function
Long-term delivery promises for the products delivered.
Complete coverage of your total demand for the products.
Functions, Trust, and Value in Business Relationships 143
Quality Function
Functionality of the products delivered.
Reliability of the products delivered.
Realization of our product requirements.
Access Function
Intermediation of contacts to prospective customers of your company.
Intermediation of contacts to prospective other suppliers of your
company.
Intermediation of contacts to relevant third parties (technology compa-
nies, consultants, marketing service providers, and so on).
Direct reference with possible business partners.
Scout Function
Information on your procurement market.
Information on your competitors.
Information on relevant third parties (technology companies, consultants,
marketing service providers, and so on).
Information on developments in your market.
Innovation Function
Ideas for new products/services of your company.
Development of your products/services.
Development of your manufacturing processes.
New technological know-how for your company.
Relationship Value
All in this entire supplier relationship has a high value for our firm.
(1 ¼ strongly disagree, 7 ¼ strongly agree)
How do you rate the value of all performance contributions that your
company gains from this supplier (e.g., volume, market information,
technologies)? (1 ¼ very low, 7 ¼ very high)
APPENDIX B
Table B1. Results of the Measurement Model Direct Functions.
Construct Indicator Standardized Item to Cronbach’s Explained Construct Variance
Factor Total- Alpha Variance Reliability Extracted
Loading Correlation (EFA)
(CFA)
Note: w2ð11Þ ¼ 28:92; p ¼ 0.002; GFI ¼ 0.973; AGFI ¼ 0.932; CFI ¼ 0.978; RMSEA ¼ 0.073.
po0.001.
Functions, Trust, and Value in Business Relationships 145
APPENDIX C
Note: w2ð51Þ ¼ 107:96; p ¼ 0.000; GFI ¼ 0.945; AGFI ¼ 0.916; CFI ¼ 0.974; RMSEA ¼ 0.060.
po0.05.
po0.001.
APPENDIX D
Note: w2ð95Þ ¼ 182:87; p ¼ 0.000; GFI ¼ 0.928; AGFI ¼ 0.897; CFI ¼ 0.961; RMSEA ¼ 0.057.
po0.001.
a
Variance of error term was fixed at 15%.
APPENDIX E
Table E1. Discriminant Validity of Constructs.
C1 C2 C3 C4 C5
Variance extracted
0.77 0.53 0.42 0.51 0.85
C1 0.77 Squared correlation of constructs
C2 0.53 0.34
C3 0.42 0.41 0.29
C4 0.51 0.16 0.11 0.12
C5 0.85 0.20 0.07 0.06 0.01
TOTAL COST OF OWNERSHIP
AND CUSTOMER VALUE IN
BUSINESS MARKETS
ABSTRACT
This paper explores the use of the total cost of ownership (TCO)
approach from the business marketing perspective. TCO provides a
method to estimate all cost associated with the acquisition, use, and
disposal of a good or service over the lifetime of the purchase.
Organizational buyers can employ TCO analysis to evaluate alternative
offerings from suppliers, to assess ongoing supplier performance, and to
drive process improvement. Sellers can use TCO models to measure,
document, and communicate the value that their offering represents to a
customer in the way of lower costs relative to the next best alternative.
TCO analysis can be a powerful selling tool to demonstrate concrete
customer value creation for alternatives that deliver comparable
benefits. The execution of a TCO analysis requires experts from both
the buyer and seller organizations to work closely together in mapping
and modeling the target customer’s application. Ideally, the sales
representative leads the process in which both parties collaborate. The
1. INTRODUCTION
The most basic classification divides costs into direct and indirect. Direct
costs are those easily attributable to the purchase and include expenses such
208 GABRIELA HERRERA PISCOPO ET AL.
Search costs
Processing orders
Delivery charges
Purchasing
Acquisition Financing
Price
Conversion
+ All other Handling & storage
expenses Usage
Disposal
Incorporation to
− Salvage or process
resale value Maintenance
Downtime & repairs
TCO
Discarding & disposal
as price or delivery. Indirect costs are those resulting from activities indirectly
related to the purchase and usually require more effort to trace. Examples of
indirect costs are downtime cost due to repairs or the loss of customers due
to poor quality related to the purchase (Ellram & Siferd, 1993).
can easily overlook this type of cost, given the spacing from the time
of transaction. Examples of post-transaction expenses include the cost
associated with maintenance, repairs, and quality failures (Ellram, 1993).
TCO models are useful for both organizational buyers and sellers. Suppliers
and customers can employ TCO analysis for a variety of purposes,
depending on the organization’s objective and capabilities.
Marketing and sales organizations can use TCO models as selling tools to
measure, document, and communicate the value that their offering can
create for customers versus competition. Fig. 2 shows how TCO is a key
component of customer value. Major uses of TCO models by sellers in
business markets are:
Understanding the customer’s value function: TCO models allow suppliers
to gain a better understanding of how their offering creates value for their
customers. The comprehensive analysis required to estimate TCO gives
suppliers a better understanding of the customer’s cost drivers and
activities related to the offering. By analyzing buyer’s operations and
processes, suppliers get an in-depth comprehension of the customer’s needs
and requirements. Such knowledge provides excellent clues for future
offering enhancements. Also, a TCO model not only provides the
understanding of customer value but also translates such value to
monetary terms, giving a more powerful tool to the business marketer.
Documenting and demonstrating the customer’s value: creating value is
the main objective of the marketing function. However, the challenge does
not end with value creation. Customers need to be aware of the value that
a supplier is creating for them. As Anderson, Narus, and van Rossum
Perceived
Benefits
TCO Perceived
Customer
Purchasing Value
Price
Perceived
Sacrifices
Other Cost:
- acquisition
- Conversion
- Disposal
$30 $10
$11
$20 $15
$10
$10
Ordering Shipping Maintenance
$0
Alternative A Alternative B
(2006, p. 91) state, ‘‘an offering may actually provide superior value – but
if the supplier doesn’t demonstrate and document the claim, a customer
manager will likely dismiss it as marketing puffery.’’ TCO is an excellent
tool to document value creation. A TCO model assesses the total cost of
an offering relative to the next best alternative. When benefits from
different alternatives are equivalent or not relevant, the TCO is an ideal
measure of the value created (Wouters, Anderson, & Wynstra, 2005).
Fig. 3 shows a TCO comparison of two different alternatives based on the
Rockwell Automation approach. Alternative A has a lower purchasing
price; however, other cost drivers differ significantly between the two
alternatives. Ordering cost is slightly higher for alternative A, while
shipping costs are comparable for both alternatives. The major source of
discrepancy is maintenance cost, which for alternative A is twice as much
as for alternative B. Cumulatively, the TCO for alternative A is higher. If
the purchaser overlooks the maintenance cost in the evaluation of
alternatives and bases the decision solely on price, the purchase would be
more costly in the long run.
Consultative selling tool and discovery of joint profitability opportunities:
in consultative selling, a sales representative acts as a consultant to the
customer, applying a total solution perspective. Instead of just selling a
product, the sales representative analyzes a problem facing the customer
with the purpose of providing a solution. A TCO model can be a powerful
Total Cost of Ownership and Customer Value in Business Markets 213
tool to help suppliers unveil potential problems that a customer may have.
The activity analysis at the start of the process, the collaboration and
information sharing between buyer and seller, and the combination of
two different sets of expertise and knowledge generate a much more
powerful solution than if the parties work in silos. The process reveals
activities that add and destroy value. Working together, buyer and seller
find ways to improve processes and to be more efficient, expanding the
size of the joint profits.
Supporting value-based pricing decisions: TCO models also provide
support for pricing decisions. Pricing tactics seek to achieve the highest
price that a customer is willing to pay, which depends on perceived value.
The value a customer perceives in an offering does not necessarily equal
the objective value that the offering delivers. Buyers often are not aware
of such value. Firms that strategically manage pricing influence the
customer’s perception by demonstrating their offering’s objective value.
TCO provides an objective measure of value that can help the selling firm
manage price effectively (Smith & Nagle, 2002).
Improving communication and strengthening relationships with custo-
mers: as supplier and customers work together toward establishing a
value measurement model, both parties augment the understanding each
other. Going through a process of information sharing, communication,
and collaboration, the interorganizational ties become stronger. If the
supplier is able to successfully demonstrate the offering’s superior value,
the customer will feel more confident in keeping the relationship in the
future. The customer incurs lower search costs, and the commitment to
the supplier, both affective and calculative, increases. The supplier’s
commitment to the customer also increases due to deeper understanding
of the customer’s needs and value functions. There might be customiza-
tion and adaptation of the offering to the particular demands of the
customer, as both parties find ways to improve processes and further
create joint value. The result is a stronger bond between buyer and seller,
favoring a long-term relationship.
To calculate TCO, the analyst needs to understand all the costs that a
purchase generates across the entire value chain of the firm. Acquiring such
214 GABRIELA HERRERA PISCOPO ET AL.
understanding is not an easy task. Some costs are evident and easily
traceable while others are not. The purpose is to include as much impact of
the purchase on other areas of the business as possible. To achieve such level
of thoroughness, three elements are key: (1) a map or diagram of all the
activities related to the purchase; (2) the identification of cost drivers; and
(3) the allocation of costs and expenses based on the amount of activities
and drivers consumed by the purchase. In other words, the calculation of
TCO requires the use of activity based costing (ABC).
Ellram (1993) proposes the following process for purchasing organiza-
tions to calculate TCO. The process starts with the shift from a price
orientation to a total cost philosophy with the support of purchasing
management. The next step involves developing a process flowchart to
identify pre-transaction, transaction, and post-transaction cost elements.
Next, the analyst determines which ‘‘cost components are significant enough
to warrant tracking’’ and decides how to track them. The purchasing agents
then gather the required data, summarize, and analyze the results. Ellram
also proposes the implementation of a TCO project in two steps: first, a pilot
study based only on a controlled group of items and, second, a full
implementation after learning from the pilot study.
Ellram and Siferd (1993) expand on the previous process by proposing a
more detailed and systematic approach. Their approach also starts with the
use of a flowchart of purchasing activities, including formal and support
activities. After mapping the activities, the analyst identifies inputs,
processes, and outputs at each step, having special consideration for the
personnel time involved. Ellram and Siferd (1993) suggest performing a
work sampling to get an estimate of the time employed on activities. The
analysis also involves identification of underlying factors driving the costs.
After the activity analysis is complete, the model requires data gathering.
Purchasing managers need to determine what information is already
available and what additional data the model requires. The cooperation
of upper management and accounting facilitates the data collection. The
process ends with the preparation of a report to access and summarize
the data.
Degraeve, Roodhooft, and van Doveren (2005) propose a generic method
to construct a procurement decision model based on TCO and ABC.
Purchasing departments can apply such method to a wide range of product
groups, including services. The process starts with interviewing managers
and personnel involved with the different products to understand the cost
elements. The interview process results in a TCO matrix, a key element in
their approach. The matrix provides the framework to analyze all activities
Total Cost of Ownership and Customer Value in Business Markets 215
and cost drivers according to three dimensions. The first dimension (in
columns) represents the sequence of activities in the value chain and includes
categories such as acquisition, reception, possession, utilization, and
elimination. The second dimension (in rows) represents the hierarchy of
purchasing costs and activities and includes five levels: supplier, product,
order, product/order, and unit level. The last dimension (inside rows) refers
to the type of potential cost saving from eliminating the activity and includes
cash and noncash. Once complete, the matrix translates into a mathematical
programming model that minimizes TCO and indicates the best suppliers
for different items. The mathematical programming model allows the firm
to handle a higher level of complexity while evaluating multiple suppliers
and items at the same time.
Hurkens, van der Valk, and Wynstra (2006) present a TCO model for a
car glass repair firm. The authors develop a spreadsheet-based tool to
calculate the TCO for glass purchases. Their approach begins with a
business process analysis and mapping to determine relevant cost categories
and drivers. The process continues by identifying relevant key performance
indicators, determining cost formulas, and calculating the cost for the
different categories in the spreadsheet model. Purchasing managers can use
such spreadsheet model to compare suppliers on different cost categories
and processes.
The previous examples illustrate TCO calculations by purchasing firms,
without the involvement of suppliers. Marketing and sales organizations
take a similar approach to calculate TCO, with the difference that the
process involves collaboration between customer and supplier. Firms
such as Rockwell Automation use TCO analysis in consultative selling
(Anderson & Narus, 2004). They have developed a model and software to
estimate TCO for particular selling situations. The salesperson works closely
with customer personnel to identify cost drivers and activities. The process
reveals potential cost savings and opportunities to improve mutual
profitability. Rockwell Automation employs the tool to demonstrate the
superior value of the customer’s offering (Anderson & Narus, 2004;
Razum, 2003).
In Rockwell Automation’s approach, the sales representative identifies all
relevant activities and cost drivers. Next, the sales representative enters all
data into the TCO tool software, generating a flowchart for the existing
scenario. The existing scenario can be a competitor’s product or a Rockwell
product requiring update. While gathering information about the existing
situation, the TCO analyst envisions potential solutions to the customer’s
problem. Once a potential solution or offering is identified, a flowchart for
216 GABRIELA HERRERA PISCOPO ET AL.
the proposed scenario can be generated and the cost driver improvements
estimated. Using the TCO tool software, the sales engineer calculates the
TCO of both scenarios and generates a chart that compares both
alternatives. Often, the analysis unveils problems and inefficiencies that
wouldn’t be discovered otherwise. The proposed solution also entails
process changes beyond purchasing a particular product form Rockwell.
The result is a credible claim of value creation that Rockwell’s sales team
can assertively present to the customer. Fig. 4 summarizes the process of
using TCO as a selling tool.
To demonstrate the offering’s value, the sales engineer uses a TCO model to
estimate the monetary worth of the potential savings. The sales engineer
meets key experts at the customer site and collects specific data and
information about the application. The engineer then concludes that instead
of the current bearing replacement frequency of twice a year, the customer
could go an average of 18 months without replacement. The savings come
from the following drivers:
Cost of replacement parts: with the new system, the customer needs less
than one bearing per year compared to two or three in the existing
situation.
218 GABRIELA HERRERA PISCOPO ET AL.
Inventory cost: due to lower need for replacement parts, the customer can
lower the level of safety inventory of such parts and components.
Maintenance labor cost: on estimate, replacing a bearing requires 5 h of
skilled labor, which can be saved with the lubrication system.
Downtime: probably the most critical cost element in this case. For
bearing replacement, the customer needs to stop the system and halt
production until the replacement is complete. Downtime causes the loss of
production capacity and can be very costly to manufacturers. In this case,
supplier and customer estimate that downtime can cost up to $100/min.
Table 1 shows the TCO estimations from this case. The supplier
documents and effectively communicates the potential savings to the
customer. The customer perceives the value that the lubrication system
creates and accepts the proposal. In the opinion of the sales engineer, the
TCO process improves the chances of a successful sale and strengthens the
relationship with the supplier.
TCO evaluates and quantifies the total cost involved in acquiring, using, and
disposing offerings over their while usable life. When other benefits are
comparable or when the analysis can treat the lack of benefits as
opportunity cost, TCO is an excellent measure of the value delivered by
an offering. Organizational buyers use TCO on a regular basis to evaluate
purchasing alternatives and suppliers.
A project where suppliers and buyers work together to estimate total cost
is the most effective approach to TCO. In the process, both parties share
information and perform an analysis of the impact of the supplier’s offering
in the customer’s operations. The analysis also unveils opportunities for
improvement in the overall value chain that can improve the efficiency and
expand the profitability of both firms.
TCO can be a powerful tool for business marketers. TCO models help
suppliers to better understand the impact of their offering in the customer’s
operation. Such models also provide an objective measure of value creation
220 GABRIELA HERRERA PISCOPO ET AL.
that suppliers can use to manage the customer’s perception and willingness
to pay. The collaborative process fosters communication and strengthens
buyer–seller relationships.
REFERENCES
Anderson, J. C., & Narus, J. A. (2004). Business market management: understanding, creating,
and delivering value (2nd ed.). Upper Saddle River, NJ: Prentice Hall.
Anderson, J. C., Narus, J. A., & van Rossum, W. (2006). Customer value propositions in
business markets. Harvard Business Review, 84(3), 90.
Degraeve, Z., Labro, E., & Roodhooft, F. (2000). An evaluation of vendor selection models
from a total cost of ownership perspective. European Journal of Operational Research,
125(1), 34.
Degraeve, Z., Roodhooft, F., & van Doveren, B. (2005). The use of total cost of ownership for
strategic procurement: a company-wide management information system. The Journal of
the Operational Research Society, 56(1), 51.
Ellram, L. (1993). Total cost of ownership: Elements and implementation. International Journal
of Purchasing and Materials Management, 29(4), 3.
Ellram, L., & Siferd, S. (1998). Total cost of ownership: A key concept in strategic cost
management decisions. Journal of Business Logistics, 19(1), 55.
Ellram, L. M. (1995). Total cost of ownership. International Journal of Physical Distribution &
Logistics Management, 25(8/9), 4.
Ellram, L. M., & Siferd, S. P. (1993). Purchasing: The cornerstone of the total cost of ownership
concept. Journal of Business Logistics, 14(1), 163.
Ferrin, B., & Plank, R. E. (2002). Total cost of ownership models: An exploratory study.
Journal of Supply Chain Management, 38(3), 18.
Hurkens, K., van der Valk, W., & Wynstra, F. (2006). Total cost of ownership in the services
sector: A case study. Journal of Supply Chain Management, 42(1), 27.
Maltz, A. B., & Ellram, L. M. (1997). Total cost of relationship: An analytical framework for
the logistics outsourcing decision. Journal of Business Logistics, 18(1), 45.
Plank, R. E., & Ferrin, B. G. (2002). How manufacturers value purchase offerings an
exploratory study. Industrial Marketing Management, 31(5), 457.
Razum, J. (2003). Envision value: Introducing industrial total cost of ownership. White paper.
Smith, G. E., & Nagle, T. T. (2002). How much are customers willing to pay? Marketing
Research, 14(4), 20.
Wouters, M., Anderson, J., & Wynstra, F. (2005). The adoption of total cost of ownership for
sourcing decisions-a structural equations analysis. Accounting, Organizations and
Society, 30(2), 167.
LINKING CUSTOMER VALUE TO
CUSTOMER SHARE IN BUSINESS
RELATIONSHIPS
ABSTRACT
1. INTRODUCTION
(Auh & Shih, 2005) B2B, IT services Customers of a single n.s. Customer loyalty relates
IT provider positively to expected
purchase share.
(Babin & Attaway, B2C, retailing Convenience sample of ‘‘The proportion of resources Shopping value relates
2000) mall shoppers given to a single retailer in a positively to customer share.
competitive arena’’ (p. 96)
(Baumann, Burton, & B2C, financial services Retail banking n.s. Length of relationship
Elliott, 2005) customers associates significantly with
225
226
Table 1. (Continued )
Authors Research Context Sampling Customer Share Definition Major Findings
(De Wulf, Odekerken- B2C, retailing Shopping mall visitors ‘‘Behavioral loyalty defined as Positive path from relationship
Schröder, & a composite measure based quality to behavioral loyalty
Iacobucci, 2001) on a consumer’s purchasing across all samples.
frequency and amount spent
at a retailer compared with
the amount spent at other
retailers from which the
consumer buys’’ (p. 37)
227
228
Table 1. (Continued )
Authors Research Context Sampling Customer Share Definition Major Findings
(Mägi, 2003) B2C, retailing Household-level panel n.s. Customer satisfaction relates
data positively to customer share;
age, gender, and other
demographic variables do
not affect customer share.
(Perkins-Munn et al., B2B, truck and Purchasing managers For example, Truck industry: Repurchase intention and
2005) pharmaceutical of fleet trucking ‘‘Share of wallet (SOW) is satisfaction link significantly
industry companies and defined as the percentage to share of wallet.
229
Notes: B2B ¼ business-to-business, B2C ¼ business-to-consumer, n.s. ¼ not specific.
230 WOLFGANG ULAGA AND ANDREAS EGGERT
3. DEVELOPMENT OF HYPOTHESES
H1. The higher the customer value, the higher the customer share.
Moreover, from a conceptual point of view, relative customer share
operationalizations should lead to superior results in cross-sectional studies
because they emphasize a competitor orientation. Although more difficult to
comprehend, these operationalizations prove instrumental for making the
customer share metric comparable across industries. For example, an
absolute customer share of 20% may signal a strong position in some
industries, but a relatively weak position in others. Using the strongest
competitor as a comparison standard helps account for contextual
influences and therefore should lead to better fitting models. Whether the
difference or ratio rule dominates, however, remains open to empirical
investigation.
H2. Relative measures lead to better fitting models in a cross-sectional
study than do absolute customer share operationalizations.
4. EMPIRICAL STUDY
4.1. Unit of Analysis
The survey instrument consists of three parts. The first part asked
respondents to select a specific key component and describe the final
product for which it was sourced. Respondents named their main supplier
234 WOLFGANG ULAGA AND ANDREAS EGGERT
The study assesses nonresponse bias following Mentzer, Flint, and Hult’s
(2001) recommendations – namely, a random sample of 30 nonrespondents
contacted by telephone to answer four questions that capture overall
value perceptions in a supplier relationship (Value 1–Value 4 in the
Appendix). The assessment also includes questions that ask nonrespondents
to provide background information about themselves and their company.
The t-tests of the group means reveal no significant differences between
nonrespondents and the sample, so nonresponse bias is not a problem in
this study.
To assess the strength of common method bias, an additional
confirmatory factor analysis incorporates a common method factor that
loads on every measure of the multi-item scales (Podsakoff, MacKenzie,
Lee, & Podsakoff, 2003). With p-values ranging from 0.81 to 0.88, none of
the additional factor loadings is statistically significant, so no substantial
common method bias is present in the sample.
236 WOLFGANG ULAGA AND ANDREAS EGGERT
4.6. Scales
The study relies on Ulaga and Eggert’s (2006) scale to measure customer
value at both the aggregate level and the level of each individual value
dimension. Two items, indicating the percentage of the actual purchasing
budget within the chosen product category allocated to the main and the
second supplier, measure customer share (see the Appendix for item
formulations).
5. RESULTS
The test of H1 uses Lohmöller’s (1989) partial least square (PLS) latent path
modeling because PLS suits formative, higher-order constructs, such as the
customer value construct (Jarvis, MacKenzie, & Podsakoff, 2003). The
bootstrap procedure (Chin, 1998) packaged in the PLS-Graph software
(version 1.8) enables the calculation of the standard deviation and generates
an approximate t-statistic. This approach overcomes the disadvantage of
nonparametric methods, namely, no formal significance tests for the
estimated parameters. Wold (1982) and Fornell and Bookstein (1982)
provide detailed descriptions of PLS.
Although discussions of the psychometric properties of the relationship
value construct appear elsewhere (e.g., Ulaga & Eggert, 2006), Fig. 1
summarizes the results pertaining to the link between customer value and
customer share. All parameter estimates are significant at the 5% level. The
findings include a positive relationship between both constructs, which
supports H1.
To test the second hypothesis, we relied on covariance-based structural
equation modeling as it allows comparing the fit of competing models. The
first model operationalizes customer share in absolute terms, such that
customer share equals the percentage of the customer’s purchasing budget
allocated to the largest supplier within the selected product category. The
second and third models measure customer share in relative terms,
calculated as the difference (model 2) or ratio (model 3) between the
percentage of the customer’s purchasing budget allocated to the largest
supplier versus that assigned to the second largest supplier within the
selected product category. As Table 2 shows, all three models fit the data
well. However, the Akaike information criterion indicates that the ratio rule
for computing customer share leads to the best fitting model. Consequently,
the empirical analysis supports H2.
Linking Customer Value to Customer Share in Business Relationships 237
Core
Benefits 0.11
0.61
Operations
Costs
Fig. 1. The Results Pertaining to the Link between Customer Value and
Customer Share.
Fit measures w2 (df ¼ 5): 21.01 w2 (df ¼ 5): 24.73 w2 (df ¼ 5): 17.26
GFI: 0.98 GFI: 0.97 GFI: 0.98
AGFI: 0.93 AGFI: 0.92 AGFI: 0.94
AIC: 41.01 AIC: 44.73 AIC: 37.26
RMSEA: 0.093 RMSEA: 0.103 RMSEA: 0.081
Notes: GFI ¼ goodness-of-fit index, AGFI ¼ adjusted goodness-of-fit index, AIC ¼ Akaike
information criterion, and RMSEA ¼ root-mean-square error of approximation.
ACKNOWLEDGMENTS
This research was conducted while the first author was at the Mendoza
College of Business at the University of Notre Dame. The authors thank the
Marketing Department at Notre Dame for its support in this project. In
addition, the authors thank the Institute for the Study of Business Markets
(ISBM) at the Smeal College of Business Administration, Pennsylvania
State University, and the Institute for Supply Management (ISM) for
providing financial and technical support for this study.
REFERENCES
Ackoff, R. L. (1961). Progress in operations research. New York, NY: Wiley.
Anderson, J. C., Håkansson, H., & Johanson, J. (1994). Dyadic business relationships within a
business network context. Journal of Marketing, 58(4), 1–15.
240 WOLFGANG ULAGA AND ANDREAS EGGERT
Anderson, J. C., & Narus, J. R. (2003). Selectively pursuing more of your customer’s business.
MIT Sloan Management Review, 44(Spring), 42–49.
Anderson, J. C., & Narus, J. R. (2004). Business market management: Understanding, creating,
and delivering value (2nd ed.). Upper Saddle River, NJ: Pearson/Prentice Hall.
Anderson, P. F. (1982). Marketing, strategic planning and the theory of the firm. Journal of
Marketing, 46(Spring), 15–26.
Auh, S., & Shih, C.-F. (2005). The relative effects of relationship quality and exchange
satisfaction on customer loyalty. Journal of Business-to-Business Marketing, 12(2), 73–97.
Babin, B. J., & Attaway, J. A. (2000). Atmospheric affect as a tool for creating value and
gaining share of customer. Journal of Business Research, 49(August), 91–99.
Baumann, C., Burton, S., & Elliott, G. (2005). Determinants of customer loyalty and share of
wallet in retail banking. Journal of Financial Services Marketing, 9(March), 231–248.
Berger, P. D., Bolton, R. N., Bowman, D., Briggs, E., Kumar, V., Parasuraman, A., & Terry, C.
(2002). Marketing actions and the value of customer assets: A framework for customer
asset management. Journal of Service Research, 5(August), 39–54.
Bhattacharya, C. B., Fader, P., Lodish, L. M. S., & DeSarbo, W. S. (1996). The relationship
between the marketing and share of category requirements. Marketing Letters,
7(January), 5–18.
Bowman, D., Farley, J. U., & Schmittlein, D. C. (2000). Cross-national empirical generalization in
business services buying behavior. Journal of International Business Studies, 31(4), 667–685.
Bowman, D., & Narayandas, D. (2001). Managing customer-initiated contacts with
manufacturers: The impact on share of category requirements and word-of-mouth
behavior. Journal of Marketing Research, 38(August), 281–297.
Bowman, D., & Narayandas, D. (2004). Linking customer management effort to customer
profitability in business markets. Journal of Marketing Research, 44(November), 433–447.
Brody, R. P., & Cunningham, S. M. (1968). Personality variables and the consumer decision
process. Journal of Marketing Research, 5(February), 50–57.
Cannon, J. P., & Homburg, C. (2001). Buyer-supplier relationships and customer firm costs.
Journal of Marketing, 65(January), 29–43.
Chin, W. W. (1998). The partial least squares approach for structural equation modeling.
In: G. A. Marcoulides (Ed.), Modern methods for business research (pp. 295–336).
London: Laurence Erlbaum Associates.
Cooil, B., Keiningham, T. L., Aksoy, L., & Hsu, M. (2007). A longitudinal analysis of customer
satisfaction and share of wallet: Investigating the moderating effect of customer
characteristics. Journal of Marketing, 71(January), 67–83.
Day, G. S. (1969). A two-dimensional concept of brand loyalty. Journal of Advertising Research,
9(September), 29–35.
De Jong, A., & de Ruyter, K. (2004). Adaptive versus proactive behavior in service recovery:
The role of self-managing teams. Decision Sciences, 35(Summer), 457–491.
De Jong, A., de Ruyter, K., & Lemmink, J. (2004). Antecedents and consequences of the service
climate in boundary-spanning self-managing service teams. Journal of Marketing,
68(April), 18–35.
De Wulf, K., Odekerken-Schröder, G., & Iacobucci, D. (2001). Investments in consumer
relationships: A cross-country and cross-industry exploration. Journal of Marketing,
65(October), 33–50.
Dwyer, R. F., & Tanner, J. F., Jr. (1999). Business marketing: Connecting strategy, relationships
and learning. Boston: Irwin/McGraw-Hill.
Linking Customer Value to Customer Share in Business Relationships 241
East, R., Hammond, K., Harris, P., & Lomax, W. (2000). First-store loyalty and retention.
Journal of Marketing Management, 16(May), 307–325.
East, R., Harris, P., Willson, G., & Lomax, W. (1995). Loyalty to supermarkets. International
Review of Retail, Distribution and Consumer Research, 5(January), 99–109.
Flint, D. J., Woodruff, R. B., & Gardial, S. F. (2002). Exploring the phenomenon of customers’
desired value changes in a business-to-business context. Journal of Marketing,
66(October), 102–117.
Fornell, C., & Bookstein, F. L. (1982). Two structural equation models: LISREL and
PLS applied to consumer exit-voice theory. Journal of Marketing Research, 19(4),
440–452.
Fournier, S., & Yao, J. L. (1997). Reviving brand loyalty: A reconceptualization within the
framework of consumer-brand relationships. International Journal of Research in
Marketing, 14(December), 451–472.
Gassenheimer, J. B., Houston, F. S., & Davis, J. C. (1998). The role of economic value, social
value, and perceptions of fairness in interorganizational relationship retention decisions.
Journal of the Academy of Marketing Science, 26(4), 322–337.
Griffin, J. (2002). Customer loyalty: How to earn it. How to keep it (2nd ed.). San Francisco, CA:
Jossey-Bass.
Heide, J. B., & John, G. (1988). The role of dependence balancing in safeguarding transaction-
specific assets in conventional channels. Journal of Marketing, 52(January), 20–35.
Hunt, S. D., & Morgan, R. M. (1995). The comparative advantage theory of competition.
Journal of Marketing, 59(April), 1–15.
Hunt, S. D., & Morgan, R. M. (1996). The resource-advantage theory of competition:
Dynamics, path dependencies, and evolutionary dimensions. Journal of Marketing,
60(October), 107–114.
Hunt, S. D., & Morgan, R. M. (1997). Resource-advantage theory: A snake swallowing its tail
or a general theory of competition? Journal of Marketing, 61(October), 74–82.
Jarvis, C. B., MacKenzie, S. B., & Podsakoff, P. M. (2003). A critical review of construct
indicators and measurement model misspecification in marketing and consumer
research. Journal of Consumer Research, 30(2), 199–218.
Keiningham, T. L., Perkins-Munn, T., & Evans, H. (2003). The impact of customer satisfaction
on share-of-wallet in a business-to-business environment. Journal of Service Research,
6(August), 37–50.
Leenheer, J., Bijmolt, T. H. A., Van Heerde, H. J., & Smidts, A. (2002). Do loyalty programs
enhance behavioral loyalty? An empirical analysis accounting for program design and
competitive effects. Working Paper No. 2002-65.
Leuthesser, L. (1997). Supplier relational behavior: An empirical assessment. Industrial
Marketing Management, 26(May), 245–254.
Leuthesser, L., & Kohli, A. K. (1995). Relational behavior in business markets: Implications for
relationship management. Journal of Business Research, 34(November), 221–233.
Lindgreen, A., & Wynstra, F. (2005). Value in business markets: What do we know? Where are
we going? Industrial Marketing Management, 34(7), 732–748.
Liu, A. H., Leach, M. P., & Bernhardt, K. L. (2005). Examining customer value perceptions of
organizational buyers when sourcing from multiple vendors. Journal of Business
Research, 58(May), 559–568.
Lohmöller, J.-B. (1989). Latent variable path modeling with partial least squares. New York:
Springer.
242 WOLFGANG ULAGA AND ANDREAS EGGERT
Macintosh, G., & Lockshin, L. S. (1997). Retail relationships and store loyalty: A multi-level
perspective. International Journal of Research in Marketing, 14(December), 487–497.
Mägi, A. W. (2003). Share of wallet in retailing: The effects of customer satisfaction, loyalty
cards and shopper characteristics. Journal of Retailing, 79(Summer), 97–106.
Marketing Science Institute. (2006). 2006–2008 research priorities. (Accessed September 12,
2006), [available at http://www.msi.org/msi/rp0608.cfm].
Mentzer, J. T., Flint, D. J., & Hult, G. T. M. (2001). Logistics service quality as a segment-
customized process. Journal of Marketing, 65(October), 82–104.
Möller, K. E. K., & Törrönen, P. (2003). Business suppliers’ value creation potential:
A capability-based analysis. Industrial Marketing Management, 32(2), 109–118.
Monczka, R., Trent, R., & Handfield, R. (2005). Purchasing and supply chain management (3rd
ed.). Mason, OH: Thomson South-Western.
Ogden, J. A. (2006). Supply base reduction: An empirical study of critical success factors.
Journal of Supply Chain Management: A Global Review of Purchasing and Supply,
42(November), 30–40.
Payne, A., & Holt, S. (1999). A review of the ‘value’ literature and implications for relationship
marketing. Australasian Marketing Journal, 7(1), 41–51.
Peppers, D., & Rogers, M. (1999). Enterprise one-to-one: Tools for competing in the interactive
age. New York, NY: Doubleday Publications.
Perkins-Munn, T., Aksoy, L., Keiningham, T. L., & Estrin, D. (2005). Actual purchase as a
proxy for share of wallet. Journal of Service Research, 7(August), 245–256.
Pfeffer, J. (1982). Organizations and organization theory. Boston, MA: Pitman.
Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations: A resource
dependence perspective. New York, NY: Harper and Row.
Podsakoff, P. M., MacKenzie, S. B., Lee, J.-Y., & Podsakoff, N. P. (2003). Common method
biases in behavioral research: A critical review of the literature and recommended
remedies. Journal of Applied Psychology, 88(October), 879–903.
Reynolds, K. E., & Arnold, M. J. (2000). Customer loyalty to the salesperson and the store:
Examining relationship customers in an upscale retail context. Journal of Personal
Selling and Sales Management, 20(Spring), 89–98.
Reynolds, K. E., & Beatty, S. E. (1999). Customer benefits and company consequences of
customer-salesperson relationships in retailing. Journal of Retailing, 75(Spring), 11–32.
Rust, R. T., Lemon, K. N., & Narayandas, D. (2004). Customer equity management. Upper
Saddle River, NJ: Prentice Hall.
Silvestro, R., & Cross, S. (2000). Applying the service profit chain in a retail environment.
International Journal of Service Industry Management, 11(3), 244–268.
Slater, S. R. (1997). Developing a customer value-based theory of marketing. Journal of the
Academy of Marketing Science, 25(2), 162–167.
Stock, R. M. (2006). Interorganizational teams as boundary spanners between supplier
and customer companies. Journal of the Academy of Marketing Science, 31(September),
558–599.
Ulaga, W., & Eggert, A. (2006). Value-based differentiation in business relationships:
Gaining and sustaining key-supplier status. Journal of Marketing, 70(January),
119–136.
Verhoef, P. C. (2001). Analyzing customer relationships: Linking relational constructs and marketing
instruments to customer behavior. Working paper, Erasmus University Rotterdam.
Linking Customer Value to Customer Share in Business Relationships 243
244
Mean Standard
Deviation
Product quality
Product1 Compared to the second supplier the main supplier provides us with better product 4.55 1.59
quality.
Product2 Compared to the second supplier the main supplier meets our quality standards better. 4.62 1.60
Product3 Compared to the second supplier the main supplier’s products are more reliable. 4.47 1.59
Product4 Compared to the second supplier we reject less products from the main supplier. 4.60 1.69
Service support
Service1 Compared to the second supplier the main supplier provides us with better services. 4.92 1.52
Service2 Compared to the second supplier the main supplier is more available when we need 4.63 1.54
information.
Service3 Compared to the second supplier the main supplier provides us with more appropriate 4.83 1.65
information.
Service4 Compared to the second supplier the main supplier responds faster when we need 4.74 1.50
information.
Delivery performance
Delivery1 Compared to the second supplier the main supplier performs better in meeting delivery 4.83 1.65
due dates.
Delivery2 Compared to the second supplier we have less delivery errors with the main supplier. 4.74 1.68
Delivery3 Compared to the second supplier deliveries from the main supplier are more accurate 4.77 1.69
(no missing or wrong parts).
Supplier know-how
Know-how1 Compared to the second supplier the main supplier provides us a better access to his or 4.68 1.59
her know-how.
Linking Customer Value to Customer Share in Business Relationships
Know-how2 Compared to the second supplier the main supplier knows better how to improve our 4.73 1.55
existing products.
Know-how3 Compared to the second supplier the main supplier performs better at presenting us 4.81 1.52
with new products.
Know-how4 Compared to the second supplier the main supplier knows better how to help us drive 4.77 1.69
innovation in our products.
Know-how5 Compared to the second supplier the main supplier knows better how to assist us in new 4.37 1.48
product development.
Time-to-market
Time-to-market1 Compared to the second supplier the main supplier performs better in helping us 4.48 1.50
improve our time-to-market.
Time-to-market2 Compared to the second supplier the main supplier helps us more in improving our 4.55 1.57
cycle time.
Time-to-market3 Compared to the second supplier the main supplier helps us more in getting our 4.40 1.58
products to market faster.
Time-to-market4 Compared to the second supplier the main supplier performs better in helping us speed 4.61 1.55
up product development.
Personal interaction
Personal1 Compared to the second supplier it is easier to work with the main supplier. 4.89 1.61
Personal2 Compared to the second supplier we have a better working relationship with the main 5.07 1.52
supplier.
Personal3 Compared to the second supplier there is a better interaction between the main 5.07 1.54
supplier’s people and ours.
Personal4 Compared to the second supplier we interact better with the main supplier. 4.91 1.57
Personal5 Compared to the second supplier we can address problems more easily with the main 4.83 1.56
supplier.
Personal6 Compared to the second supplier we can discuss problems more freely with the main 4.69 1.59
supplier.
Personal7 Compared to the second supplier the main supplier gives us a greater feeling of being 4.72 1.63
treated as an important customer.
245
246
RELATIONSHIP COSTS
How do each of the following costs of the main supplier compare with the costs of your second-best supplier?
Main Supplier’s Main Supplier’s Costs Main Supplier’s Main Supplier’s Costs Main Supplier’s Mean Standard
Costs are Much are Somewhat Lower Costs are the are Somewhat Higher Costs are Much Deviation
Customer value
Value1 Compared to the second supplier the main supplier adds more 4.99 1.51
value to the relationship overall.
Value2 Compared to the second supplier we gain more in our 4.93 1.45
relationship with the main supplier.
Value3 Compared to the second supplier the relationship with the main 5.01 1.51
supplier is more valuable.
Value4 Compared to the second supplier the main supplier creates more 5.01 1.49
value for us when comparing all costs and benefits in the
relationship.
Customer share
Share1 For this component, we purchased about x% from our main 72.63% 16.85
supplier during the past 12 months.
Share2 For this component, we purchased about x% from our second 19.58% 13.17
supplier during the past 12 months.
247
CONFIGURATIONS AND CONTROL
OF RESOURCE INTERFACES IN
INDUSTRIAL NETWORKS
ABSTRACT
The role of management control has not received sufficient attention in the
literature on value creation so far. Therefore, this paper aims to
investigate the role of control in value creation in industrial networks.
More specifically, the aim is to examine the management and control of
interfaces between key resources within and between firms, in the
networks surrounding firms, when they attempt to create value. All the
firms that take part in a value-creation process have both formal and
informal control systems: these firms have budgets, specific routines,
reward systems, and sanctioned ‘‘ways to behave.’’ The paper relates the
Industrial Marketing and Purchasing (IMP) group’s research on
interaction, relationships, and networks with control literature, and
presents a framework for controlling resource interfaces in a network
setting. Two in-depth cases illustrate the role of control in value creation.
The first case covers the development of a low-weight newspaper grade
that Holmen and its paper mill Hallsta initiated. The second case
examines the attempt to develop and commercialize a new, energy
efficient pulping technology.
1. INTRODUCTION
Value creation is at the core of all business (Moran & Ghosal, 1999;
Ramirez, 1999; Simons, 1995). A great deal of research is available on the
antecedents of value and how firms create value for their customers in
business markets (e.g., Anderson & Naurus, 2004; Walter, Ritter, &
Gemünden 2001). However, the literature pays less attention to how the
firms in a network control each other’s resources and resource interfaces in
order to create economic value. Therefore, this paper examines the role that
management control plays in the combination of resources and resource
interfaces in industrial networks when the aim is to create value. In the
management control literature (Hopwood, 1996; Håkansson & Lind, 2004;
Dekker, 2004), control is largely looked upon from a firm internal
perspective, while this paper highlights the interorganizational dimensions
of control.
Baraldi and Strömsten (2006) divide value creation into two subprocesses:
value embedding and daily value utilization/production. These two
subprocesses are logically separate, but both must be present for creating
and realizing value (Johanson & Strömsten, 2005) for users, and as a
consequence also for the solution provider. The distinction and specific role
of the two subprocesses are even more important when value embedding
and daily utilization need close connection, as in the creation of unique and
fully customized solutions. In addition, there are variations in the need of
tightly connecting value embedding and daily value production/utilization:
high interface complexity and interdependency result in a tight connection
between value embedding and daily value production/utilization (Baraldi &
Strömsten, 2006). When the two subprocesses are tightly related, it takes
time to find sociotechnical compromises and reciprocal adaptations (Ibid).
Nevertheless, a tight connection between value embedding process and daily
value production/utilization may be an absolute necessity whenever
interfaces are numerous, highly complex, and interdependent (Ibid).
Besides, even if value creation will take longer, chances are high that one
will obtain, through continuous adaptations, a solution that ‘‘fits’’ and
reduces disruptions for several of the involved actors in the network, both
on the supplying and the using side.
Economic value emerges when actors develop resources and there is a use
for these resources that leads to exchange between two parties. Even if
exchange in most cases involves only two parties, there might be several
other actors involved, directly or indirectly in the value-creation process. All
the firms that interact (Håkansson, 1982) in a value-creation process have
Resource Interfaces in Industrial Networks 253
both formal and informal control systems: they have budgets, specific
routines, reward systems, and sanctioned ‘‘ways to behave.’’ A firm that for
example aims at changing a product’s features, or using a new input in its
production process, is affected not only by its own control system when it
starts collaborating with a supplier and/or a customer, but also by the
supplier’s or customer’s control system. In some cases, these firms develop a
joint control system for a limited time or for a specific project (Dekker,
2004). But the current literature on value creation does not pay sufficient
attention to the role of management control systems. Therefore, this paper
aims to extend an earlier analysis (see Baraldi & Strömsten, 2006) in order to
investigate the role of control (both intraorganizational control as well as
interorganizational control) in value creation in industrial networks. This
paper examines the management and control of interfaces between key
resources within and between firms, in the networks surrounding these firms
when they attempt to create value.
Two cases illustrate the role of control in value creation. The first case
covers the development of a low-weight newspaper grade that Holmen and
its paper mill Hallsta initiated. The second case examines the attempt to
develop and commercialize a new pulping technology, ThermoPulp, in
cooperation between Sunds Defibrator and the paper producer SCA.
Studying successful technology development and value-creation episodes
can indeed be valuable, as we learn from good examples. However, less
successful cases are just as valuable but business research tends to under
sample them. The two cases of this paper cover therefore both a success and
a failure, that is, a case where value did not emerge according to the
expectations. The two cases mirror each other in their structure and
contents, so that the successful and the less successful one can be compared
in order to attain a more fine-grained view of how value is created or
possibly not created.
Therefore, at a general level, this paper describes and analyzes value
creation in industrial networks by focusing on how firms combine and
control resources and resource interfaces systematically. Thus, at a more
specific level, the paper aims to penetrate the role of management control in
relation to the opportunities and barriers to value creation present in the
network of resource interfaces surrounding the focal products. By looking at
both successful and less successful value-creation processes it is possible to
pinpoint such opportunities and barriers.
The paper is organized as follows. First, the paper presents a theoretical
frame of reference concerning resources and networks, and how actors
within a network context actively and systematically attempt to control and
254 ENRICO BARALDI AND TORKEL STRÖMSTEN
The notion of resource heterogeneity (Penrose, 1959) stresses that the value
of a resource does not reside in the resources itself, but this value depends on
the combinations of a focal resource with other resources (Ibid: 25, 74–75).
A specific feature of a resource becomes more or less valuable when actors
confront or put together that resource with other resources. In addition,
resources even shape each other’s features during long-term interaction
processes (Håkansson & Waluszewski, 2002). Put differently, the value of a
focal resource emerges from the network of other resources that embed the
focal resource.
This relativistic perspective of value also make explicit that a resource
must be valuable for someone or in relation to something else and for a
particular purpose, that is, nothing could ever be valuable in a vacuum.
These theoretical tenets also make explicit that the creation of value is
necessarily an interactive process and that value is always idiosyncratic and
thus highly context specific. Next to this interactive and relativistic nature,
another key aspect of value is its multidimensionality, that is, there is not
one single value but a multiplicity of values included in the very same
resource that may ‘‘speak’’ to a rather broad audience: a resource always
includes both physical (technical) and social features that can potentially
deliver different values to different actors.
Then, at a more fine-grained level, one can break down, or decompose,
the value of a resource into several dimensions or value-bearing features.
256 ENRICO BARALDI AND TORKEL STRÖMSTEN
The value of a product can include for instance the following dimensions:
costs, functions/performances, durability, health-friendliness, and style.
Whenever one breaks down the value of a resource down to its components
one can reveal a web of values built into this resource by interactions
(between single resource bits) that create specific value-bearing features.
Whether the single value-bearing features are mutually additive, that is,
progressively increase the value of a focal resource or not, depends very
much on the context that forged and utilizes these resource features: some
values such as low cost and high performances of a product may be
mutually exclusive features because of resource constraints on the
production side; while the low cost of a product may be the trigger that
induces using the product in such high volumes that stimulate other actors
to develop complementary resources that allow achieving very high
performances from using these resources together. In addition, the
economizing on a costly resource might need the development of features
of another resource that has direct or indirect interfaces to the first resource.
Hence, what complicates the attribution of value to resources is the fact that
actors regularly use them together with other resources and that their several
values interact in highly complex ways.
During the value-creation process, both the first-time embedding and the
daily production and utilization of economically relevant values (i.e.,
features affecting cost and performance) proceed at a physical and at a
social level in a network. There is however no automatism and determinism
in the creation of value: some actor must evaluate, and accordingly consider
as valuable, even the most apparent physical features of a resource prior to
activating it in a utilization process that eventually realizes the value of that
resource. Moreover, the creation and activation of the physical and social
features of a resource happen in combination with other physical and social
resources. Therefore not only the social, but also the physical values of each
single resource are highly idiosyncratic: someone has to attribute value even
to the most physically apparent and seemingly objective features of a
resource; and this ‘‘(e-) valuation process’’ is highly specific, depending on
the contextual conditions where actors exchange and utilize the resource.
Someone must find the resource valuable, either because of the way a firm
uses the resource technically together with other resources, or because of the
way the resource helps the firm to create commercial values, for instance for
its customers.
The idea of services of a resource (Penrose, 1959, p. 25), and hence the
notion of value as deriving from the activities that utilize a resource (Wedin,
2001, pp. 41–45; Baraldi, 2003, p. 18) is certainly of great importance,
Resource Interfaces in Industrial Networks 257
as well as the knowledge about resource interfaces (Wedin, 2001, p. 29). But
since most activities use several resources at the same time, the value of a
single resource resides in the interfaces and in the combinations with other
resources. Thus a closer look at the notion of resource interfaces is
necessary.
involve only social resources (OUs and relationships); and mixed interfaces
that connect social and physical resources (e.g., a product and an OU).
Examples of physical interfaces between a product and a facility are: (1) the
time necessary to perform certain operations on that product and (2) the
rate of defective products. Examples of organizational interfaces between
a BU and a BR are: (1) the share of time that an OU dedicates to a BR and
(2) the investments that a unit makes for a specific customer relationship.
Examples of mixed interfaces between a facility and a relationship are:
(1) the percentage of output that a specific customer purchases and (2) the
customer trust that the operations of that facility contribute to create. Quite
importantly, the connection between physical and organizational resources
in a mixed interface means that the influence goes in both directions. For
example, an OU certainly can influence the features of a product, but the
product also can have an important impact on the organization (Håkansson &
Strömsten, 2007, p. 6).
Resources and their interfaces form different types of configurations, in
terms of complexity, interdependency, and dispersion of resources interfaces
in the network (Baraldi & Strömsten, 2006). Interface complexity indicates
whether a technology is simple or complex, with processes involving one or
several technological bases, and with a few or many actors involved in the
embedding and the production/using processes. High complexity makes
interfaces hard to oversee, especially if interfaces are very interdependent,
that is, indirect interfaces dominate over direct ones. Whether interfaces are
interdependent indicates whether the function of one interface is (mutually)
dependent upon another and if this influence attempts at value creation and
value realization. Interface dispersion indicates the physical and social
distance between the involved physical and organizational resources in a
specific network situation and whether the technological competencies
necessary for value creation span few or many firms’ boundaries in the
network.
Thus, expanding on the above classification, interfaces can be direct or
indirect, depending on whether the effects between two resources directly
move from one resource to the other or a third resource intervenes as a
mediator. Indirect interfaces become visible through the features created in
an interface farther away from a user for instance (Baraldi & Bocconcelli,
2001, pp. 567–568; Wedin, 2001, p. 168). Extending the analysis to several
resources around two focal ones helps identifying these indirect interfaces.
At the same time, this extension indicates that every resource and every
interface is embedded in a greater whole. The analytical framework in this
paper stresses precisely this point: to understand how the value even only of
260 ENRICO BARALDI AND TORKEL STRÖMSTEN
a single resource emerges, one needs to unravel several direct and indirect
interfaces that stretch across the whole network. In fact, value emerges not
only alongside single resource-to-resource interfaces (of physical, social, and
mixed type), but also from the complex web of indirect physical,
organizational, and mixed interfaces spread over firms’ boundaries and
across a whole network. Table 1 summarizes the discussion.
Since this paper investigates the values created around a number of focal
products, it is therefore pivotal to stress that the value of each product does
not lie simply in the ‘‘Product–user’’ interface or in the ‘‘buyer–seller’’
interface. Instead, the potential value is distributed in all relevant interfaces
across the resource network. For example, the creation of value for a
newspaper starts as early as in the wood-sorting process where the paper
producer and the wood suppliers take part. But the creation of value for a
newspaper also includes the creation of specific strength features in the
paper during the pulping process. Then printing units activate these features
Physical What are the numbers How dispersed are Are there
and the nature of the relevant products and interdependencies in
physical resources facilities in the the producing/using
involved around a network around a patterns between
focal resource? focal resource? physical resources
around a focal
resource?
Organizational What are the numbers How dispersed are Are there
and the type of relevant interdependencies in
business logic of the organizational units the buying/selling
organizational and relationships in patterns between
resources involved the network around a organizational
around a focal focal resource? resources around a
resource? focal resource?
Mixed What are the numbers How dispersed are the Are there
of physical and physical and interdependencies
organizational organizational between the
resources involved in resources involved in producing/using and
a mixed interface? a mixed interface? buying/selling
patterns in a mixed
interface?
Resource Interfaces in Industrial Networks 261
in the network around the supplier of paper. The fact that several resources
intervene in the creation of value means that several organizations take part,
directly or indirectly, explicitly and implicitly, in the value-creation process.
Resource interfaces are not only the underlying sources of value, but they are
ideally the target of managerial actions to create value. In other words,
resource interfaces are the very tools that firms can, at least partially, control
in order to create economic value. However, specifically controlling resource
interfaces, especially at a whole-network level, is not easy, because controlling
requires affecting the behavior of other firms who affect and are affected by
these resource interfaces. Controlling interfaces is thus a highly demanding
endeavor that requires balancing between conflicting pressures between
different interfaces and the interests of different actors and overcoming
several barriers, especially when actors at several sites in the network need to
make costly changes for embedding and utilizing a new value.
The literature traditionally views control as an intraorganizational affair
(Hopwood, 1996). However, a recent interest among accounting and control
researchers also addresses the interorganizational facets of control (e.g.,
Berry, 1994; Otley, 1994; Håkansson & Lind, 2004). Ouchi (1979) introduces
a control framework that Merchant (1985) develops further; this framework
points to three different types of mechanisms applicable to influence and
control actor behavior: result control, action control, and personnel control.
Result control involves the identification of results that are critical for an
organization and the evaluation expost of these results. Action control deals
with the identification of actions (or preventing actions) that are critical for
the organization to reach its objectives. Finally, personnel control deals with
issues such as selecting and training (teaching) people in order to create a
behavior that can help the organization to reach its objectives. Ouchi (1979)
and Merchant (1985) see result and action control as formal control types,
compared to the more informal personnel control. This control framework
is also relevant from an interorganizational perspective (e.g., Dekker, 2004)
and helpful for analyzing how firms can control the three types of resource
interfaces discussed above.
Firms need to coordinate their behavior in relation to other firms and
organizations in order create value. As value resides in the network and not
within the single firm, a focal firm needs to induce other firms to behave in
ways that facilitate the value creation the firm is promoting.
262 ENRICO BARALDI AND TORKEL STRÖMSTEN
relationship and then suggest ways to increase the leverage that this facility
has on the development of the relationship. Capability trust (Ibid) is
relevant in the analysis of mixed resource interfaces because this dimension
also involves physical resources, the capability to use and develop resources,
and their interfaces to other resources. Thus, for mixed interfaces also it is a
matter of identifying, selecting, and mobilizing counterparts that are
dependent or interdependent upon a physical resource. Controlling an
interface between a BU and a facility implies influencing how the unit selects
its cooperative partners, directing its competence development towards the
facility so that is beneficial for the focal firm, but also for some other actors
that might affect the functioning of that facility. The table below illustrates
the different types of ‘‘interface-controls’’ (Table 2).
Controlling resources that reside outside the legal boundaries of a firm
can certainly be hard and involves identifying interfaces among the relevant
set of resources. However, considering the long-term relationships the IMP
group’s research tradition (e.g., Axelsson & Easton, 1992; Håkansson, 1982)
identifies, control is understandable from a network perspective as the
attempt of a firm to influence the behaviors and priorities of other relevant
actors within its network horizon (Anderson, Håkansson & Johanson, 1994:
by using result, action, and personnel control in various combinations).
The empirical material that the two case studies build on is extensive,
entailing more than 100 face-to-face interviews. The first case concerns the
creation of a low-weight paper grade, in the whole network stretching from
electricity production to printing and publishing, and takes as a starting
point a focal organization, Holmen Paper and its production unit Hallsta
Paper Mill, located about 100 km north of Stockholm in Sweden (Wedin,
2001). The second case study relates to the low-weight paper study, and
concerns how an equipment manufacturer developed ThermoPulp, an
electricity efficient pulping technology, and its attempts to commercialize
this technology. For the newspaper and pulping technology cases, more
than 100 interviews were conducted in the period 1995–2001 at more than 40
organizations affecting the focal resource, newsprint. The empirical material
has since then been updated with some 20 additional face-to-face interviews.
The empirical case studies were collected with the explicit goal to analyze
Resource Interfaces in Industrial Networks 265
reference customer for the new technology and Hallsta needed a process that
could help it to lower its oil consumption, its chemical pulp use, and
produce a paper with lower weight.
The other Swedish alternative was Sunds. Sunds differed from Defibrator
technically as the firm manufactured another type of refiner, the so-called
double-disc refiners, which were assumed to produce a weaker pulp, not
suiting Hallsta’s production objectives. Defibrator produced single-disc
refiners. Furthermore, Sunds was owned by SCA, one of the main competitors
to Hallsta and Holmen, which was not considered a benefit for Sunds.
The general idea about the new mechanical pulping technology was to
take care of the properties of the wood fiber better than before. The length
of a wood’s fiber and the fibers’ ability to bond generally affect the
properties of the pulp and the paper produced, this is especially true of its
strength. For a publisher or a printing house, the paper’s strength properties
are central in order to obtain an efficient and ‘‘safe’’ printing process.
Several thousands of newspapers are often printed during few hours every
night and there is little time for fixing production errors. For a paper mill,
this would mean that less chemical pulp would be needed as a reinforcement
input. The idea with the new TMP technology was to process the wood
fibers in the pulping process so that different fiber lengths would come out
from the pulping process. The portion of long fibers that gives the final
paper its strength features should increase at the expense of the middle and
short fibers that give the paper its optical features. Thus it was a matter of
finding the right combination of wood fibers that went into the paper
machine and in the paper-making process.
Thus, the challenge was to use the wood fibers and create a paper that
could be used in the customers’ printing presses without problems, despite
the product being much thinner than before. A potential problem also also
the increased use of color in the daily newspapers. In addition, customers
started one-by-one to invest in new printing presses and thereby also shift
from one technology to another. In a few years during the 1970s and 1980s,
the printing industry left the old-fashioned letter press technology and
invested in presses using the offset method. This method had somewhat
other demands on the paper as the interaction between the input resources
was much more intense, as rubber cylinders were used to transfer the ink to
the paper. Moreover, as the offset method was starting to gain ground, more
and more color and also chemical liquids started to be used in the printing
process. That meant, the process became more ‘‘wet’’ than before and
starting to use a lighter and thinner paper during these conditions was a real
challenge.
270 ENRICO BARALDI AND TORKEL STRÖMSTEN
A TMP unit consists of so-called disc refiners instead of the chain works
that SGW is built up of. Disc refiners had been used in the pulp and paper
industry since the beginning of the 1920s, but for totally different purposes
than Hallsta now wanted them for. The first refiner was developed in the US
early in the 19th century. Bauer Brothers, the American equipment
manufacturer found a refiner that was used for ‘‘breaking down cottonseeds
and peanuts’’ and then adapted it for the pulp and paper industry
(Sundholm, 1998, p. 28) and the concept of grinding raw material between
two counter rotating discs have been used for processing agricultural
products for a long time. In the paper industry, the main application area
for disc refiners was in the production of board. In addition disc refiners
were also used for processing pulp before the pulp was further transported
into the paper machine (after having being processed in the SGW process).
For example, Voith had developed a ‘‘raffineur’’ in the 1850s for this
purpose (Sundholm, 1998). The first step toward using refiners for
producing mechanical pulp was taken in the 1920s when Bauer Brothers
started to develop the refiner concept. The reasons behind the development
of refiner technology in the 1950s and 60s can be traced to the fact that the
raw material in the north eastern parts of USA became more and more
scarce and, therefore, more expensive. At the same time there was an excess
of wood chips from the saw mill industry on the west coast. This made it
interesting to develop equipment that could use wood chips as its raw
material (Waluszewski, 1989). Thus, the very same arguments used in the
USA were used in the Swedish context some 20 years after this (Fig. 1).
Soon after the purchase of TMP equipment, Hallsta and Defibrator
developed a close cooperative relationship as is described by both parties.
1600
1400
Oil consumption
1200
Oil GWh
1000
800
600
400
200
0
60
63
66
69
72
75
78
81
84
87
90
93
96
19
19
19
19
19
19
19
19
19
19
19
19
19
Year
Fig. 1. Oil consumption at Hallsta 1960–1996.
Resource Interfaces in Industrial Networks 271
From the initial investment in 1974, Hallsta and Defibrator had a formal
agreement to cooperate. However soon joint problem solving started to
emerge between the parties and a more informal side of the agreement was
developed. The formal part of the agreement meant that Defibrator had the
right to use Hallsta as a reference mill, which meant that Defibrator invited
their customers to Hallsta and also trained customers on Hallstas’ facilities.
The informal part, that was perhaps the most important one for Hallsta,
concerned the development work of the refiners and the TMP process in
general. Defibrator was in need of a customer to be able to develop its
refiners, while Hallsta needed help and advice from Defibrator to run its
facilities. As TMP1 at Hallsta was the first TMP mill in an integrated paper
mill, there were some problems that had to be solved, both in the
configuration of the process and in the refiners themselves. Defibrator
needed to test ideas and equipment and Hallsta needed to develop its
production facilities and make them more efficient. For example, if
Defibrator had manufactured something, a prototype or a component that
could be used in production, it could be tested at Hallsta quite rapidly. This
could, for example, regard new types of refiner segments or new patterns of
a refiner segment, where there is a need for a ‘‘real life’’ testing in order to
evaluate whether the new segment is useful for the customer or not.
Early quality problems included high content of shives, unprocessed fibers
that caused problems in the paper machines, and more critically in the
customers’ printing processes. By increasing the refining intensity and by
changing the patterns of the segments, these problems could be overcome.
These changes were based on trials and errors: ‘‘Still today, we don’t know
what happens inside a disc refiner, even if the knowledge certainly has
increased on what parameters to use in order to increase pulp quality’’ as an
engineer at Defibrator put it.
Eventually, a number of benefits could be reached when the pulp attained
an acceptable quality level, measured on the quality index Freeness, which
indicates the pulp’s drainage ability in the paper machine. This test also
indicates other features such as certain strength properties. One such
strength indicator is the paper’s tear strength. Hallsta’s operators realized
that by increasing the refining intensity the paper got stronger, as long as the
length of the fibers were not damaged by the new mechanical pulping
technology. Thus, less chemical pulp was needed as a reinforcer, just as the
advocates of the technology promised. In addition, with a higher share of
mechanical pulp the opacity increased, which allowed producing a thinner
paper: a paper with lower grammage weight. As the TMP technology
reached higher grounds, Hallsta and Defibrator taught other customers to
272 ENRICO BARALDI AND TORKEL STRÖMSTEN
Defibrator how to run TMP mills, how to avoid quality problems, and what
pulp recipe worked for what products. As an engineer at Defibrator puts it:
‘‘The development of the TMP process laid the ground to decrease the use of
chemical pulp and facilitated the development of a thinner paper. The
relationship with Hallsta was instrumental in this process.’’
A few years later, another innovation further reduced the consumption of
oil in paper making. Defibrator managed to pressurize disc refiners so that
the large amounts of steam created when wood fibers are defibrated in the
interaction with the refiner segments, could be recovered and used in paper
machines’ drying section. The need for steam in the drying section had
already been reduced by the stronger pulp which in turn admitted a lower
grammage, moreover now the steam was produced in the pulping activity
(as the disc refiners were used as ‘‘steam producers’’). Thus Hallsta’s oil
consumption could be dramatically reduced as can be seen from the figure
above.
Going from 52 g per square meter to 48 and then to 45 g per square meter,
put some new requirements on the input of the paper machine. As
mentioned above, a lighter paper also means that fewer fibers are used to
produce a paper that is going to be printed on and this puts demands on
strength features of the pulp produced. The joint development efforts with
Defibrator were not enough for Hallsta to develop a lighter paper: a
complementary resource was necessary, electronic control devices. Hallsta
collaborated with the supplier of control systems ABB in this project. ‘‘The
cooperation was quite intimate, we had meetings and discussed possible
solutions with ABB, what was possible to do and they explained for us how
we could reach our goals. Then there was an education package for the
operators in order to get to know how the new systems worked, how to
interpret the different measures.’’
The fact that this was a standard that emerged throughout the network of
actors and resources where Hallsta acted certainly helped. The knowledge
that ABB had developed around electronic control devices, in other
relationships with paper producers, could be used within new settings such
as in the case of Hallsta. One critical factor if the new paper machine, PM12,
was going to be able to go down to 45 g was that it was possible to control
the paper web’s profile on a continuous basis, online. Hallsta had invested in
an ABB system earlier and it was further developed to manage this task.
A thinner paper also means that the numbers of running meters per roll of
paper increased. This put demands on a much more even paper profile and
small differences along the paper web caused problems on the rolling
machine as well as on the tambour, where the paper is cut in different
Resource Interfaces in Industrial Networks 273
dimensions. Even if these problems could not be totally avoided they could
be managed with help from ABB.
For the paper machine operators it was a learning process to know how
much fiber was about to go into the paper machine. In practice it was an
issue to decrease the amount of pulp from the silo into the paper machine.
Moreover, the demand for increased opacity was increasing. One of the
customers had had problems with the opacity as it was possible to read
the ad from the opposite page. Accordingly, the advertisers complained. The
complaints soon landed in Hallsta. In order to solve this problem, the
operators started to put in clay as filler that increased the opacity of
the paper. This was also good for another reason; clay is cheaper than pulp,
so the total recipe got cheaper with more clay in it. As the manager for PM
12 put it: ‘‘This is a kind of common knowledge in the business, all the paper
mills do the same when they face this type of problem. But how much and in
relation to what paper grades is highly specific.’’
The supplier of paper machines Voith also contributed to solving
Hallsta’s problems with low grammage by developing the paper machine
in a key dimension. Voith was founded 130 years ago in a little town called
Heidenheim in the southern part of Germany, where the headquarters are
still located. The manufacturing and research and development are also
located in Heidenheim for the paper machine division, Voith Sulzer Paper
Technology. Voith is the paper machine supplier with whom Holmen
(including Hallsta) is most involved and is also historically the main supplier
of paper machines to Holmen.
The two companies have historically had a very close relationship. Hallsta
is by tradition known as a so-called ‘‘Voith mill.’’ Since the start in 1915, the
majority of the paper machines at Hallsta are supplied by Voith. The
relationship has continued, with Voith having delivered a paper machine to
Hallsta’s sister mill Braviken in 1996 for 2.1 billion SEK. In 2002, Hallsta
again invested in a new paper machine, and also this time Voith was the
main supplier. An example that illustrates the importance of a close
cooperation is what occurred in the fall of 1996 when one paper machine
had a serious accident when the drying roller broke down. Within hours
Voith representatives had landed in Hallstavik to fix the problem.
Service activities become central when it comes to such complex and
capital intensive equipment as paper machines. To a high degree, the service
activities also influence the economic outcome of the investment of the
facility. Contacts between Hallsta and Voith take place on a regular basis
and can, for example, concern spare parts, maintenance or the rebuilding of
critical parts of the paper machine (Table 3).
274 ENRICO BARALDI AND TORKEL STRÖMSTEN
The relationship with Voith is important given the properties of the paper
machine and the interfaces to other resources. A modern paper machine
runs at speeds up to 1,700–1,900 m/min, while the older ones at Hallsta run
at speeds from 1,000 to 1,200 m/min. The speed imposes serious quality
demands on the pulp, and especially upon the properties influencing the
strength. As a paper machine is a large capital investment, it is crucial that
its capacity is fully utilized. A breakdown of 1 h in a paper machine is very
costly, reducing revenue by up to 70–80,000 SEK in Hallsta’s case
(depending on the price for the paper and its hourly production capacity).
What is important in terms of reducing the grammage of the paper is the
rule that says, that the weaker the paper, the more the breakdowns that
occur. As a thicker paper, everything else equal, is stronger, the balance of
producing a thinner but still strong paper was a challenge for Hallsta and its
partners in developing the low-weight paper.
Voith’s elimination of the ‘‘free draughts’’ in their paper machines was an
important development step in reducing the grammage. This was important
since the free draughts were the areas where different sections interfaced
each other (e.g., the pressing and drying sections) and also where the paper
webs earlier hung loose. The free draughts required a very strong paper web
and constrained the speed of paper machines. The paper web was stretched
in the free draughts and, if it contained shives or weak parts, the whole web
could break down and the paper machine had to stop. As every stop is
extremely costly (see above), and a high priority goal is to lower unplanned
stoppage time, Voith’s aim with the new paper machine, PM12, was to
eliminate the free draughts.
This innovation could have eased up strength requirements, but it instead
allowed increasing speed in the paper machines, as an increased output in an
growing market paid off more. Therefore, despite the elimination of free
draughts, the paper web had to become stronger due to the increased speed.
As such strength features depend on the fiber-to-fiber bonding created in the
pulping process, when wood fibers are defibrated, Hallsta and Defibrator
examined how the features of the pulp changed with increased load and
Resource Interfaces in Industrial Networks 275
changed refiner segment patterns. Hallsta and Defibrator found out together
that the higher the intensity in wood refining, the stronger the pulp. As a
consequence, the higher load necessary to increase refining intensity led to
an increased use of electricity.
Lower grammage was something that Hallsta’s customers also wanted:
one of these was and still is Dagens Nyheter, Sweden’s biggest newspaper.
But to avoid unwanted effects with a lower weight paper, Holmen and
Dagens Nyheter had to work together until the printing presses could run
smoothly. In printing processes, a thinner (and weaker) paper can create
great problems, such as web breaks. Thus, Hallsta and Dagens Nyheter’s
printing house together trimmed the printing process based on a thinner
paper. As discussed above, lower weight paper can cause problems for the
advertisers; when the paper gets thinner, opacity can become insufficient,
that is, the paper becomes transparent. Thus, the amount of ink and how
pictures were composed had to be adapted to the new grammage. This was
something that Dagens Nyheter in turn had to teach its customers and the
advertising agencies. The ink producer Akzo also had to adapt its products
to the thinner newsprint.
The firms and the physical and organizational resources that were part of
embedding and using low-weight value in Holmen’s News are illustrated in
the figure below (Fig. 2).
In creating and using low-weight paper there were two main technical
components involved, the first one was the pulp and the second was the disc
refiner, which is a part of the TMP process. Other major physical resources
involved were, on the producing side, the paper machines and wood
facilities and, on the using side, the printing presses and the distribution
apparatus, where the newspaper reached the end user, the reader. We will
start by discussing the physical interfaces, and then move on and examine
the organizational ones.
(1) Interfaces around the disc refiner. A new type of equipment for
producing pulp had to be developed, the disc refiner. This equipment
plays an important role in the surrounding technical system. Further, it
was in the disc refiner that strength features were going to be created.
These features had to be activated later on in the resource and activity
structure, and the interfaces had to be ‘‘working’’ immediately but still
276 ENRICO BARALDI AND TORKEL STRÖMSTEN
Advertising
agencies
Sunds
Defibrator
DN Distribution
company
Disc refiners
Paper machine
TMP Dagens Nyheter
Hallsta Paper Mill
Ink MAN Roland
ABB
Akzo
Key:
Fig. 2. Some of the resources involved in creating low-weight Holmen News. The
arrows indicate a direct interface while the dotted lines indicate an indirect interface.
the same time reduces disruptions. But a stronger pulp also consumes
other resources such as electricity.
(3) Interfaces around the printing press: The interfaces around the printing
press links to start with two production facilities that interact system-
atically with each other. The printing presses at Dagens Nyheter are
supplied almost exclusively with paper from specific paper machines,
since the paper features created in a paper machine are almost unique
(even if newsprint is considered to be a standard product). The printing
site of Dagens Nyheter, therefore combines its three printing presses
with paper from certain paper machines and with inks from specific
suppliers in order to get satisfying resource combinations in the printing
presses. One key interface in the daily utilization of lower grammage is
therefore the one between Hallsta’s PM12 and Dagens Nyheter’s
printing presses. The paper quality is tried out with the customer, and its
features should be held constant so that the printing process is reliable
for the customer. Dagens Nyheter’s printing site monitors paper quality
several times a day to identify discrepancies and the exact paper roll that
caused problems. Thanks to bar-coding, Hallsta can consult its IT
system to see if there were any profile problems on that paper web in
their production. Just like the paper machine, the printing press is
composed of a large number of subsystems, some of which are designed
and built in-house by the printing press manufacturer, and some of
which are purchased from external suppliers. A large number of
different kinds of printing presses are available for different purposes
and, within one application area the configuration of one type of
printing press can differ from another. The printing press influences the
development of a large number of different input resources in the paper-
making process, such as ink, rubber blankets, paper, and control
systems. All these resources interact with each other, and the newsprint
is just one of many resources that the customer has to take into
consideration.
(4) Interfaces around the newsprint. The printing process uses low weight
from the very beginning: changing paper rolls create tensions in the
paper web which can lead to web breaks if the paper web is not strong
enough. Thus the interface between paper and printing press is critical.
How long a paper roll lasts depends on the paper grammage: the thinner
the paper, the longer the paper roll will last, and this is positive for
several involved actors: Fewer roll changes reduce the risk of web
breaks. Individual operators’ work gets smoother, since they need to
change fewer rolls.
278 ENRICO BARALDI AND TORKEL STRÖMSTEN
(1) Interfaces involving Hallsta Paper Mill: To start with the relationship
with Defibrator was fundamental for introducing the pulping technol-
ogy that decreased wood and oil consumption. This relationship allowed
both companies to learn a lot about TMP at a time when this technology
was relatively unproven. Further, the interface between the mother
company, Holmen Paper and the owners of Dagens Nyheter was
certainly also of great importance. Dagens Nyheter’s demands on a
lower grammage weight were channeled into the production units and
back to the printing sites. Interaction between the producer and the user
of newsprint was necessary in order to create both a reliable printing
process and a nice looking end product. The interface Hallsta–Dagens
Nyheter (the newspaper) rested on a long-term relationships started in
the 1910s when Holmen started to supply newsprint to Dagens Nyheter.
A driving force in developing a thinner paper had to some extent to do
with the economics of paper production. Dagens Nyheters’ Purchasers
saw the lighter paper as a way to save money since the paper is priced
Resource Interfaces in Industrial Networks 279
per ton: more printing surface in a longer roll is paid the same amount of
money. Today, the product, Holmen News 42 g per square meter is the
backbone of the relationship. Even, when the lower grammage is part of
the relationship, aspects of the newsprint is managed almost on a
day-to-day basis, but in an indirect way. Every project, every develo-
pment effort starts with the product, Holmen News in the background.
Thus, the historical processes of the relationships are still alive in both
Holmen and Hallsta as well as within Dagens Nyheter and its printing
site DNEX. But the historical processes also live within the ‘‘current’’
relationship processes. The routines that are worked out, how
distribution activities are designed, and how often the product is
shipped from Hallsta to DNEX, everything depends to some extent on
the development of the lighter paper standard.
One organizational interface that was used to coordinate physical
resources was the relationship between Hallsta and ABB which was directed
towards the production facility PM12. ABB had a long-term experience of
industrial control systems, acquired through several BRs, while paper
making had a history of several decades at Hallsta. Moreover, the ability
and the motivation to solve production problems and develop the machine’
capabilities to control the paper web’s profile online was high at both
parties.
(2) Interfaces involving the customer Dagens Nyheter. Taking the
perspective of the customer, Dagens Nyheter, other interfaces must be
handled, not only in relation to the newsprint. These interfaces have an
impact on how the newsprint is both embedded and used on a daily
basis. With a lower grammage there was a need to coordinate the use of
inks and damp in the printing process at Dagens Nyheter. Thus, there
was a need to engage for example, Akzo, a supplier of ink and
chemicals, in order to fix problems of opacity, set-offs, web breaks.
Dagens Nyheter’s personnel worked specifically with the products from
specific paper machines and knew from experience how they reacted
with different types of inks and chemicals. The goal for DNEX was and
still is to produce a product that is identical to its three printing presses.
DNEX has therefore tried to define what result a certain combination of
inputs will give. This was not possible formerly, but the introduction of
a more sophisticated control system has made it at least feasible to be
tried. None of the input goods is a totally independent variable and
there is a continual adaptation process going on to make adjustments to
compensate for the different resources.
280 ENRICO BARALDI AND TORKEL STRÖMSTEN
(3) Interfaces involving the advertising firms. An interface that was and still
is crucial for the whole network is the one between the firms that
advertise and the product newsprint. The advertisers are the economic
backbone in this network. The advertisers account for 60–70% of
Dagens Nyheter’s revenue (and other daily newspapers), which makes
them a group worth listening to for the publishing firms and the
independent printing houses. The demands from the advertisers drive
the publishers to a large extent, which in turn push these demands down
to the suppliers of raw materials. Technically, the advertisers need to be
aware of the newsprint features in order to obtain a satisfying final print:
DNEX, the printing site, contributes to teaching such features to its
advertising customers in the network. If the newspapers’ advertising
departments could decide, the paper would be thicker and would absorb
more ink, making the quality of the advertisements higher. However,
such paper would be too thick for several reasons: To start with, the cost
would be too much, distribution would be too costly, and handling
would be too hard both for the reader and for the printing house, not to
mention the additional weight that would need to be distributed.
Because of this, the publishers want a paper that is thin and of low
grammage, but that still is white and opaque enough to allow a good
printing result. Thus the advertising firms’ demands have an impact on
the whole of the graphics industry. In order to be able to offer good
quality four color printing, some newspapers have joined forces and
built large printing houses that the newspapers either own together, or
they buy production capacity from an independent printing house.
These newspapers share operations and facilities that concern the
production of editorial material and advertisements, and the printing
and distribution of the newspapers.
and there was a need for specific knowledge in the problem-solving process.
The knowledge was of general character in the beginning, prior to being
applied, but then it certainly became contextualized. The lack of knowledge
about the resource interfaces made the development process hard to control
with formal control mechanisms. Instead, the low-weight project can be
characterized as several small steps in a distributed and self organized
network, where different types of informal control mechanisms were crucial.
Moreover, one can see how the centre of gravity in the network shifted over
time, where the need to solve problems was the greatest. Early on, there was
Hallsta and Defibrator that had to work intimately together to solve
problems with the new pulping technology. Later on, problems in the
printing press, with runability and with the optical features of the paper
became more apparent and then problem solving was directed to this part of
the network, involving different actors with different competencies. Still the
development work was built on earlier competence developments in other
parts of the network.
As so many actors had something to win on the development of a low-
weight paper, the small efforts really paid off, if everybody went in the same
direction. Thus, the interfaces were geared towards a similar goal, even if the
logics and the interests sometimes were conflicting, the overall strength in a
network marching in the same direction is powerful and make change hard
to stop.
The discussion implicitly mentions both the opportunities and the barriers
to change. The search for a technology that could support low-weight
newsprint went on, at several fronts simultaneously. One actor that got
more power, or at least gained more centrality than before was the developer
and manufacturer of control systems, ABB. As paper got thinner, new
problems would arise in the paper machines as well as in the printing
presses. How to run these facilities in the best possible way became a
crucial task to solve for ABB. Thus, the knowledge that ABB gained
(and has gained over the years) could almost be characterized as a
knowledge integrator. Even the money involved in control systems increases
steadily as a share of investment. Can some small (from a physical
perspective) and financially (from an organizational perspective) less
important interfaces be slightly improved the leverage for some of the
actors within the network can be substantial. ABB was a key actor in this
process, as it made the technical change measurable and controllable for
Hallsta and its partners. For example, the more paper that is rolled up on a
tambour, the more precise must the operation be and here ABB’s
competence was very important. And as the resources and interfaces were
Resource Interfaces in Industrial Networks 283
directed towards the saving of wood, oil, increasing efficiency in both paper
machines and printing presses, the control mechanisms were designed in
order to support these goals.
The wood–electricity–disc refiner is one interface with slow but dramatic
change. The role of control is clearly visible. In this interface, the use of
wood has become much more efficient, less wood is used per ton paper
produced, as this was a prioritized performance metric. However, the use of
the other input resource in the interface, electricity has in fact become less
efficient. Mainly because it was not part of the ‘‘system,’’ as it was merely
seen as a supporting resource and further not scarce. This would, however,
change, in a rather dramatic way. The next case will examine an attempt to
develop a more electricity efficient pulping technology.
5. DEVELOPMENT OF AN ELECTRICITY
EFFICIENT PULPING TECHNOLOGY
strong paper are in harmony with the customers’ demands of a strong paper,
this is a development that has continued over the years.
Of all the electrical energy that a paper mill is using, about 95% can be
traced to the production activities and the TMP process, while the
remaining percent are accounted for by, for example, the provision of light
and heating. Of the 95% used for production activities, the lion’s share of
the utilization can be traced to the disc refiners that produce pulp. In the
electric motors that run these facilities, electricity is consumed in large
quantities every day, every hour, and every minute. In fact, Hallsta’s
electricity consumption is some 2 TWh annually, which corresponds to the
capital of Sweden, Stockholm’s consumption of electricity during a year
(Fig. 3).
Hallsta’s use of electricity has steadily increased over the years and
especially from 1974 when the mill invested in TMP for the first time. See
Fig. 3. Not only the absolute use of electricity has increased but also in
relative terms, per ton pulp produced, and per ton paper produced. Thus,
the use of electricity has in those terms actually become less efficient.
However, if one takes into consideration that the TMP process (and its
increased use of electricity) facilitated an improved pulp quality and this
indirectly has made it possible to use wood more efficiently, increase speed
in paper machines, decrease oil consumption, increase color use in printing
2000 700
1800
600
1600
1400 500
1000s of tons
1200 400
GWh
1000
800 300
600 200
400
100
200
0 0
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
Year
Electricity consumption Oil consumption Production
presses, the use of electricity in the TMP process comes in another light.
However, when the focus is solely on electricity use, the numbers do not
look impressive for the industry.
Pulping production based on SGW pulping is an old institution in the
forest industry. Since 1850, the paper industry is making newspaper paper
from ground pulp, where wooden logs have been crushed against a
grindstone. This was the predominant process for newspaper paper until the
end of the 1960s. Toward the end of the 1970s, the environment groups
started to realize how dangerous sulfite cellulose was. The sulfite cellulose
factories of the newspaper paper mills were hurriedly shut down. Parallel to
this development, a new technology was introduced that made it easier to
phase out the sulfite factories – the so-called thermomechanical pulp process
(TMP). TMP, developed by American and Scandinavian companies, was
advantageous because it produced a pulp consisting of long fibers that were
so strong that chemical reinforcement pulp eventually could be completely
excluded. TMP development did not occur overnight, however. The first
TMP applications for newspaper paper began to be used in the mid-1950s,
but it was not until the mid-70s that there were paper machines being fed
only with TMP (at Hallsta Paper Mill). More than creating a thinner
paper (as was described in the previous case), paper machines themselves
were also being further developed at the same time. Their speed
was increased through the introduction of such innovations as the gap
former and the zigzag wire. The increase in speed meant that the demand for
pulp strength also increased. To avoid having to mix in chemical (sulfate)
pulp, which has good tensile properties but costs more than TMP and also
affect the properties of the end product negatively, efforts are continuously
being made to make the TMP stronger instead. The result of these efforts is
a pulp-producing process that is very electricity intensive, because
processing the wood fibers requires electric energy. Basically, the more the
electricity used in the process, the higher quality the pulp and subsequently
the paper.
After a succession of mergers and acquisitions, there were only a few
major companies left that produced disc refiners in the 1990s: Among them
there were Sunds Defibrator and Andritz. Andritz was the result of several
acquisitions. Sunds Defibrator, on the other hand was also the result of
several mergers and acquisitions.
However, as the wood costs as well as electricity costs for paper mill
increased during the late 1980s and early 1990s, a competing technology, a
pulping method based upon waste paper, emerged, where the raw material
was cheap and the process much less energy demanding than the TMP
286 ENRICO BARALDI AND TORKEL STRÖMSTEN
process. The raw material, waste paper, was further heavily subsidized by
governments around Europe. This made the waste paper technology a
crucial threat which soon took market share from Sunds Defibrator. In fact,
the waste paper technology was present since the 1970s, but it had a bad
reputation within the paper industry for a long time. Among paper
engineers, waste paper was seen as a second-rate raw material.
As a response to the new environmental concerns, which also included a
changed view of waste paper in general, both within the industry but also in
the public, SCA and Sunds Defibrator started to develop a new electricity
efficient technology, building on the existing TMP process, called
ThermoPulp. This case illustrates the obstacles that the company had in
commercializing the ThermoPulp concept.
Ever since the TMP process came into use, the manufacturers of refiners
have tried to increase the efficiency of the process’s electric-power
consumption. The results, however, were only marginal. The equipment
firms have invested in such improvements as developing the grinding
patterns of the grinding discs, increasing their number of revolutions.
Sweden’s Skogsindustrins Tekniska Forskningsinstitut (The Forest Indus-
try’s Technological Research Institute), STFI, has also carried out research
in the field of electric-power efficiency for the TMP process.
Sunds Defibrator was during the 1990s one of two existing full-scale
refiner producers. Sunds Defibrator was in turn the result of a merger
between the Swedish firms, Defibrator and Sunds. In much the same way, its
only main competitor Andritz, also consists of merged firms such as Bauer,
Sprout, and Hymac. Thus, the field has undergone significant changes in the
number of actors. Today the refiner producers as a result are quite few
worldwide, as are the number of paper producers. One effect of this is that
the product development process within each firm is hard, if not impossible,
to conceal from the prying eyes of the competitors.
Some of the development processes Sunds Defibrator was involved in
during the 1990s concerned for example a computer simulation program
which aimed at increasing the understanding on what happens within the
disc refiner when wood chips meet and interact with the disc refiner plates.
The basic question is how the different patterns could be optimized in
relation to specific wood qualities. Another project that Sunds Defibrator
undertook in the 1990s was the Pulp Quality Monitor (PQM) project. PQM
is a control device for refiner equipment which among other things is used in
order to monitor physical flows and thereby optimize the distance between
the two disc refiners. Sunds Defibrator had an assortment of nine disc refiner
models of disc refiners, which they can offer their customers.
Resource Interfaces in Industrial Networks 287
However, for a long time, Sunds Defibrator, could take advantage of its
standing as the largest manufacturer of refiners and the company with the
greatest development resources to make sure that no other company came
up with alternative technology for defibrating wood fiber into mechanical
pulp. The overall strategy for Sunds Defibrator was to grow and to gain a
large market share in the mechanical pulping market. The reason was partly
that an installed base would generate revenues in terms of services and
maintenance, but also to be in place when new orders were to be placed.
There was no urgent need to develop technologies that saved electricity in
the TMP process as so many other costs were saved thanks to a high wood
yield and a stronger pulp.
And in fact, the force to develop the refining process did not come from a
refiner manufacture. Instead, it was the equipment firms, such as Voith,
working with recycled paper who – in a relatively short time (although waste
paper was used as raw material since the early 1970s) – developed a process
to turn recycled fiber pulp into a high-quality product. This was a serious
threat to Sunds Defibrator. The Mechanical Pulping Division accounted for
50% of the Group’s total sales in the late 1980s, this share fell sharply to
about 20% during the next few years. This was mostly due to the success of
the recycling equipment firms.
One of the advantages of the recycled paper pulp process is that the
process only requires about 500 kWh per ton, which was and still is 20% of
what the TMP process needs. This together with a cheap raw material, waste
paper, and a general positive view from buyers of newsprint, newspapers
started to demand that a certain share of the newsprint would consist of
recycled paper, in order to be considered environmentally friendly. All this
made the waste paper production process a highly competitive one. Sunds
Defibrator began to realize the significance of the situation, and the wish to
develop the TMP process was very high up at the list of items at this point.
However, even though this was an urgent problem for the refiner
manufacturer Sunds Defibrator, the idea behind ThermoPulp came from
a customer and not from within Sunds Defibrator.
Around 1992, the ThermoPulp project was initiated when a researcher at
Svenska Cellulosa AB (SCA) contacted a couple of engineers at Sunds
Defibrator to discuss a possible joint project for developing refining
technology. Both companies had personnel in their development divisions
with long experience within their branches and in research on mechanical
pulp. In addition, SCA was a major industrial user of electricity and had
clear economic incentives to lower its use of electricity. Their production of
LWC paper, which is a high-quality paper grade, demands intensive
Resource Interfaces in Industrial Networks 289
Studies have shown that in two-step refining, it is in the first step that
most of the pulp’s properties are determined; the second step influences
these properties only marginally. Moreover, the second refining step can be
carried out under atmospheric pressure or under pressurized conditions
without significantly changing the pulp’s properties. SCA and Sunds
Defibrator’s goal of ThermoPulp was therefore to obtain the desired pulp
properties in the first refining stage, after having prewarmed the wood chips
at 1801, the temperature at which lignin softens. Then, energy-saving
measures could be undertaken in the second stage (Höglund, Falk, &
Jackson, 1996). This was what the group of people worked intensively with
during the early and mid 1990s. The optimism was high. One further
advantage of ThermoPulp was that the equipment could be connected to
existent surrounding equipment, since only the modification of one process
stage, the refining, is involved. No ‘‘tying up’’ of investment resources was
therefore involved, either, since the return to conventional TMP production
was possible.
The ThermoPulp seemed initially to gain some momentum, as some
important orders were placed. Of course, the lead user, SCA, were among
the first to place an order and so was Braviken Paper Mill (also part of
Holmen Paper and Hallsta Paper Mill’s sister mill) in Sweden. Irving Paper;
Iroque Falls and two units within Abitibe also purchased a ThermoPulp
system. All in all, six systems were sold early on. What about Hallsta Paper
Mill? Well, even if Hallsta is seen as a pioneer in many aspects when it comes
to try new pulping technologies, in this case they chose a ‘‘wait and see’’
strategy as one of the managers at Hallsta explained. ‘‘We were vulnerable
at the time [due to an owner with financial problems], we had old paper
machines which we had to use in an optimal way. There was not much room
to try out new things or to be experimental. We had to use our old facilities
as efficient as possible. However, as Braviken [Hallsta’s sister mill] was an
early user, we could follow the development closely.’’
Decreasing electric use in the TMP process was and still is no easy game.
In effect, all of the projects carried out at Sunds Defibrator and other
companies during the past years to make energy consumption more efficient
have led to deterioration in the quality of the pulp, which in turn has had a
negative effect on the finished newspaper paper. A study conducted by Sunds
concluded in 1997 that a mill had a period of lower paper machine
performance during a ThermoPulp test. The trials showed that the cause of
the problem was that Thermo-mixer temperatures when going over 1651C
lead to a poorer pulp quality. One possible reason for this was due to thermal
degradation (Johansson, Frith, Falk, & Gareau, 1998; Cannel, 1999).
292 ENRICO BARALDI AND TORKEL STRÖMSTEN
Both Sunds Defibrator and the people at SCA tried to solve the problems
that occurred. However, this turned out to be too hard a challenge. The
technology also started to gain some bad reputation within the paper
industry, an industry that on the other hand has a reputation of being very
conservative when it comes to trying out new technologies. In fact, the TMP
technology can be considered the latest radical innovation within the industry.
Thus, the problem to reduce the use of electricity turned out to be valid
also for ThermoPulp. Even though a good amount of the invested energy is
converted into heat and steam, ‘‘it is apparently the ‘useful’ energy that is
reduced and that causes a loss in quality,’’ as one of the people involved in
the ThermoPulp project put it. For example, ThermoPulp creates poorer
brightness due to the high temperature in the second refining stage. If
hydroperoxide must be added, this causes extra cost for the mill that installs
a ThermoPulp line. Moreover, the pulp that comes out of ThermoPulp has a
somewhat different fiber distribution, than conventional TMP, with a higher
share of short fibers, which sometimes means that sulfate pulp must be
added to meet with the strength demands of paper machines and printing
presses. If this turns out to be the case, the entire savings in cost from the
reduction in energy consumption may thereby be lost.
SCA Printing
press
Customers/Printing houses
Power
station
Svdkraft/Power
Key:
Fig. 4. Resource interfaces involved in the ThermoPulp case. The arrows indicate a
direct interface while the dotted lines indicate an indirect interface.
dependent on the proportion of shives in the pulp. The simple rule is that
the larger the proportion of shives, the more breakdowns there will be.
According to a number of the people interviewed, one way to decrease the
use of electricity in the refining process would be to use better methods to
clean the pulp to remove the shives. To avoid breaks, the other fibers in
the surrounding paper web must compensate for the shives making it
necessary to produce so-called ‘‘over strong’’ paper. A uniform pulp is
therefore a must to obtain a production process that is reliable,
predictable, as well as efficient. Electricity consumption is central to the
entire production system represented by the refining of wood fibers, since
it gives the pulp and the paper qualities that are necessary in order for
production activities through the whole activity chain to be carried out
efficiently. The paper must cope with many different situations during the
refining process, from wood to finished newspaper. At the same time,
many presumptive sources of error can be traced in the production, with
294 ENRICO BARALDI AND TORKEL STRÖMSTEN
the manufacturing of pulp occupying a central role for the result of the
rest of the process, which emphasizes the importance of electrical power.
A change in the manufacture of the pulp, especially in the refining process
(and its use of electricity) – which represents the ‘‘heart’’ of the pulp
production – is a serious intrusion. It is also a production process that
involves heavy capital investments and one where historical investments
strongly influence future ones, something that also was a draw back for
ThermoPulp.
(2) Interfaces around the disc refiner. In general one could say that the
development of ThermoPulp was an incremental technical change.
ThermoPulp was an incremental technical change both in the process,
and in the product, how things were done and resources combined,
rather than developing totally new resources. The increase in the
temperature was not new knowledge but the principle was well known
within the paper industry. The first initiative came from an adjunct
professor at the Royal Institute of Technology who also held a R&D
position at SCA. With the deep knowledge about the technology and the
industry in general that he and his collaborators shared, this was
probably not something surprising. The knowledge that most develop-
ment steps in the capital intensive paper industry must be step-wise or
even incremental, in order to take care of all the resources and
investment that one can find in a paper mill and in the firms around it,
going for an incremental development model was probably a very wise
decision. Still, the fact that the small deviations from what is considered
‘‘good’’ pulp quality (somewhat poorer brightness and poorer tensile
strength) made the commercialization too hard to achieve is interesting
from a researcher’s perspective. The network around a disc refiner is
certainly not forgiving for small flaws, everything must be ‘‘perfect’’ or
according to a given ‘‘standard,’’ otherwise new resource combinations
must be tried out, some resources might even have to be replaced. Since
time is such a scarce resource in this context and constant production is
a key issue, even these small things made it impossible to sell only more
than six ThermoPulp systems.
(3) Interfaces around paper making. In a paper machine, pulp or
suspension goes through three processing stages before it is turned into
a finished product. These three stages correspond to the following parts
of the machine: the wire section, the press section, and the drying
section. A fourth section can be said to be the rolling machine, where the
paper is cut into batches with standard dimensions to match the
demands of the customers.
Resource Interfaces in Industrial Networks 295
One reason why ThermoPulp did not become a success, was because
of the configuration of paper machines and the in-built need for a strong
pulp. From the wire section the web goes to the press section, via a pick
up cloth. If the paper web is weak due to a certain amounts of shives or
other defects, the paper machine operator might face a web break here,
with very unpleasant work in the coming hours to be done. The press
section consists of three press nips whose task is to further dewater the
suspension (the pulp). In the press section, the suspension is dewatered
from about 15–43% dry content. In the drying section the suspension is
further dewatered. The web is blown from the last roller in the press
section so that it becomes fixed on the down side on the drying cloth
and is then fed into the drying section. This is the first free ‘‘draught’’ in
relatively modern paper machines. This is also a place in the paper
machine where the paper web can break. In earlier models, the free
draught started between the wire and the press sections, which increased the
risk of web breaks. Any paper producer would go to any length to prevent a
web break to happen. The easiest way to solve this potential problem is to
create a paper web that is strong enough, and the way to do this is to process
the wood fibers intensively and to not add chemical pulp into the pulp
recipe.
Some of the more important organizational interfaces in the development
of ThermoPulp will now be examined and some of these interfaces can also
be seen as barriers to the lack of commercial success that Sunds Defibrator
and the ThermoPulp project experienced.
In general, the paper producers are many times as large as the refiner
producers and at times some of them have elected to have the
production of refiners in-house in order to integrate the production of
refiners with the users of refiners. For example, Sunds Defibrator (Sunds
and later Sunds Defibrator) was for a long time period owned by SCA.
Another example is Jyhlävaara (another supplier of disc refiners) that
for a long time was subsequently owned by the Finnish UMP group. In
time, it appears as if this in no way has proved to be more effective than
letting the refiner producers sell to anyone interested in buying. In fact,
being part of a paper producer could many times be bad for business.
Even if the owner in some examples could function as a reference
customer it could also be problematic when the relationship with a
prospect customer and the owner was competitive and in order to avoid
conflict of interests the units selling disc refiners were sold off. For
example, the Holmen Paper mill, Hallsta, refused to buy equipment
from Sunds as long as it was owned by SCA. Letting in Sunds
equipment in the mill was like letting a competitor in, which was out of
question. Was it negative for Sunds Defibrator that their prime
reference customer was their old owner? Also this is hard to speculate
around, even if some of the interviewees in fact pointed in that direction.
(2) Interfaces involving customers. After had run ThermoPulp trials from
1995 to 1996, Irving Paper declared in 1997 that ThermoPulp was an
operational process. In spite of this, due to increasing pulp demand,
Irving later in 1997 reconfigured its disc refiners into a three-stage
system. For Irvine Paper, it was a matter of Increasing TMP production
rate and then the use of the ThermoPulp process was suspended. They
never really started to use ThermoPulp again. Swedish Braviken also
experienced lower quality pulp which affected production cost
negatively. Bleaching costs increased and then the financial logic with
using ThermoPulp had disappeared. As Braviken never really became a
real user, its sister mills within the Holmen Group, such as Hallsta,
never became interested as well. Abitibe’s two units also eventually
decided to stop using ThermoPulp.
If one thinks about the variety of resources and interfaces existing and
necessary to mobilize in developing the ThermoPulp technology, Sunds
Defibrator or SCA could have not have foreseen every possible obstacle in
Resource Interfaces in Industrial Networks 297
the development project. As SCA were both a customer and a former owner
to Sunds Defibrator, the interfaces were not ‘‘far away’’ as in the printed
veneer project, instead, SCA probably faced the same problems with lost
strength and brightness just as the other customers. Why did not a bell ring,
were there no early warning signals that the firms’ control systems could
have captured in some way?
For sure, there was some internal resistance that was concerned with the
financial investment and commitment in going into a development project
like this. There were also some interests within the company that pushed for
meeting competition from the waste paper technology by developing similar
products or facilities. Instead, Sunds Defibrator met competition in their
own back yard, by developing the mechanical pulping technology, where
everything more or less remained the same, even if some of the components
were somewhat altered, the way the activities were performed changed
somewhat and so did the components within the system. Was this a wise
decision? It was at least a decision that the firm could make. Sunds
Defibrator was a company with a background in the mechanical pulping
field, this was their experience and competence and this was where they had
added value over the years to so many paper mills around the world. From
that perspective it seems evident that a firm like that should develop a more
efficient mechanical pulping technology.
As for the organizational interfaces involved in the project, these were
certainly important in order to coordinate and organize the project. Further,
these interfaces were critical in establishing the project to start with to
monitor how it progressed and to solve the problems within it. However,
one can perhaps wonder if the organizational interfaces were too limited to
be defined. Perhaps also other types of competences and other actors with
different types of interests should have been part of the project. Since the
ThermoPulp technology only was a modification of an existing industrial
process, the actors involved might have thought that it would be too
complicated and too little to win in bringing in a diverse set of actors and
competencies.
However, a group of engineers within Sunds Defibrator even wrote a
conference paper about the possible problems that ThermoPulp might cause
users. Even if the problems indeed were small, they in the end were be big
enough to prevent prospect customers and users to jump on the
‘‘bandwagon.’’ This could serve as an example of ‘‘tipping points’’ in
industrial networks. Small margins make a product or an industrial process
a success or a failure. In this case, bleaching costs increased with some 100
SEK per ton of pulp. This may seem much or little. However, as Hallsta
298 ENRICO BARALDI AND TORKEL STRÖMSTEN
Paper Mill produces, in a good year, 800,000 tons of paper, increased costs
for bleaching would be 800,000 100 SEK ¼ 80,000,000 SEK in extra costs.
If you add that there also was a need to use more chemical pulp, the extra
costs increases even more. In the end this will hurt the profitability of the
firms and hence the ability to pay out dividends to the owners.
Seen from Hallsta Paper Mill’s perspective it was natural not to be a lead
user in this case. As their owner had financial problems the willingness to try
new technical solutions was not great. Since its sister mill Braviken took at
least a semiactive part in the development work, as being one of the first
adapters of ThermoPulp, Hallsta got all the information that they wanted.
One issue that made Hallsta extra resistant to start using ThermoPulp was
the structure of its paper machines. Due to the low-investment activity at
Hallsta, their paper machines had become relatively smaller and smaller
over the years. One way to compensate for this was to produce newsprint
with higher grammage, so-called improved newsprint, and thereby get more
ton out of the small paper machines. These paper grades had to be brighter
than the standard newsprint grade, as they often were used as supplements
and for weekend papers. Using a pulping method that would increase
the need to use bleaching chemicals made very little sense for Hallsta at
the time. Even if the mill consumed enormous amounts of electricity, the
marginal effect was always on the traditional technology’s side. So Hallsta
stayed where they were and played it safe.
Even if there are two different projects and even technologies, consider
how the low-weight newsprint project differs from the ThermoPulp project.
The physical interfaces that Sunds Defibrator and SCA had to deal with
were more or less the same, generally speaking; there were wood chips and
how they interacted with the disc refiner and the refiner segments, the
involvement of printing presses and paper machines. However, the
organizational interfaces were designed or at least looked upon in a different
way. The low-weight newsprint project was distributed, in terms of
development work and many local compromises and problem-solving
activities. The ThermoPulp project, on the other hand, seems to be designed
just like a text book success case, with an extremely competent and
experienced supplier and a lead user that had strong incentives to lower the
use of electricity. However, the development work was very much centralized
to these two actors. There were perhaps the concerns of intellectual property
rights and the fear of a (the single one) competitor would reap the benefits
from the innovation developed within the dyad of SCA and Sunds
Defibrator. More than one firm has lost the battle of technological standard
setting by keeping the innovation too close to oneself.
Resource Interfaces in Industrial Networks 299
What should SCA and Sunds Defibrator then have done? The problem
might in fact be the way they formulated the problem and how they
analyzed the future profitability of the firm. The problem, the parties
argued, was how their customers accounted for the use of electricity in the
disc refiner. Sunds Defibrator saw only electricity as a cost component in the
customers economy. Accordingly, the problem should be solved in altering
the disc refiner in one way or the other. Another way to approach the
problem would have been to look outside the focal interface of disc refiner–
electricity–wood and ask simple questions like: What characteristics of the
paper-making process drive the use of electricity in the TMP process and in
the disc refiner? What characteristics of the printing process drive the use of
electricity in the TMP process and in the disc refiner? What in the
distribution of newspapers and what in the demands of advertisements drive
the use of electricity in the TMP process? How is the economy for the
affected actors constituted? This is another way of thinking, not necessarily
better in all situations. However, this way of arguing would identify other
types of barriers and opportunities for creating value than if the problem is
only defined as a local one. As a consequence the ‘‘opportunity space’’ or the
room to maneuver at least in thinking strategically increases substantially.
In fact, when the problem is ‘‘distributed’’ and when resources are
embedded this is in fact what a firm that wants to change something must
do. Otherwise the whole system will work against the firm, instead of in
favor of its objectives, strategies, and ways of measuring development and
change. In fact, if these questions above had been asked, Sunds Defibrator
would have realized that their customers not only saw electricity as a cost,
but also as a ‘‘revenue generator,’’ as the increased use of electricity had
meant higher quality newsprint and a more efficient paper-making process
as well as a more efficient printing process for their customers.
the two cases focuses on the three different types of interfaces discussed
in the theoretical section, physical, organizational, and mixed interfaces,
with the purpose of understanding how their configuration enabled or
hindered the analyzed value-creation processes. Moreover, the analysis also
identifies how the control mechanisms (result, action, and personnel control)
reviewed in the theoretical session are used by the involved firms in relation
to three types of resource interfaces.
use wood in a much more efficient way than before, and that they get an
overall better production economy when the chemical pulp could be
excluded, among other things. It was further possible to observe many, both
direct and indirect interfaces between the organizations that both embed
and use the feature of low weight, even if these organizations do not
necessarily know about each other. At least four relationships among the six
units that were active in the value embedding process were identified. In the
daily value production/utilization process there are a large number of actors
that directly and indirectly are involved and use the paper and its different
features, or have to adapt to it.
In the Holmen low-weight paper project the focal mixed interface was the
relationship ‘‘Defibrator-Hallsta’’ and the product ‘‘Newsprint’’. Hallsta
chose a technical solution, the TMP technology, and then involved a
partner, Defibrator, but several other actors had to intervene in the value
embedding phase. The embeddedness of the above mixed interface was quite
substantial. The issue was not if there were going to be technical problems,
the issue was how the problems were going to be solved, and then Defibrator
was seen as the best partner choice. As already mentioned, it is possible to
identify many interorganizational interfaces in the low-weight paper case,
but what is interesting is that these are not explicitly handled to create
low-weight value. Instead, there are several issues that are handled
simultaneously by the involved actors, where low weight is only one issue
among many, and there is subsequently a rather loose coordination of value
creation as the technical change that the newsprint case represent is indeed
multilayered, involving several actors with different interests. There are in
fact several actors that take an active role even if no one takes a strong
initiative in the embedding process. Further, there are several overlapping
and even reinforcing interests that come at play. Present are also several
conflicting interests that need to converge, even if there is no clear mediator.
A lighter paper in the end got momentum through many local compromises.
As these were not costly for the actors in the short run the development was
not stopped and then the development could go on and there was time to
solve technical problems without being too risk averse. Table 4 sums up the
discussion on resource configurations in the low-weight case.
Relating configurations to control we can start with the physical
interfaces (see Table 5 below). Control is used in different ways in this
case in relation to physical interfaces. As for result control mechanisms, the
various actors in the network around Hallsta had identified the same
physical objective: to produce and/or use a low-weight newsprint paper. It
was not only Hallsta who had this objective which made the development
302 ENRICO BARALDI AND TORKEL STRÖMSTEN
easier to achieve. The objectives were to some extent defined collectively and
the whole network was also under pressure to change the use of both wood
and oil, due to direct and indirect cost issues. The change promised lower
use of oil and a much more efficient, higher yield of wood. Further, the
industry would also increase its reputation as environmentally friendly if
sulfite pulp could be excluded from the paper recipe. The involvement of
ABB and their process control devices meant that the activities on both
paper machines and printing presses could be monitored and altered much
more effectively than before, hence the technical action control increased.
Resource Interfaces in Industrial Networks 303
Physical Several actors have the Holmen’s technical Defibrator, ABB and
same objective, low choices steered Voith were selected as
weight development activities partners to increase
Several combinations are to make it possible to Hallstas ability to
tried out over firm reach the goal of a low- manage physical
boundaries in order to weight paper interfaces
create a newspaper
with lower weight
Organizational Holmen’s objective to A formal contract defined Another unit within
lowering weight is due activities within and Holmen had experience
to save raw material outside the relationship of Defibrator which
and cut costs with Defibrator influenced the selection
of Defibrator
This objective was aligned Informal agreement was The image of Defibrator
with several key actors developed over time as an innovative
in the network company played in
Mixed Dagens Nyheter’s Holmen influenced and Mutual learning and
printing site’s objective convinced Dagens teaching between
was clear cut: Print Nyheter about the Hallsta and the
thousands of benefit with a lighter Defibrator people
newspaper in a few paper situated at Hallsta’s site
hours every night around the use and
Customers were Use of certain resources production of disc
rewarded, formally and banned, such as refiners and refiner
informally, when they chemical pulp segments
got the same printing
surface for lower price,
due to the thinner
paper
With the new types of devices it was suddenly possible for operators to
control the process on-line and alter the process when finding it necessary.
Further, the development activities were steered towards lower grammage,
which excluded some activities and motivated the performing of other, such
as search for new technologies and new input resources. Holmen and Hallsta
were certainly active in their selection of Defibrator as a supplier of disc
refiners and TMP technology. Thus, the exercise of personnel control in
relation to technical interfaces was motivated by the fact that Defibrator was
considered the most technically competent supplier of disc refiners available.
304 ENRICO BARALDI AND TORKEL STRÖMSTEN
use processes, where pulping units have to interact with paper machine
units, which in turn have to interact with internal sales organizations and
directly with customers. The organizational interfaces thus follow the
technical ones and this creates an interdependency that must be handled and
taken into consideration. As a consequence, the embedding process reveals a
rather tight network of personal friends that go long back, and this seems to
be critical. However, in order to understand the process of use and
production of a specific product, a wider network picture is necessary.
However, it seems that the actors involved in the project never fully took
this wider network into account. Instead the whole operation was
approached as a ‘‘closed system,’’ where the dyad between Sunds Defibrator
and SCA was the focal point. When the ThermoPulp process was ‘‘finished’’
it was launched to other customers and then some unpleasant surprises came
up, which made the diffusion stop rather early on.
A key mixed interface in the ThermoPulp case is the one between the
relationship ‘‘Sunds Defibrator- SCA’’ and the facility ‘‘ThermoPulp’’ (see
Table 7). The relationship was built on personal ties and mutual technical
objectives through the value embedding process, and the goal was clear for
both parties, a lower electricity usage in the pulping process. The
coordination of the project can be characterized as tight in that there were
a few actors involved during the value embedding process. Further, SCA
and Sunds Defibrator centralized the knowledge development to the dyad
and strictly focused on lowering the electricity utilization in the TMP
process. The focus on lower electricity consumption might have over-
shadowed the need to bridge and compensate for other dimensions in the
pulping process and in the interface to paper making and printing. During
the embedding process, both actors had a mutual interest in lowering
electricity consumption, but the problems started in the day-to-day use of
this new value, as the pulp features were worsened on some important
dimensions. One can in fact argue that in the embedding process, all the
involved actors seemed to be winners. It was in the use of the process its
pitfalls become visible. Even if the compromises necessary can seem to
be minor, they were costly when producing large volumes of pulp and paper:
in the end, this stopped the commercialization of the ThermoPulp
technology. One can even argue that there were no real gains, except for
lower electricity consumption for the users. In the low-weight paper case, it
was instead possible to mobilize a larger number of BUs within and across
companies, since all, and not only users, seemed to have something to win,
small as the gain seemed to be. In the ThermoPulp project, the only
dimension at stake was electricity utilization, but changing although
Resource Interfaces in Industrial Networks 307
successfully this single dimension in the production system meant that the
system was no longer in balance: other interrelated components needed to
be altered and ended up in a less favorable positions for most actors. The
ThermoPulp’s resource configurations are summarized in Table 6 below.
Then, if the control dimension is approached, the physical result control
in this case was ‘‘identified’’ by Sunds Defibrator as they lost business to a
substitute technology. The objective was clear for their side: lower electricity
use in disc refiners, otherwise, there was a risk that the firm would go out of
business. However, defining the problem this way meant they fail to notice
the revenue generating feature that electricity actually had for their
customers. Action control was partly based on the research conducted by
one of the initiators at SCA. However, the technical knowledge on how to
achieve an even pulp quality is not resting on safe knowledge grounds.
Instead, the knowledge to a large extent is experiential and ‘‘tacit’’, thus it
was hard to explicitly apply action control in this case for Sunds Defibrator.
The laboratory site of Sunds Defibrator was partly constraining what
could be tested, and then the parties conducted the full-scale tests at SCA’s
mill. The selection of Sunds Defibrator by SCA (and vice versa) was
natural in some sense- Sunds Defibrator was the leading manufacturer of
TMP technology at the time and SCA was and still is one of the major users
of electricity in the paper industry. Moreover, key individuals from both
sides had a joint history working for the forest industry’s research institute
and knew each other well and had worked with the TMP process for
decades. ‘‘Technical’’ trust was an important reason for choosing counter-
parts in this case.
Control from an organizational resource interface perspective is interesting
in this case. For Sunds Defibrator it was important to secure sales and
revenues, which was the main organizational result control. This would be
done through lowering the usage of electricity in the TMP process
(a technical/physical result control). To reach that objective the development
project with SCA was supported from the board and top management team.
One can indeed talk about a mutual selection process which indicates the
rather strong personnel control. The action control at play here can to some
extent be speculated about. The engineers defining the problem of the high
electricity utilization in the TMP process, the ‘‘solution space’’ about how to
lower the electricity use was defined to take place within the overall paradigm
that the TMP technology stands for. Instead of looking ‘‘outside’’ the
technology, to define the problem more broadly, the single equipment, the
disc refiner, would be the component that would absorb a whole technical
system’s use of electricity. Thus, it is possible to argue that the informal
308 ENRICO BARALDI AND TORKEL STRÖMSTEN
action controls limited the search process among the firms and the
individuals that took part of the development project. The action control
and personnel control played a mutual and reinforcing role here as there was
a group of individuals that had a long common history at the same research
institute and working for same companies and who knew each other
privately. The view on how to solve the technical problem certainly directed
their search for solutions. The fact that there on the organizational level, was
a common owner history also played a role in the selection phase.
Approaching the focal mixed interface in this case from the control
dimension, one can see how result controls were used in the relationship
between Sunds Defibrator–SCA: save business by lowering electricity use in
the disc refiners was the clear objective for both parties. But the two parties’
strong motivation towards this objective was probably both a positive thing
Resource Interfaces in Industrial Networks 309
and a very important weakness. In fact, other objectives were more or less
ignored in the project: all focus was on lowering electricity utilization. This
meant that the development team to some extent neglected measurements
concerning how the new technology would affect the customers’ costs (such
as results concerned with increased bleaching chemicals) and revenues.
However, as soon as the ThermoPulp project ‘‘went live,’’ these types of
problems started to emerge. In terms of action control, there were strong
technical interdependencies that steered the development work. For
example, the raw materials (wood chips) had to be the same, the same
types of basic components (e.g. types of refiner segments) were also
strategies like the ones that Holmen pursued should be aligned with, or
at least not collide with, these control systems. For example, Holmen
could benefit from the fact that the development partner, Defibrator,
was in need of a strong reference customer and their efforts (represented
in their control systems) were then aligned. Another strategy is to
change the control systems at important counterparts, if there is no or
little fit between a new offering and a user’s control system. For
example, Holmen’s customer Dagens Nyheter wanted to have a lighter
paper in order to save costs, thus the printing house’s way of measuring
paper by ton but still getting the same printing surface was in favor of
Holmen. These actors used different types of control mechanisms
(result, action, and personnel control) in their efforts of creating and
realizing value. An important source of either support or opposition to a
new technology is the nature and the measuring focus of the various
firms’ control systems. In summary, if you do not have the support of
existing control systems, it is important at least to avoid clashing with
them. But the best situation is when the new solution implies that further
value can be extracted with the further help of a ‘‘supporting’’ control
system, might it be intra- or interorganizational. For instance, in the
Holmen case, light-weight paper was not only an accounting exercise,
but also generated a series of additional values as soon as the result
controls of printing press operators could be improved: their perfor-
mance increased because they did not have to change paper rolls as often
as before. Even if this seems like a small value, several innovations have
found it hard to overcome the hesitations of end users whose control
systems did not support a change in the use of a product.
(2) Degree of complexity and control: When resource combinations give
uncertain outcome, they are hard to control and measure, and
consequently the value-creation process is harder to coordinate.
Therefore, in these situations, one often tries to apply personnel
controls as one trust individuals or companies to solve a certain problem
or develop a new product. This could be seen also in some of the two
episodes presented above. Whenever value creation requires overcoming
complex technical issues, involving several direct and indirect physical
interfaces and large investments at several sites and in a variety of
technical solutions that all need to be attuned with each other, then,
value embedding becomes more difficult or time consuming. Action
control is typically hard to implement as no single actor possesses all
know-how to instruct others on how to perform the relevant activities.
Selecting BUs and individuals that one can trust becomes crucial in
312 ENRICO BARALDI AND TORKEL STRÖMSTEN
This paper has examined how the configuration and control of resources
and interfaces in a network around an innovation can create barriers or
opportunities. The two cases are empirical bases are not enough to draw
general conclusions (not that it ever was an intention), even if one can
certainly make analytical generalizations (Yin, 1994, p. 30). The network
around an innovation and more specifically the configuration of the
resource interfaces and the forms of control systems used by actors can help
to understand why some innovations succeed in overcoming all the
obstacles, while others slowly vanish or meet a more abrupt end, without
creating any actual value for the involved actors. Why do resource
configurations and interorganizational control enable some products and
not others to create value? Further research on this matter is clearly needed:
firstly, in-depth case studies embracing an entire network of actors and
resources could lead to a deeper understanding of the value-creation process
and, quite importantly, to analyze the interactions between the various
control systems used by the actors in the network; secondly, survey-like
studies capable of mapping synthetically different network configurations
and management control systems could help to capture on a larger scale the
impact of the former on the success or failure of value-creation processes.
Finally, another interesting research avenue would be to study the
knowledge and competence dimension behind value creation and the
opportunities and barriers thereof. Some of the issues faced in this paper
point in the direction of knowledge issues, such as routines, accounting
systems and organizational interfaces, but more specific research is certainly
necessary and the framework on resource interfaces proposed in this paper
could be a useful starting point.
REFERENCES
Anderson, J. C., Håkansson, H., & Johanson, J. (1994). Dyadic business relationships within a
business network context. Journal of Marketing, 58(4), 1–15.
Anderson, J. C., & Naurus, J. A. (2004). Business market management. Understanding, creating
and delivering value. Upper Saddle River, NJ: Pearson Prentice Hall.
Resource Interfaces in Industrial Networks 315
Araujo, L., Dubois, A., & Gadde, L.-E. (1999). Managing interfaces with suppliers. Industrial
Marketing Management, 28, 497–506.
Axelsson, B., & Easton, G. (Eds). (1992). Industrial networks – a new view of reality. London:
Routledge.
Baraldi, E. (2003). When information technology faces resource interaction. Using IT tools to
handle products at IKEA and Edsbyn. Doctoral Thesis, Department of Business Studies,
Uppsala Univ.
Baraldi, E., & Bocconcelli, R. (2001). The quantitative journey in a qualitative landscape.
Developing a data collection model and a quantitative methodology in business network
studies. Management Decision, 39(7), 564–577.
Baraldi, E., & Strömsten, T. (2006). Embedding, producing and using low weight: Value
creation and the role of the configuration of resource interfaces in the networks around
Holmen’s newsprint and IKEA’s lack table. IMP Journal, 1(1), 52–97.
Baraldi, E., & Waluszewski, A. (2007). Conscious use of others’ interface knowledge: How
IKEA can keep the price of the Lack table constant over decades. In: H. Håkansson &
A. Waluszewski (Eds), Knowledge and Innovation in Business and Industry. The
Importance of Using Others. Milton Park, NY: Routledge.
Berry, A. J. (1994). Spanning traditional boundaries. Organization and control of embedded
operations. Leadership and Organizational Development, 15, 4–10.
Blois, K. (1972). Vertical quasi-integration. Journal of Industrial Economics, 20(3), 253–272.
Cannel, E. (1999). Mechanical pulping technologies focus on reducing refining energy. Pulp and
Paper. Retrieved on-line: ohttp://www.pponline.com/db_area/archive/p_p_mag/
Dekker, H. C. (2004). Control of interorganizational relationships. Evidence of appropriation
concerns and coordination requirements. Accounting Organizations and Society, 29,
27–49.
Easton, G. (1995). Methodology and industrial networks. In: K. Möller & D. Wilson (Eds),
Business marketing: An interaction and network perspective (pp. 411–492). Boston:
Kluwer Academic Publishers.
Gauri, P., Hadjiakhani, A., & Johanson, J. (Eds). (2005). Managing Opportunity Development in
Business Networks. London: Palgrave Macmillan.
Håkansson, H. (Ed.) (1982). International Marketing and Purchasing of Industrial Goods: An
Interactive Approach. Chichester: Wiley.
Håkansson, H. (1987). Product development in networks. In: H. Håkansson (Ed.), Industrial
technological development – A network approach (pp. 84–115). London: Croom Helm,
Chapter 3.
Håkansson, H., & Lind, J. (2004). Accounting and network coordination. Accounting,
Organizations and Society, 29, 51–72.
Håkansson, H., & Snehota, I. (Eds). (1995). Developing relationships in business networks.
London: Routledge.
Håkansson, H., & Strömsten, T. (2007). Resources in use. The embedded electricity. In:
H. Håkansson & A. Waluszewski (Eds), Knowledge and innovation in business and
industry. The importance of using others. Milton Park, NY: Routledge.
Håkansson, H., & Waluszewski, A. (2002). Managing technological development. IKEA, the
environment and technology. London: Routledge.
Hopwood, A. (1996). Looking across rather than looking up and down: On the need to
explore the lateral processing of information. Accounting, Organizations and Society, 21,
589–590.
316 ENRICO BARALDI AND TORKEL STRÖMSTEN
Höglund, H., Falk, B., & Jackson, M. (1996). ThermoPulpt – a new energy efficient mechanical
pulping process. Sundsvall: Sunds Defibrator.
Johanson, M., & Strömsten, T. (2005). Value processes in industrial networks. Identifying the
creation and realisation of value. In: P. Ghauri, A. Hadjikhani & J. Johanson (Eds),
Managing opportunity development in business networks. London: Palgrave Macmillan.
Johansson, O., Frith, M., Falk, B., & Gareau, R. (1998). ThermoPulp-recent process
developments and experiences. Annual Meeting, Technical Section CPPA, Montreal.
Merchant, K. A. (1985). Control in business organizations. London: Pitman.
Moran, P., & Ghosal, S. (1999). Markets, firms and the process of economic development.
Academy of Management Review, 24(3), 390–412.
Otley, D. (1994). Management control in contemporary organizations. Towards a wider
framework. Management Accounting Research, 5, 289–299.
Otley, D. (1999). Performance management, a framework for management control systems
research. Management Accounting Research, 10, 363–382.
Ouchi, W. G. (1979). A conceptual framework for the design of organizational control
mechanisms. Management Science, 25, 833–848.
Penrose, E. (1959). The Theory of the growth of the firm, (Reprint 1995). New York: Oxford
University Press.
Ramirez, R. (1999). Value co-production: Intellectual origins and implications for practice and
research. Strategic Management Journal, 20, 49–65.
Richardson, G. B. (1972). The organisation of industry. Economic Journal, 82, 883–896.
Rindö, A. (1995). More Thermo than Mechanical. Sunds Defibrator: The World of Fiber Processing.
Sako, M. (1992). Prices, quality and trust: Interfirm relationships in Britain and Japan.
Cambridge: Cambridge University Press.
Simons, R. (1995). Levers of control: How managers use innovative control systems to drive
strategic renewal. Cambridge, MA: Harvard Business School Press.
Sundholm, J. (1998). Mechanical pulping. Tappi Press.
Walter, A., Ritter, T., & Gemünden, H. G. (2001). Value creation in buyer–seller relationships.
Theoretical considerations and empirical results from a seller’s perspective. Industrial
Marketing Management, 30, 365–377.
Waluszewski, A. (1989). Framväxten av en ny mekanisk massateknik. En utvecklingshistoria.
Doctoral Thesis, Department of Business Studies, Uppsala University.
Wedin, T. (2001). Networks and demand. The use of electricity in an industrial process. Doctoral
Thesis, Department of Business Studies, Uppsala University.
Yin, R. K. (1989). Case study research: Design and methods. Newbury Park, CA: Sage
Publications.
Yin, R. K. (1994). Case study research: Design and methods (2nd ed.). Thousands Oaks, CA:
Sage Publications.
CREATING SUPERIOR VALUE
THROUGH NETWORK OFFERINGS
ABSTRACT
This paper draws on the experiences of project marketing and solution
selling to improve the understanding of how to create superior value for
customers. Project marketing and solution selling have both developed
approaches to deal with complex marketing situations for a number of
years now. The upstream mobilization of customer network actors and the
downstream enlargement of the content and scope of the offering are the
key features of these approaches.
This paper presents two case studies to focus attention on elements that
are crucial to this twin-track approach. The downstream extension of the
offering relies on services supporting the customer’s action (SSC), which
supplement traditional services that support the supplier’s product (SSP).
The upstream extension leads to an introduction to other types of services
or elements of the offering – the services supporting the customer’s
network actors (SSCN).
Furthermore, the paper proposes a marketing process that takes the
supplier’s viewpoint, for whom the entire approach is a network
mobilization, into account. This approach to the offering, which included
SSP, SSC, and SSCN, is typical of a network strategy in which the
supplier recruits and enrolls new actors to (re)model the buying center.
1. INTRODUCTION
The change from the simple idea that a company transfers value to its
customers to meet their needs to the more complex idea that a company can
co-create value with its customer to improve its competitiveness nurtures
industrial marketing theory and practice. The IMP Group’s (Hakansson,
1982) interaction approach represents the catalyst for such a transforma-
tion. The interaction approach now includes the basic principles of the
service-dominant (S-D) logic (Lusch & Vargo, 2006a). This logic emphasizes
that experiences and relationships, especially in the cocreation and sharing
of resources, create customer value. Thus, interorganizational collaboration
in value-production appears highly relevant to understanding 21st century
business marketing in which suppliers and customers’ traditional roles are
becoming more complex and intertwined (Möller, 2006). Currently,
industrial marketing is indeed less about meeting customers’ needs and
more about identifying their latent needs or even creating these needs.
Consequently, suppliers’ strategy is not just to achieve value-added delivery
but also to look for superior value creation for their customers by involving
them appropriately in a co-construction process.
This type of approach is not new. For a number of years, companies in
two particular fields have mostly been responsible for developing such an
approach. The two fields – projects-to-order and solutions – also depict the
complexity of the marketing situations encountered. These ideas are thus
familiar ones for researchers and consultants involved in project marketing
since the early 1980s (Cova, Mazet, & Salle, 1993), as well as marketing and
selling of solutions since the middle of the 1990s (Bosworth, 1995). It would
seem relevant to further examine these two types of companies, their trends,
and marketing practices if one aims at an improved understanding of how to
create superior value for customers.
This paper first presents the history and key concepts of project marketing
and solution selling. The paper then clarifies the common and divergent
points between project marketing and solution selling to produce an initial
Creating Superior Value through Network Offerings 319
marketing cycle that are relevant to all transactions are bidding (C) and
negotiation (D). As has been thoroughly determined (Hakansson, 1982),
most industrial transactions that cover goods and services need an
interaction between a buyer and a seller. Consequently, some of the aspects
of preparation (B), implementation (E), and transition (F) may also be
relevant in this case. However, complex item transactions, such as project
transactions, are the only ones that always have to experience the full range
of the cycle from A to F (Cova & Holstius, 1993).
Examining complex item transactions through the perspective of solutions,
Sawhney (2006) identifies the customer activity cycle as the temporally linked
sequence of activities in which customers engage to solve a complex problem.
This cycle consists of three phases (Sawhney, 2006, p. 372):
Pre or before: when customers are deciding what to do to get the desired
result – searching, deciding, acquiring;
During: when customers are doing what they decided on – installing,
using, operating; and
Post or after: when customers are keeping things going – reviewing,
renewing, extending, upgrading, and updating.
Tuli et al. (2007) examine solution transactions as ‘‘a set of four relational
processes’’ (Tuli et al., 2007, p. 5):
Requirement definition: customers are not fully cognizant of their business
needs and should have discussions with the supplier to elaborate them;
Customization and integration: customization involves designing, modify-
ing, or selecting products and services to fit a customer’s environment and
integrating them into a coherent whole;
Deployment: it refers to the delivery of the integrated solution and its
installation within a customer’s environment; and
Post-deployment support: it is more than providing spare parts, operating
information, and routine maintenance; post-deployment support also
includes deploying new solutions in response to customers’ evolving
requirements.
Thus, to take the high level of uncertainty relating with low transaction
frequency into account, project marketing toys with anticipation by relying
on relationship elements. Project marketing also takes the complexity and
fragmentation of a buying center into consideration (many actors are
involved: individuals, organizations, business, and nonbusiness actors) when
defining offerings. In order to cope with the characteristics of all the possible
recipients of the value in the buying network, the offerings are of a
multilevel nature (Cova et al., 2002).
Companies dealing with a project use four levels of offering: (1) the
technical/functional offering, which includes products, services (technical
assistance, after sales, training), work, etc.; (2) the financial/contractual
offering, which includes financial terms (price, conditions of payment,
revision formulae, etc.), contract conditions (warranties, hardship clauses,
etc.), as well as details of any financial arrangements (barter, countertrade,
and buyback), and contractual arrangements (Built–Owned–Operated–
Transferred, joint-ventures); (3) the political offering, including formal and
informal agreements between local partners, details of local investments,
and, generally speaking, all investments made by the supplier within the
customer’s milieu to improve his political position; (4) the societal offering,
including all actions taken by the supplier to improve his or her position with
civilian groups with an interest in – or against – the project (associations,
users, and inhabitants).
The latter enables the supplier to possess those resources required to interact
with the buying network actors in all the phases of the transaction cycle.
Superior value creation for the customer should therefore build on a
marketing process that facilitates both extensions.
Interpreting this twin-track extension in terms of offerings is possible. The
downstream extension of the offering relies on what Mathieu (2001) called
SSC. The upstream extension leads to an introduction to other types of
services or elements of the offering (Cova, Dontenwill, & Salle, 2000) – the
services supporting the customer’s network actors (SSCN). For the latter, it
is not a matter of according favors to facilitate the influence of a specific
actor in the network surrounding the customer, but rather of real
complementary offerings. These are therefore additional services included
in the supplier’s proposition. Such services are not separate elements, but
part of a value proposition dedicated to the actors of the customer network.
These services are therefore a network offering that allows the reconstruc-
tion, or rather the remodeling, of the buying center. By mobilizing the
different actors who can consider the value proposition of these elements of
the offering, it is possible to achieve this remodeling. It is in truth more an
issue of cocreation of value with these actors by combining downstream and
upstream approaches: broadening the content and scope of the offering
while enlarging the buying center.
The approach of the offering, which included SSP, SSC, and SSCN, is
typical of a network approach in which the supplier recruits and enrolls new
actors to remodel the buying center. The supplier is not seeking influence
simply through relations – which could be close to influence peddling – but
tries to create value for business and nonbusiness actors in the customer’s
network. Consequently, the supplier cannot rely on a predetermined
offering that corresponds exactly with the ideal product or service. It is
rather a question of a polymorphous offering that adequately reflects the
customer and his network’s needs. All the elements of the offering that
the supplier is going to accumulate are destined to produce value for the
customer firm and the specific actors within or around this firm.
Works on integrated solutions very rarely take SSCN into consideration
(Windahl & Lakemond, 2006). However, very recently, scholars promoted
the concept customer solution nets (Möller & Rajala, 2007) that constitute
specific partner constellation of companies with complementary resources
and competences. However, these companies only originate from the supply
side when the SSCN concept takes actors, who originate from both the
supply network and the customer network, into account. Indeed, SSCN are
difficult to integrate in a reasoned definition of the offering as a coherent
Creating Superior Value through Network Offerings 331
4. CASE STUDIES
To illustrate the twin enlargements of the scope of the offering and the
number of buying center actors in the value creation of companies working
with business or solutions, two case studies are offered: BATIR and the 2012
Olympic Games. Case study research is extensively used in B2B marketing to
examine the decisions and behavior of groups and individuals within
organizations and in intercompany relations (Dubois & Araujo, 2004;
Dubois & Gadde, 2002; Halinen & Törnroos, 2005). This method aims at
examining complex issues in a systematic, combining approach (Dubois &
Gadde, 2002). Specifically, this method builds on the study of two cases
concerned with the given phenomenon. The main objective of the research is
to achieve a deep understanding over time (Woodside & Wilson, 2003) of the
actors, interactions, and behaviors during the specific process of offering
strategies aimed at providing projects or solutions.
The first case (BATIR) is part of a long-term program of action research
that the authors undertook with major companies operating within B2B
markets. Interviews with three managers, who took part in the process
under consideration from the supply side, were the main source of the data
collection. The researchers held and tape-recorded these long interviews on
site, remaining with the supply company for several days; this aided the
understanding of the overall context in which the marketing actions took
place. The second case (2012 Olympic Games) describes an extreme
situation. Archival material from the different newspapers that covered the
situation during 2005 was the source of the data collection. Furthermore,
the researchers gathered information from the two major competitor
countries to ensure objectivity.
This case concerns the July 2005 allocation of the 2012 Olympic Games to
either Paris or London. At the outset, Paris seemed to have a head start as
the June 6 report of the IOC Commission awarded Paris the highest marks
of the five candidate cities (London, Paris, Madrid, New York, and
Moscow). The Paris application was also the only one to obtain full marks.
In contrast, there were serious doubts whether London’s Olympic Park
project would meet the deadline.
The Commission report noted that the French were staking their
candidacy on scrupulously following of a 2003 IOC report’s recommenda-
tions on ways to reduce the cost and complexity of the Games. Since
assuming the presidency of the IOC, Jacques Rogge had pushed for cheaper
and smaller Games to encourage less industrialized countries to attend.
Awarding the 2012 Games to a project as compact as that which Paris
Creating Superior Value through Network Offerings 335
presented, would be a clear signal from President Rogge. This was not,
however, to be. London, with a budget four times larger than that of Paris,
obtained the Games.
As expected, the French blamed everyone but themselves for the
International Olympic Committee’s failure to select Paris as the 2012
Games host. The French sports daily L’Equipe, which almost functioned as
the official newspaper of the Paris bid, reported in a front-page editorial that
London had used loopholes in the bidding rules to win. The newspaper
accused London of going beyond propriety in aggressive marketing and
pure demagoguery. L’Equipe specifically cited the London vision of using
the Olympics to encourage children in Britain, as well as in underdeveloped
countries worldwide to practice sports. Only Essar Gabriel, the young (39)
chief operating officer of the Paris, bid seemed to understand the power of
London’s message. ‘‘They took a risk with a vision of universality that went
beyond what we perceived as the vision of the IOC, and it worked.’’
Whereas Tony Blair booked two lifts in his hotel in Singapore in which he
and Sebastian Coe would welcome his guests, who included 40 members of
the IOC, the French President Jacques Chirac slammed British and Finnish
food. Paris lost by two votes; Finland has two IOC members. ‘‘The Finnish
delegates are very proud of their national food,’’ said London Mayor Ken
Livingstone. ‘‘It could have been that.’’ For some observers, the technical
quality of the application was less important than the charm offensive aimed
at members of the Committee, as well the other applicants’ political and
economic interests. In addition, Paris failed to match the Commonwealth
votes (26 votes in the Committee), as the French are almost absent from the
IOC corridors of power. France only has 3 active members out of a total of
125 and one honorary member out of a total of 21.
Beyond the errors in the French strategy and those of its president, the
difference in the different stakeholders’ perceptions of the co-construction
process is striking. Paris honed in on Jacques Rogge, whereas London tried
to interact with as many IOC members as possible. This led Henry Kissinger
to remark that, ‘‘the French have not understood what the IOC is.’’ London
constructed initiatives and local projects far beyond the single organization
of the 2012 Olympic Games with each of the IOC members – which does not
appear to be corruption, despite the clumsy insinuation by Bertrand
Delanoë, the mayor of Paris. Similarly, it is striking that while Paris tried to
produce a value proposition in accordance with the customer’s expressed
needs, London drew on the implications for the customer and his or her
network: boosting and reaffirming the universality of the Olympic Games,
not by reducing the costs but by increasing their impact on the world.
336 BERNARD COVA AND ROBERT SALLE
An analysis of the two case studies and subsequently comparing the analysis
with a reference framework – definable through the convergence of project-
marketing and solution-selling approaches – enable the presentation of a
marketing process for companies looking to create superior value for their
customers. The marketing process is possible by always taking the viewpoint
of the supplier for whom the entire approach is a network mobilization
(Mouzas & Naudé, 2007) paralleling the customer–supplier relational processes
(Tuli et al., 2007). At every step of the process, questions arise regarding the
approach to value creation to which the supplier and the customer network
actors have committed. The existing project-marketing and solution-selling
approaches sometimes provide answers to the following questions.
How can suppliers ensure that their understanding of the customer network
actors’ [e.g., Mouzas & Naudé’s (2007)] vision is correct? What network
horizon should the supplier choose (Anderson, Hakansson, & Johanson,
1994)? Does one part of the network always remain invisible? Should the
supplier favor one type of actor (business or nonbusiness)? Is the network
position concept that Mattsson (1985) developed relevant in this case? Are
there no hybrid actors that belong to both the customer and supply
networks?
By focusing on the customer rather than on the market, the process of
getting to know and analyzing a customer network can benefit from the
general outline of the method that Johanson and Mattsson (1988) suggested.
This outline encompasses the following questions. (1) Who are the actors in
the customer network: business and nonbusiness actors? Which are the
important relationships between these actors and the customer? (2) What
are the relative positions of these actors in the customer network? What
are their roles? What possibilities do these actors around the customer offer
the supplier regarding access to the customer? This analysis leads to the
definition of the key actors in the customer network. (3) What are the
supplier–actor relationships in the customer network? (4) What incentives
would one offer the actors to mobilize in support of the supplier’s
breakthrough to the customer? (5) What methods can one employ to
mobilize in support of the supplier’s breakthrough to the customer?
Creating Superior Value through Network Offerings 337
In addition, suppliers should not only care about the visible network – the
socioeconomic actors (e.g., the customer, engineering company, bank, and
other institutions) – contractually involved in the buying process, but also
about the hidden network – the socioeconomic actors (e.g., the citizens, local
associations, and international organizations such as Greenpeace, oppo-
nents) – that could enter the buying process on a noncontractual basis.
Solution suppliers who do not grasp this phenomenon and who only
network visible actors may find themselves in the position of having only
managed half of the project network (Sahlin-Andersson, 1992). This is
where the approach becomes difficult, as the supplier has to enter the
network to learn more about the invisible actors. Consequently, it is difficult
for suppliers to plan this type of network approach in full. Suppliers
therefore have to be reactive and know how to evolve by considering events
as they occur.
How can the supplier choose the customer network actors with whom to
interact? How can one avoid turning to actors who are isolated and without
relationships, which is the traditional way of approaching influencers and
stakeholders? What should the basis for selection be: the actor’s importance
in the decision-making process, which is the reason for approaching
stakeholders in project management (Loosemore, 2006), or a fit/matching
process between the supplier and the actor? How can one integrate the
relationship between actors into the selection process? How can one
integrate the relationship between some of these actors and some supply
network actors into the selection process?
How can one identify the aim of the potential value creation between the
targeted actor and the supplier? Can one base the value creation drivers on
the risks associated with any organizational buying behavior? Should
researchers consider each actor’s stakes more strategically? Recognition of
actors’ stakes refers to the process of identifying the factors that allow the
mobilization of certain of these targeted actors. This process involves several
levels: first, the overall corporate level of the actor concerned, thereafter the
functional level of a specific entity or department within this actor and,
finally, the individual level of a particular person within the actor.
338 BERNARD COVA AND ROBERT SALLE
The method that could be used on the actors in the customer network is
similar to that used in solution selling (Bosworth, 1995) and project
marketing (Cova et al., 2002). This method involves detecting what is not
going well with an actor and what the actor is as yet unable to identify or
face up to – a latent problem. There is a latent problem when, from their
perspective and building on their experience, suppliers observe a situation in
the actor’s organization that is inefficient or could lead to a potential
problem. This situation is the result of the supplier’s analysis, but of which
the actor is still unaware. The supplier’s dissatisfaction statement thus
indicates that the actor is facing a problem. Generally, the actor does not
know how to approach the poorly formulated problem.
How can the supplier contact the actors in the customer network when he or
she has not yet started any value-creation work with the customer? On what
does the supplier’s legitimacy to interact with these actors build? Should the
supplier use a third party to make contact with these actors? What grounds
can the supplier use to make the initial contact with an actor who has
neither asked for anything nor expressed a need?
What level and form of investment can the supplier reasonably mobilize in
creating value with these actors? How can the supplier guarantee that the
investment will not be a total loss or, worse, an advantage for a competitor?
How can the supplier hand back power to these actors in their relationship
with the customer? What types of skills should the supplier promote
regarding the targeted actors?
How does the solution generated create value for all the parties involved?
How can the supplier define the relevant content of the integrated solution
and, especially, of the service dimension? How can the supplier define the
appropriate degree of integration and bundling of his or her offering?
Creating Superior Value through Network Offerings 339
6. CONCLUSION
Drawing from the experience of project marketing and solution selling, this
paper demonstrates the importance for the supplier of combining both
upstream and downstream approaches when developing an offering that
creates superior value for the customer. Through an upstream approach, the
supplier identifies all the actors in the customer network who could be
involved in the customer’s decision-making process and tries to understand
what is at stake for them. Through a downstream approach, the supplier
designs the content and the perimeter of an offering in such a way as to
customize it according to the stakes for these customer network actors. This
leads the supplier to develop SSCN.
The development of SSCN is in tune with the latest developments of the
S-D logic (Lusch & Vargo, 2006b), as it proposes a move from the value
chain toward a value-creation network/constellation. Such a move is break
from a goods-dominant logic. Consequently, creating superior value for
customer means mobilizing and servicing actors far beyond the boundaries
of the buying center, supply chain, and customer solution net (Möller &
Rajala, 2007). However, one could question the generalizability of such an
approach outside the realm of project and solution businesses. The growing
trend toward integrated solutions in all types of businesses (Stanley &
Wojcik, 2005) supports our call to expand the validity of this approach to
numerous other industries.
REFERENCES
Anderson, J. C., Hakansson, H., & Johanson, J. (1994). Dyadic business relationships within a
business network context. Journal of Marketing, 58(4), 1–15.
Anderson, P. F., & Chambers, T. M. (1985). A reward/measurement model of organizational
buying behavior. Journal of Marketing, 49(2), 7–23.
Artto, K. A., & Wikström, K. (2005). What is project business? International Journal of Project
Management, 23(5), 343–353.
Bansard, D., Cova, B., & Salle, R. (1993). Project marketing: Beyond competitive bidding
strategies. International Business Review, 2(2), 125–141.
Bosworth, M. T. (1995). Solution selling, creating buyers in difficult selling markets. New York:
McGraw-Hill.
Cova, B. (1990). Appels d’offres: du mieux disant au mieux coopérant. Revue Franc- aise de
Gestion, (mars-avril-mai), 61–72.
Cova, B., & Crespin-Mazet, F. (1997). Joint construction of demand: The dynamic of supplier-
client interaction in project business. In: H. G. Gemunden, T. Ritter & A. Walter (Eds),
Relationships and networks in international markets (pp. 343–359). Oxford: Pergamon.
340 BERNARD COVA AND ROBERT SALLE
Cova, B., Dontenwill, E., & Salle, R. (2000). A network approach to the broadening of the
offering: Beyond added services. Paper presented at the 16th IMP Conference, Bath,
UK, September 7–9.
Cova, B., Ghauri, P., & Salle, R. (2002). Project marketing – Beyond competitive bidding.
Chichester: John Wiley & Sons.
Cova, B., & Holstius, K. (1993). How to create competitive advantage in project business.
Journal of Marketing Management, 9(2), 105–121.
Cova, B., Mazet, F., & Salle, R. (1993). Towards flexible anticipation: The challenge
of project marketing. In: M. J. Baker (Ed.), Perspectives on marketing management
(Vol. 3, pp. 375–400). Chichester: John Wiley & Sons.
Cova, B., Mazet, F., & Salle, R. (1996). Milieu as a pertinent unit of analysis in project
marketing. International Business Review, 5(6), 647–664.
Cova, B., & Salle, R. (2007). A comprehensive approach to project marketing and the
marketing of solutions. Industrial Marketing Management, 36(2), 138–146.
Davies, A., Brady, T., & Hobday, M. (2006). Charting a path towards integrated solutions.
MIT Sloan Management Review, 47(3), 39–48.
Dubois, A., & Araujo, L. (2004). Research methods in industrial marketing studies. In:
H. Håkansson, D. Harrison & A. Waluszewski (Eds), Rethinking marketing: Developing
a new understanding of markets (pp. 207–227). Chichester: John Wiley & Sons.
Dubois, A., & Gadde, L. E. (2000). Supply strategy and network effects – Purchasing behaviour
in the construction industry. European Journal of Purchasing & Supply Management, 6,
207–215.
Dubois, A., & Gadde, L. E. (2002). Systematic combining. An abductive approach to case
research. Journal of Business Research, 55(7), 553–560.
Dunn, D. T., Thomas, C. A., & Lubowski, J. L. (1981). Pitfalls in consultative selling. Business
Horizons, 24, 59–65.
Galbraith, J. R. (2005). Designing the customer-centric organization: A guide to strategy,
structure and process. San Francisco: Jossey-Bass.
Günter, B., & Bonaccorsi, A. (1996). Project marketing and systems Selling – In search of
frameworks and insights. International Business Review, 5(6), 531–537.
Hadjikhani, A. (1996). Project marketing and the management of discontinuity. International
Business Review, 5(3), 319–336.
Hakansson, H. (Ed.) (1982). Marketing and purchasing of industrial goods: An interaction
approach. Chichester: John Wiley & Sons.
Halinen, A., & Törnroos, J.-A. (2005). Using case methods in the study of contemporary
business networks. Journal of Business Research, 58(9), 1285–1297.
Hannaford, W. (1976). Systems selling: Problems and benefits for buyers and sellers. Industrial
Marketing Management, 2, 139–145.
Holstius, K. (1987). Project export. Research Paper 1. Lappeenranta University of Technology.
Johanson, J., & Mattsson, L. G. (1988). Internationalisation in industrial systems – a network
approach. In: N. Hood & J. E. Vahlne (Eds), Strategies in global competition (pp. 287–314).
London: Croom Helm.
Johnston W. J., & Lewin E. L. (1994). A review and integration on organizational
buying behavior. Working Paper Marketing Science Institute. Report Number 94-111,
July.
Loosemore, M. (2006). Managing project risks. In: S. Pryke & M. Smyth (Eds), The management
of complex projects: A relationship approach (pp. 187–204). Oxford: Blackwell.
Creating Superior Value through Network Offerings 341
Lusch, R. F., & Vargo, S. L. (Eds). (2006a). The service-dominant logic of marketing: Dialog,
debate, and directions. Armonk, New York: M.E. Sharpe.
Lusch, R. F., & Vargo, S. L. (2006b). Service-dominant logic: Reactions, reflections and
refinements. Marketing Theory, 6(3), 281–288.
Mathieu, V. (2001). Product services: From a service supporting the product to a service
supporting the client. Journal of Business & Industrial Marketing, 16(1), 39–58.
Mattsson, L.-G. (1973). Systems selling as a strategy on industrial markets. Industrial
Marketing Management, 3(2), 107–120.
Mattsson, L.-G. (1985). An application of a network approach to marketing: Defending
and changing positions. In: N. Dholakia & J. Arndt (Eds), Changing the course of
marketing: Alternative paradigms for widening marketing theory (pp. 263–288). Green-
wich: JAI Press.
Miller, R., & Lessard, D. R. (2000). The strategic management of large engineering projects:
Shaping institutions, risks, and governance. Cambridge, MA: MIT Press.
Möller, K. (2006). Role of competences in creating customer value: A value-creation logic
approach. Industrial Marketing Management, 35(8), 913–924.
Möller, K., & Rajala, A. (2007). Rise of strategic nets – New modes of value creation. Industrial
Marketing Management, 36(7), 895–908.
Mouzas, S., & Naudé, P. (2007). Network mobilizer. Journal of Business & Industrial Marketing,
22(1), 62–71.
Oliva, R., & Kallenberg, R. (2003). Managing the transition from products to services.
International Journal of Service Industry Management, 14(2), 160–172.
Owusu, R. A., & Welch, C. (2007). The buying network in international project business:
A comparative case study of developments projects. Industrial Marketing Management,
36(2), 147–157.
Page, A., & Siemplenski, M. (1983). Product systems marketing. Industrial Marketing
Management, 12, 89–99.
Sahlin-Andersson, K. (1992). The social construction of projects: A case study of organizing an
extraordinary building project – The Stockholm Globe Arena. Scandinavian Housing and
Planning Research, 9, 65–78.
Sawhney, M. (2006). Going beyond the product. Defining, designing and delivering customer
solutions. In: R. F. Lusch & S. L. Vargo (Eds), The service-dominant logic of marketing:
Dialog, debate and directions (pp. 365–380). Armonk, New York: M.E. Sharpe.
Sharma, D., & Molloy, R. (1999). The truth about customer solutions. In: Viewpoint (pp. 1–14).
Boston, MA: Booz, Allen & Hamilton.
Skaates, M. A., & Tikkanen, H. (2003). International project marketing: An introduction to the
INMP approach. International Journal of Project Management, 21(1), 503–510.
Stanley, J. E., & Wojcik, P. J. (2005). Better B2B selling. McKinsey Quarterly, 3, 15.
Stremersch, S., Wuyts, S., & Frambach, R. T. (2001). The purchasing of full-service contracts.
Industrial Marketing Management, 30(1), 1–12.
Tikkanen, H. (Ed.). (1998). Research on international project marketing. In: Marketing and
international business – Essays in honour of Professor Karin Holstius on her 65th birthday
(pp. 261–285). Turku: Turun Kauppakorkeakoulun Julkaisuja.
Tuli, K. R., Kohli, A. K., & Bharadwaj, S. G. (2007). Rethinking customer solutions: From
product bundles to relational processes. Journal of Marketing, 71(July), 1–17.
Webster, F. E., & Wind, Y. (1972). Organizational buying behavior. Upper Saddle River, NJ:
Prentice-Hall.
342 BERNARD COVA AND ROBERT SALLE
Windahl, C., & Lakemond, N. (2006). Developing integrated solutions: The importance of
relationships within the network. Industrial Marketing Management, 35(7), 806–818.
Wise, R., & Baumgartner, P. (1999). Go downstream. The new profit imperative in
manufacturing. Harvard Business Review, 77(5), 133–141.
Woodside, A. G., & Wilson, E. J. (2003). Case study research method for theory building.
Journal of Business & Industrial Marketing, 18(6/7), 493–508.
Young Byun, H., & Smith, P. (1990). Some effects of systems selling in networks. Paper
presented at the 6th IMP Conference, Milan, Italy.
COMPETENCE-BASED VALUE
FRAMING FOR BUSINESS-TO-
BUSINESS CUSTOMERS
ABSTRACT
This paper shows how business suppliers set up processes allowing the
translation of their competencies into value for the customers. As such, this
paper seeks to complement the dominant view in which competencies are
seen mainly as valuable for the firm owning the competencies but not for that
firm’s customers. In so doing, the paper seeks to contribute to two bodies of
research: the notions of core competencies in strategic management and of
value for customer in business marketing. These two bodies of research
interact infrequently thus far, leaving the question of how value is transferred
unanswered. This question is relevant because competencies are immaterial,
tacit, and non-tradable assets. Hence, the research question underlying the
present paper becomes: How can competencies translate into valuable
outputs and be made accessible to the customer? To answer this question, a
qualitative approach is used that involves a multiple-case study analysis
aimed at exploring the competence-based process of value supplying in
business markets. Specifically, this paper suggests the following propositions:
(1) Competence-based value analysis, where suppliers anticipate customers’
1. INTRODUCTION
The nexus between value creation and company resources and competencies
has been a much-debated topic for more than a decade in strategy and
Competence-Based Value Framing for B-to-B Customers 347
Resource-based Input resources, Barney (1986, 1991), VRIN resources as input of production Tautology in key premises of
view inside-out Peteraf (1993) processes that generate superior value for the theory. Missing link
perspective customer and superior performance between competencies and
value for the market
Competence- Organizational Grant (1991), Prahalad Competencies as distinctive routines of
based view factors, inside-out and Hamel (1990) transformation of specific mixes between
perspective physical and immaterial inputs (resources)
producing superior value for customer and
superior performance
Dynamic Organizational Kusunoki, Nonaka, and Ability to continuously innovate and
capabilities factors, inside-out Nagata (1998), Teece, reproduce capabilities over time allows to
perspective Pisano, and Shuen overcome path dependency and gain
(1997) superior value from market transactions
Relational view Output resources, Dyer (1996), Dyer and Value and competitive advantages stems Few indications about how
implicit providing Singh (1998) from coproduction and joint exploitation companies can insulate the
In his seminal work, Barney (1986) identifies value sources in the factor
market, arguing that transactions cannot take into account a priori the
overall potential of exploitation for a given resource within a firm’s
business process. In addition, more recent work translates value generation
into the firm’s internal processes. Barney (1991, p. 106) notes that
‘‘resources are valuable when they enable firms to conceive or implement
strategies that improve their efficiency and effectiveness.’’ Ray, Barney,
and Muhanna (2004, p. 26) emphasize that ‘‘resources can only be a source
of sustained competitive advantage if they are used to ‘do something,’
e.g., if those resources are exploited through business processes.’’ Thus,
the RBV posits that resources and competencies that fulfill certain key
characteristics can be a source of superior value when they are inputs for
business processes. While this approach shifts the unit of analysis from the
firm to the process, it leaves the sources of value for a given resource
largely unexplored.
Similarly, in the competence-based view, an exogenous perspective
of value generation informs subsequent developments of the RBV. The
processes by themselves – intended as specific modalities of production,
management, and market knowledge organization – emerge as key sources
of competitive advantage in the subsequent contributions to the RBV, where
capabilities and core competencies are specific routines of transformation of
specific mixes of physical and immaterial inputs (Grant, 1991). Here, some
researchers point to the strategic approaches to increase the resource and
capability endowment by highlighting that as resources and competencies
are idiosyncratic, they are more easily accumulated internally than
externally (Dierickx & Cool, 1989; Teece et al., 1997). Prahalad and Hamel
(1990) define competencies as how a firm learns to coordinate the set of
production capabilities by integrating different technological flows. They
use a metaphoric picture of the roots of a tree to illustrate that resources
and competencies last longer than products/fruits. The implication of this
illustration is that firms should focus their attention on the identification of
their core competencies in order to feed, develop, and exploit the fruit. Other
authors have contributed to a dynamic perspective of the RBV by focusing
on the continuous innovation and reproduction of capabilities as a means
for a given organization to limit the path-dependence constraints generated
by the resource-accumulation processes and, therefore, as a key component
in a firm’s success (Kusunoki et al., 1998; Teece et al., 1997). However,
the majority of this theoretical discussion fails to answer the initial question
of what gives value in the market to specific resources and competencies
(Priem & Butler, 2001a, 2001b).
350 FRANCESCA GOLFETTO ET AL.
3. RESEARCH METHOD
the data considered both the individual firms and the overall district (the
Tuscan Spinners). Finally, as the potential for value supplying from
competence transactions might vary significantly in different stages of
the relationship life cycle, the cases include firms focusing on both new
business relationships (e.g., contacts with prospects) and long-standing
business relationships (e.g., interactions over a period of time). The selected
firms covered a wide spectrum of conditions in buyer–seller relationships
(Table 2).
For each firm, evidence of business relationships was collected through
primary and secondary sources on the Internet. Face-to-face meetings took
place between 2002 and 2004, primarily during the spring/summer of 2003.
Each meeting lasted between 1 and 2 hours, and follow-up discussions were
usually conducted by telephone or e-mail. Managers read (and subsequently
released for publication) the resulting case vignettes. Two investigators
conducted the interviews: One facilitated the discussion, while the other
codified the conversation into text and filled in gaps in the questions. The
extensive archival data from each informant is used for triangulation
purposes. Finally, participant observation at various European trade fairs
offered a substantial amount of qualitative data. This research context is
interesting because it allows the firms to: (1) develop an experiential
approach to competence-based marketing and communication, (2) improve
their ability to anticipate competencies through feedback mechanisms, and
(3) use social interaction to increase the likeliness of implementing
investment and risk-sharing mechanisms.
The research method can be best described as a cross-case analysis (Yin,
1994), or an explorative-cum-descriptive case design (Yin, 1994), in that it
provides an understanding of an empirical phenomenon that has hitherto not
4. CASE PRESENTATION
4.1. Tuscan Spinners
The Tuscan Spinners represent a cluster of small firms based in Tuscany that
produce knitting yarns. The Tuscan Spinners are considered as market
leaders for the quality of the yarn they produce and the creativity and
innovation of their fibers. They control almost the entire supply of top-of-
the-range products and account for a significant share of yarn production
worldwide.
Since the 1990s, the Tuscan Spinners have faced the emergence of low-cost
manufacturers in Far Eastern countries. These new competitors developed
efficient production processes and are skilled in quickly imitating the most
successful creations. As a result, the Tuscan Spinners faced a serious threat
to their knitting-yarn manufacturers, owing to the risk that yarn, a relatively
simple product, became a commodity, so eroding the income potential
of their high-quality and high-creativity products. The Tuscan Spinners
could not respond to this kind of competition by focusing on cost-advantage
strategies, nor could they defend their innovations against imitations.
However, their ability to anticipate the fashion trends that become establis-
hed styles in the future downstream market and to incorporate these styles
into their fibers was far more difficult to replicate. These skills were
particularly appreciated by the customers (the knitwear producers), as a
yarn supplier who is skilled in fashion trends can quickly align the company
with the customer (distributor and consumer) needs, even if the fashion
trends are evident only months later. However, the value potential of the
Tuscan Spinners’ soft skills is not easy to communicate to the market and to
translate into a customers’ willingness to pay a premium price.
In order to convey the new message across their customers, the Tuscan
Spinners heavily reengineered their communication strategy. They joined
356 FRANCESCA GOLFETTO ET AL.
8,300 in 2003. Today, visitors to Pitti Filati consider the event as a strong
learning experience, while the Tuscan Spinners represent the reference
manufacturers for the sector. Although the Tuscan Spinners are not immune
to future competition, their competence-based marketing approach has put
them in such a strong position that they can charge a premium price.
4.2. Picanol
4.3. Filtrauto
Filtrauto is a leading OEM, specializing in filtering systems for air and fuel.
The firm is part of the automotive French–Italian group Sogefi, which
supplies automotive components to the world market. In 2003, Sogefi had a
turnover of almost h1,000 million. Sogefi is the world’s fourth largest
supplier of suspensions and the fifth largest supplier of filters.
Filtrauto has developed a unique approach to the management of major
customers in the automotive industry. In this sector, suppliers usually
request to tender from the manufacturers for each new product. The
manufacturers define the design and performance of the vehicle and
the dimensions of the individual parts, while the suppliers present a pre-
project of specific parts or solutions. The manufacturers seek to reduce
the number of suppliers to control quality and ensure strong collaboration
in problem solving. This results in supplier selections becoming an
increasingly competitive process. The past decade has seen a decrease of
38% in the number of suppliers to car manufacturers; in 2004, the total
number of OEMs was around 1,500. Companies forecast a reduction in
the number of OEMs to 40 within the next 5 years. Moreover, car
manufacturers are increasingly asking suppliers to propose new solutions
and, specifically for filters, to widen the range from single cartridges to
broad filtration systems.
As it recognized this trend in customer needs, Filtrauto has modified
its own business model. Rather than merely providing stand-alone
filters, Filtrauto now offers know-how and integrated filtering systems.
The new approach was consistent with the competence overlap (with
the customer competence) already developed by Filtrauto, which inte-
grates the single filter into the customer’s end product (the car). However,
the competitive market required the development of new competencies,
and Filtrauto therefore started to take on specialized technicians to
oversee the design of the system and coordinate the specialized component
suppliers.
In order to support this integrated solution approach, the commer-
cial activity of the OEM division shifted its focus from sales representatives
and advertising toward competitive presentations of the pre-project
requested by the car manufacturer. These presentations raised Filtrauto’s
360 FRANCESCA GOLFETTO ET AL.
competence in the eyes of the customer. In the past, a project was presented
solely by the technical director. The technical director then collected
customer feedback and provided inputs to the project group and
production. Now, a larger project team undertakes the drafting of the
project bid. The project team includes: the platform director (an expert
on the customer’s specific platform), the computation technicians, the
product conception technician, and the quality technician. This team
includes well-prepared technicians who can discuss the customer’s problems
and provide innovative solutions. The traditional sales representatives who
visited the car manufacturer/purchaser, maintained customer relations, and
presented the products to the purchasing department or the various
technicians in the customer’s product and innovation groups no longer
operate.
As a result, the OEM division has significantly improved in performance.
Its contribution to the overall turnover grew from 30% to 60% (50% for
original equipment and 50% for original spares). At the same time, it
reduced the weight of the after-market sales in which Filtrauto has remained
largely a supplier of products. Although the company’s turnover has not
risen, the new policy has been successful in maintaining turnover levels in a
very difficult market situation.
5. FINDINGS
The evidence from our case studies suggests that the novelty of a
competence-based approach to value for customer does not lie so much in
the structure of the supplying process but is more apparent and significant
in its content. The value-supplying process remains primarily anchored
to the established structure of analysis–creation–communication–delivery
(e.g., Anderson & Narus, 1999). However, when it comes to the content
of the new approach for value for customer, the problem of dealing with
competencies emerges. The literature suggests a number of features that
make competencies inherently difficult to market as economic goods. These
difficulties include causal ambiguity, intangibility, and the nonavailability of
factor markets (e.g., Prahalad & Hamel, 1990; Barney, 1991). Thus, these
difficulties require ad hoc tools in the diagnosis of value sources (causal
ambiguity), in the communication of value (tacit nature), and in their
delivery to the customer (non-tradability).
The following sections summarize the key findings at each step of the
value-supplying competence-based process. These sections also show how
competence-based marketing can lead to value for customer, despite or
because of the difficult characteristics of competencies.
The Italian Spinners know the future fashion trends, they are creative, they know how to
adapt products quickly to the tastes of our customers; they often even influence fashion
along the entire production chain, they are excellent problem-solvers, they have loads of
ideas, they offer what we really need. (Interviews with two business customers at the Pitti
Filati trade fair.)
Our research on the end-user market and the styles embodied in our products and in
the specialized competence of our companies allow us to overcome competition from low
cost producers. (Interview with a Tuscan Spinners general manager at the Pitti Filati
trade fair.)
In the IBM case study, what emerged during the analyses in support of
the reorientation was that customers were seeking the ability to integrate
364 FRANCESCA GOLFETTO ET AL.
The trade fairs have proved to be fundamental in giving the idea of company expertise
which we want to communicate with the new strategy. The machines are always at the
fairs, because the customers want to touch, see the movement, hear the noise and smell
the oil. They want to see what the machines can do for them; they want to talk to
technicians to find out if they understand their problems, if they can make changes in
response to customer needs. (Interview with the marketing director.)
The revision in Picanol’s strategy has also led to a significant change over
the last 2–3 years in the way in which the machines are presented. Originally,
only machines were on display, and primarily technological solutions were
shown. Today, the machines are presented in groups defined by the sector
for which they are built, thus emphasizing the specific technical solutions
provided and the products that may be made with the machines. At ITMA
2003 (the world event for textile machines), different creations were
presented for each of the three market divisions (clothing, home textiles,
and technical fabrics). A famous Belgian designer designed the various
368 FRANCESCA GOLFETTO ET AL.
models and products, which were then made on Picanol machines. The
presentations demonstrated that the offered solutions were aligned with the
problems posed by the new fashion trends. For example, in order to market
the machines used in textiles for clothing, Picanol mounted a spectacular
show of white ‘‘woven-on-Picanol’’ clothes onto which images of the firm’s
looms at work were projected:
With these presentations we want to initiate our closeness with the customer, our
expertise and knowledge of the specific end-markets. We want to communicate that we
are aware of the new trends in fashion, that we know the problems that these new trends
present, and that our machines already have the best solutions. We want to communicate
that our machines can be updated when fashion changes. In a nutshell, we want to
show our interest and our skills, in order to partner with our customers . . . . These
presentations differentiate us from the competition, because our low-price competitors
cannot offer all this. (Interview with a marketing manager.)
Our research on the end market, the styles proposed in our products and generally
the specialized competence of our companies allow us to overcome competition from
low-cost producers . . . we distribute samples of our creations to visitors, even if few of
them come back as customers. Nevertheless, this release of creativity serves to underline
that just as we can offer free creativity for everyone, we can also create specifically for
individual customers. The approach pays off, because the world’s leading fashion
designers are among our customers. Others can copy an individual item, but not our
Competence-Based Value Framing for B-to-B Customers 369
essential ability, which is to create new items continuously. (Interview with a Tuscan
Spinner general manager during the Pitti Filati trade fair.)
The nexus between value for customer and the supplier’s competencies is
at the heart of current research on business markets (Grönroos, 1997;
Håkansson & Snehota, 1995; Harmsen & Jensen, 2004; Möller, 2006).
Traditionally, a resource-based theory has analyzed the contribution of
competencies to the creation of value by focusing on the input side of
production processes (Barney, 1986, 2001). However, in business markets, a
supplier’s competencies typically target production processes that overlap
those of the buyer, being de facto provided by the former and accessed by
the latter, who obtains extra value. For this reason, the competencies
delivered in a business relationship increasingly determine the supplier’s
value to the customer (Golfetto & Gibbert, 2006). The supply of
competencies is therefore relevant for value creation (Grönroos, 1997), but
exceptions (e.g., Golfetto & Mazursky, 2004; Zerbini et al., 2007) remain
largely unexplored in current literature.
This study looks at the process through which business marketers
promote and supply their competencies. Evidence from the four case studies
(in the automotive component, yarn manufacturers, IT systems, and textile
machine industry) suggests that a competence-based value-supplying
process is more unique in its content and mechanisms than in its structure.
Such a process stems from the supplier’s ability to identify competence gaps
in the customer’s portfolio. This process is further based upon investments
Competence-Based Value Framing for B-to-B Customers 371
that aim at developing an overlap between the supplier’s know-how and the
customer’s processes. The value-for-customer process ultimately rests on the
effectiveness of experiential techniques to foster the customers’ perception
of values, besides the supplier’s ability to set up facilitating interfaces in
the relationship, which ensure that customers have access to their own
know-how (Table 3, Fig. 1).
The present study makes two main theoretical contributions. First,
the study further investigates the relationship between value supplying
(Anderson & Narus, 1999) and company competencies (Möller & Törrönen,
2003; Srivastava et al., 2001) by focusing on the distinctive content
of value-supplying processes whose unique contents are competencies.
More specifically, a competence supplier’s ability to create value depends
on their forward-looking orientation, which targets the customer’s
market (end-market orientation), and directs the effort to accumulate
specialized skills relevant to the customer’s business processes. However,
competence supplying differs from market orientation (e.g., Kohli &
Jaworski, 1990; Helfert, Ritter, & Walter, 2002) both in terms of focus
(it is limited to a customer’s specific need) and in its proactive approach
(as it goes beyond the receipt of insights from customers, to anticipate
end-market trends). Thus, although all competence suppliers are market
oriented, not all market-oriented business suppliers are competence
providers.
Second, the research advances the understanding of marketing compe-
tencies (Gibbert et al., 2006; Golfetto & Gibbert, 2006; Zerbini et al., 2007)
by identifying crucial mechanisms that business marketers may implement
to satisfy their customer’s competence needs. The research focuses on the
rationale underlying the identification and selection of competencies in
which to invest. This is performed by targeting the skills required in the
customer’s activities, rather than by focusing on (and leveraging) bundles
of competencies that enhance internal processes. However, this work
emphasizes the peculiarities of competence-based communication with
respect to the more common means of promoting skills and identifying the
role that live techniques play in allowing customers to experience how
suppliers’ competencies work in their own specific environment. In other
words, live communication techniques reach beyond the mere support of
reputation and brand image.
The competence-supplying framework developed in this study has some
limitations, however. First, the paper is based upon limited case study
research. A larger set of data would be needed to strengthen the conclusions
of the analysis. Nevertheless, the presentation of novel evidence of cases of
372
Table 3. The Competence-Based Process of Value Creation in the Four-Case Study.
Tuscan Spinners IBM Filtrauto Picanol
Competence-based Anticipation and incorporation Bundling of IT systems and Integrating OEM components into Adapting the supply to the
value analysis in the yarn of future fashion services and customization platforms performing specific seasonal fashion and to the
trends in the end markets according to downstream functions in the end product specifics required for
markets (from filters to filtering systems) downstream markets
(apparels, home textiles,
technical fabrics)
Competence-based Collective investments in Acquisition of PWC’s Accumulation of architectural Specialization and internal
value creation knowledge on future consultant experts in competencies on integrated development of competencies
consumer tastes and customers’ businesses to fill filtering systems relevant for each of the main
behaviors the competence gap between markets
IBM’s IT potential and
customers’ needs
Reconfiguration of sector- Reorganization of R&D processes
specific competencies per customer platform in order to
dispersed in the organization ensure superior responsiveness in
through a layering approach the pre-bid deals
REFERENCES
Anderson, J. C., & Narus, J. A. (1999). Business markets management: Understanding, creating
and delivering value. Upper Saddle River: Prentice Hall.
Azimont, F., Cova, B., & Salle, R. (1999). Vente de solutions et marketing de projets. Revue
Franc- aise du Marketing, 173/174, 131–140.
Barney, J. B. (1986). Strategic factor markets: Expectations, luck, and business strategy.
Management Science, 10, 1231–1241.
Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of
Management, 1, 99–120.
Barney, J. B. (2001). Is the resource-based ‘view’ a useful perspective for strategic management
research? Yes. Academy of Management Review, 1, 41–56.
Borghini, S., & Rinallo, D. (2003). Communicating competence in diagnostic and medical
industry: A view from customers. XIX IMP Conference, Lugano.
Bosworth, M. T. (1995). Solution selling: Creating buyers in difficult selling markets. New York:
McGraw-Hill.
Bourgeois, III. L. J., & Eisenhardt, K. (1988). Strategic decision processes in high velocity
environments: Four cases in the microcomputer industry. Management Science, 34,
816–835.
Day, G. S. (1994). The capabilities of market-driven organizations. Journal of Marketing, 4,
37–52.
Day, G. S. (2000). Capabilities for forging customer relationships. Marketing Science Institute
Working Paper No. 00-118.
Competence-Based Value Framing for B-to-B Customers 375
Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive
advantage. Management Science, 35, 1504–1511.
Dubois, A., & Torvatn, T. (2002). Toward understanding interaction and resource
development: The firm as a network buffer. XVIII IMP Conference, Dijon.
Dyer, J. H. (1996). Specialized supplier networks as a source of competitive advantage:
Evidence from the auto industry. Strategic Management Journal, 4, 271–291.
Dyer, J. H., & Nobeoka, K. (2000). Creating and managing a high-performance knowledge
sharing network: The Toyota case. Strategic Management Journal, 21, 345–367.
Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and sources
of interorganizational competitive advantage. Academy of Management Review, 4,
660–679.
Eisenhardt, K. E. (1989). Building theories from case study research. Academy of Management
Review, 4, 532–550.
Fisher, M., Frankemolle, H., Pape, L.-P., & Schween, K. (1997). Serving your customer’s
customer: A strategy for mature industry. The McKinsey Quarterly, 2, 81–89.
Foss, N. (Ed.) (1996). Resources, firms, and strategies. Oxford: Oxford University Press.
Foss, N., & Knudsen, C. (1996). Towards a competence theory of the firm. London: Routledge.
Gibbert, M., Golfetto, F., & Zerbini, F. (2006). What do we mean by ‘marketing’ resources and
competencies? A comment on Hooley, Greenley, Cadogan and Fahey (JBR 2005).
Journal of Business Research, 59, 148–151.
Glaser, B. G., & Strauss, A. L. (1967). The discovery of grounded theory: Strategies for
qualitative research. New York: Aldine.
Golfetto, F., & Gibbert, M. (2006). Marketing competencies and the sources of customer value
in business markets. Industrial Marketing Management, 35, 904–912.
Golfetto, F., & Mazursky, D. (2004). Competence-based marketing. Harvard Business Review,
82(November–December), 26.
Grant, R. (1991). The resource-based theory of competitive advantage: Implications for
strategy formulation. California Management Review, 33(Spring), 114–135.
Grönroos, C. (1997). Value-driven relational marketing: From products to resources and
competencies. Journal of Marketing Management, 13, 407–419.
Håkansson, H., & Snehota, I. (Eds). (1995). Developing relationships in business networks.
London: Routledge.
Hanan, M. (1995). Consultative selling. New York: Amacom Books.
Harmsen, H., & Jensen, B. (2004). Identifying the determinants of value creation in the market.
A competence-based approach. Journal of Business Research, 57, 533–547.
Helfert, G., Ritter, T., & Walter, A. (2002). Redefining market orientation from a relationship
perspective – Theoretical considerations and empirical results. European Journal of
Marketing, 36(9/10), 1119–1139.
Hitt, M., & Ireland, R. D. (1986). Relationships among corporate level distinctive
competencies, diversification strategy, corporate strategy and performance. Journal of
Management Studies, 23, 301–416.
Hunt, S. H. (1997). Competing through relationships: Grounding relationship marketing in
resource-advantage theory. Journal of Marketing Management, 13, 431–445.
Kogut, B. (1988). Joint ventures: Theoretical and empirical perspectives. Strategic Management
Journal, 9, 319–332.
Kohli, A. K., & Jaworski, B. J. (1990). Market orientation: The construct, research propositions
and managerial implications. Journal of Marketing, 2, 1–18.
376 FRANCESCA GOLFETTO ET AL.
Kusunoki, K., Nonaka, I., & Nagata, A. (1998). Organizational capabilities in product
development of Japanese firms: A conceptual framework and empirical findings.
Organization Science, 6, 699–718.
Möller, K. K. E. (2006). Role of competencies in creating customer value: A value-creation
logic approach. Industrial Marketing Management, 35, 913–924.
Möller, K. K. E., & Törrönen, P. (2003). Business suppliers’ value creation potential.
A capability-based analysis. Industrial Marketing Management, 32, 109–118.
Mullin, R. (1997). Taking customer relations to the next level. Journal of Business Strategy, 1,
22–26.
Nonaka, I. (1994). A dynamic theory of organizational knowledge creation. Organization
Science, 5(1), 14–37.
Normann, R., & Ramirej, R. (1994). Designing interactive strategy: From value chain to value
constellation. Chichester: Wiley.
Peteraf, M. (1993). The cornerstones of competitive advantage: A resource-based view.
Strategic Management Journal, 14, 179–192.
Pine, B. J., & Gilmore, J. F. (1998). Welcome to the experience economy. Harvard Business
Review, 76(July–August), 87–105.
Prahalad, C. K., & Hamel, G. (1990). The core competence of the corporation. Harvard
Business Review, 68(May–June), 79–91.
Priem, R. L., & Butler, J. E. (2001a). Is the resource-based ‘view’ a useful perspective for
strategic management research? Academy of Management Review, 1, 22–40.
Priem, R. L., & Butler, J. E. (2001b). Tautology in the resource-based view and the implications
of externally determined resource value: Further comments. Academy of Management
Review, 1, 57–66.
Ravald, A., & Grönroos, C. (1996). The value concept and relationship marketing. European
Journal of Marketing, 2, 19–30.
Ray, G., Barney, J. B., & Muhanna, W. A. (2004). Capabilities, business processes and
competitive advantage: Choosing the dependent variable in empirical tests of the
resource-based view. Strategic Management Journal, 25, 23–37.
Shapiro, B. P., Rangan, V. K., Moriarty, R. T., & Ross, E. (1987). Manage customers for
profits (not just sales). Harvard Business Review, 65(September–October), 101–108.
Srivastava, R. K., Fahey, L., & Christensen, H. K. (2001). The resource-based view and
marketing: The role of market-based assets in gaining competitive advantage. Journal of
Management, 27, 777–802.
Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management.
Strategic Management Journal, 7, 509–533.
Thompson, A., & Strickland, III. A. J. (1983). Strategy formulation and implementation. Dallas:
Business Publications.
Treacy, M., & Wiersema, F. (1993). Customer intimacy and other value disciplines. Harvard
Business Review, 71(January–February), 84–93.
Tripsas, M. (1997). Unraveling the process of creative destruction: Complementary assets
and incumbent survival in the typesetter industry. Strategic Management Journal, 18,
119–142.
Tuli, K. R., Kohli, A. K., & Bharadwaj, S. G. (2007). Rethinking customer solutions: From
product bundles to relational processes. Journal of Marketing, 71(3), 1–17.
Ulaga, W., & Eggert, A. (2006). Value-based differentiation in business relationships: Gaining
and sustaining key supplier status. Journal of Marketing, 70(January), 119–136.
Competence-Based Value Framing for B-to-B Customers 377
Woodruff, R. B. (1997). Customer value: The next source for competitive advantage. Journal of
the Academy of Marketing Science, 2, 139–153.
Woodside, A. G., & Wilson, E. J. (2003). Case study research methods for theory building.
Journal of Business and Industrial Marketing, 18(6/7), 493–508.
Yin, R. K. (1994). Case study research: Design and methods. London: Sage.
Zerbini, F., Golfetto, F., & Gibbert, M. (2007). Marketing of competence: Exploring the
resource-based content of value-for-customers through a case study analysis. Industrial
Marketing Management, 36(6), 784–798.
CUSTOMER VALUE METRICS
ABSTRACT
The increasing attention that managers and scholars are paying customer
value management builds on the consequences of effective customer value
management and the links between the quality of customer relationships
and company value. Both consequences and links drive the need to analyze,
measure, and manage customer value. Furthermore, the ever-increasing
intensity and variety of competition enhances the focus on customer value as
a means to create or regenerate competitive advantage.
To enable full appreciation of the wide range of customer value analysis
and measurement methods, this paper first presents a general framework of
the strategic rationales behind customer value management. The paper
adopts two different but complementary perspectives: the first focuses on
customer value as a competitive weapon; the second highlights how
customer value can drive company performances.
The deep changes that stem from market globalization and new digital
technologies result in the competitive landscape’s growing complexity. Two
visible traits of this complexity are the intensification of firm rivalry and the
gradual extension of competitive boundaries. The following phenomena
inform these traits (D’Aveni, 1994; Porter, 1985):
the increasing level of infraindustry competition;
the increasing opportunities that firms have to enter new business areas by
exploiting the technological skills and competitive advantages acquired in
their original field of activity (cross-industry competition);
the increasing interdependence of companies belonging to different
markets but satisfying the same sets of customer needs through the use
of different technologies (interindustry competition);
the proliferation of indirect competitive relationships due to the spread of
diversification strategies, which makes it highly probable that a mutual
competitor will link firms operating in different contexts (chain competition).
In the above-mentioned cases, the value for the customer is critical due to
the causal relationships that connect this variable to customer satisfaction
and, thus, to customer loyalty. Only a real customer loyalty – a loyalty
based on sound perceptions of value – can protect the firm from indirect
forms of competition (that are difficult to detect ex ante).
In summary, the current evolution in the dynamics of competition forces
firms to focus on the analysis and management of value for the customer.
This imperative becomes clear when considering the links between the value
for the customer and shareholder value concepts (Anderson, Fornell, &
Mazvancheryl, 2004; Berger et al., 2006; Gupta, Lehman, & Stuart, 2004;
Gustafsson, Johnson, & Roos, 2005; Kooil & Keiningham, 2007; Reinartz,
Thomas, & Kumar, 2005; Stahl, Matzler, & Hinterhuber, 2003; Schoder,
2007; Venkatesan & Kumar, 2005; Zeithaml, Rust, & Lemon, 2001).
Products come and go; firms keep customers, if well managed, ensuring the
survival and development of the company. Simple, direct statements such as
these often convey the increasing importance of customer orientation and
draw attention to the new marketing frontiers: from a focus on sales, market
share, margins, and short-term profitability to a forward orientation aimed at
building strong customer relationships. However, the shift towards customer
orientation does not decrease the relevance of customer profitability, but
provides a new perspective by considering each customer as the company’s
asset in place and, even more, as a vector of growth opportunities.
A conceptual framework – called the customer-based view (CBV) of the
firm – expresses the critical role of the customer in a firm’s value-creation
process. The following propositions summarize the central assumptions of
the value-creation process: (Fig. 1)
P1: Shareholder value is a function of the value of the firm’s customer base
(customer equity)
P2: Customer equity originates from the size and quality of the market and
customer relationships
P3: The size and quality of the customer relationships depend on customer
satisfaction, trust, and loyalty
P4: Customer satisfaction, trust, and loyalty depend on the firm’s capability
to manage customer value over time (customer life cycle)
Customer Value Metrics 153
Customer Equity
Customer Investments to
Satisfaction Increase Dynamic
Capabilities
P5: Value for the customer depends on the firm’s stock of resources,
competences, and capabilities
P6: Investments aimed at improving customer value management capabil-
ities have to enhance resources and competences continuously.
Xn
Qt pt Xn
Dt þ Rt
WC ¼ t þ (1)
t¼1
ð1 þ iÞ t¼1
ð1 þ iÞt A1
with W (worth) indicating value; ‘‘t’’ indicating the time horizon of the cash
flows (‘‘F ’’); and ‘‘i ’’ indicating the rate at which future cash flows can be
discounted in order to take account of the risk. By adopting the CBV all
three components of the company’s current value benefit from lasting and
loyal customer relationships. And the company present value is right the
sum of the customer-base present value (or customer lifetime value).
The cash flows that a company generates over time are the result of its
ability to establish, maintain, and develop customer relations. All conditions
being equal, the longer a company keeps such relationships going, the
greater the value of ‘‘t’’ will be. Calculating the ‘‘t’’ value is possible by
means of the expected average longevity (EAL) index, which estimates the
duration of relationships by means of the customer loyalty results – the
Customer Value Metrics 155
customer retention rate (CRR) that the company achieves. The assumption
is that the greater the customer-base’s degree of loyalty, the longer the
relationships will last. The formula for the estimation of the average
potential longevity is therefore:
1
EAL ¼ (3)
1 CRR
with CRR being calculable at the end of every year (x) as:
Customers at the end of 200x New customers 200x
CRR200x ¼ (4)
Customers at the beginning of 200x
due to the greater value that they perceive in the new products. The
combined outcomes of these two considerations – lower maintenance costs
and higher returns (in terms of quantity, price, and their combination) for
customers already in the company portfolio – make the greater profitability
of companies that can depend on customer loyalty more understandable
than those that systematically lose customers and have to reinvest in order
to acquire new ones.
In addition, a truly loyal customer becomes less sensitive to price and will
therefore reward the company’s product by paying a premium rather than
buying its competitors’ discounted products (Huber, Herrmann, & Wricke,
2001). By making relatively better use of the company’s products and
facilities, loyal customers generate lower costs. Loyal customers also make
the company’s marketing investments more profitable, as targeting these
investments is possible by grounding them on long-term customers’
knowledge. Finally, loyal relationships are less risky and affect the value
of ‘‘i’’ positively, which consequently decreases.
1.2.2. Customer Equity Originates from the Size and Quality of the
Market and Customer Relationships
The second proposition suggests that customer equity depends on the size
and the quality of the relationships that the firm established with its
customer base (Reinartz & Kumar, 2003). The first factor (size) originates
from the ability to generate new relationships (measured in terms of the
customer attraction rate) and from the ability to deploy (growth
opportunities) existing relationships, mainly through positive referrals.
An overview of the many growth opportunities stemming from a
customer loyalty base emerges from an adaptation of the matrix by Ansoff
(1965) as in Fig. 2.
Growth opportunities are identifiable – and estimated – in every
quadrant. Each customer, as well as the whole customer base, can increase
the value generated for the company (hence its customer equity) by buying
more or spending more: cross selling, trading up, or up-selling are the
company options to increase customer equity (quadrant 2). By leveraging
the current customer base, the company attracts new customers, thus linking
further growth opportunities to it (quadrant 3). The positive reputation,
spread through traditional customer word of mouth until it achieves viral
communication effects, is the main driver of this customer base. Finally, a
truly loyal customer base is collaborative and responsive in supporting new
product development and adopting innovation marketed under the
company brand. Consequently, brand or business extensions become more
Customer Value Metrics 157
Business Base
Current Potential
Current
Penetration
(upselling) Business or
Trading Up Brand
Cross Selling Extension
Customer Base
Reputation
spread Combined
by Word of Mouth, Development
Mouse, and Eyes
Potential
of value for the customer during all the main stages. The following section
describes these stages, highlighting the critical role that value for the
customer plays in the development of relationships.
Phase1
Satisfaction and Trust
Expected Value
versus
Perceived Value
Phase2
Behavioral Loyalty
Perceived Value
versus
Competitor’s Value
Phase 3
Mental Loyalty
“Get”value
versus
“Give”value
Phase5
Full Loyalty
Fig. 3. From Customer Satisfaction to Customer Loyalty.
customer loyal. However, the length of this phase and of this relational state
depends on competition pressures and on the evolution of technologies that
could render the customer’s apparently loyal behavior no more than a mere
repurchase. Sometimes, loyal behavior is just the result of lock-in conditions
determined by the economies of trust developed in the early phases of the
relationship life cycle. Consequently, this kind of relationship is definable as
behavioral loyalty.
The phase of mental loyalty: the behavioral loyalty phase does not last
indefinitely. During the relationship life-cycle conflict circumstances emerge,
usually caused by environmental (also casual) or competitive issues (e.g., a
particularly effective advertising campaign), pushing customers towards
comparing the product of the company that has so far commanded their
loyalty with those of its competitors. For the outcome of this conflict to be
positive, customers’ perception of the value differential should favor the
company’s products and not those of its competitors. Bear in mind that the
customer’s perspective is purely subjective and that the specific experience of
purchasing and consuming over time influences such a perspective.
Consequently, the value that the customer perceives at this stage is definable
as monadic.
If, following this evaluation process, the value offered by the company,
net of the costs of transfer to a competitor, is higher than that of the
alternatives, customers will enter the phase of mental loyalty; if not, their
loyalty will be only behavioral – determined by the transition costs involved
in choosing a competitor as a supplier.
Mental loyalty is definable as a firm conviction that the company’s
products offer the best value over time. The intertemporal nature of this
conviction concerns the company’s dynamic capacities – its ability to
improve its product over time – and acts as the determinant in the inferential
process concerning the value that the producer will offer the customer in
future. In this sense, the experience of the differential value that the
company offers over time generates the customer’s strong sense of
commitment to continue the relationship.
The phase of full loyalty: in general, loyal, longstanding customers get to
know the company and its products and, eventually, liken the value
obtained to that produced for the company. The perception of these
customers – although superficial and naı̈ve – is that their loyalty has a
positive impact on the profitability of the company: loyalty thus generates
an extra value. Therefore, the focus shifts to terms of trade, which is a
comparative value definable as the dyadic value. Perception of dyadic value
can give rise to evaluations of the equitableness and fairness of the
162 BRUNO BUSACCA ET AL.
1.2.5. Value for the Customer Depends on the Firm’s Stock of Resources,
Competences, and Capabilities
The fifth proposition subordinates firms’ ability to create value for the
customer to the endowment of intangible resources. The value proposition
offered to the market must correspond to the value drivers that customers
recognize. Simultaneously, these customers’ dynamism is the cause and
consequence of the company’s strategic dimensions evolution. The com-
pany’s intangible resources, the routine governing its functioning, and the
range of possibilities (development paths) accessed, represent this strategic
dimensions evolution (Teece, Pisano, & Shuen, 1997). In this perspective,
value proposition’s enhancement and scope may depend on the following
features:
understanding the customer value definition of benefits and costs lies within
the definition’s conceptual domain. Knowing which of the various
components are directly observable and measurable and which require
indirect analysis and approximations is fundamental for identifying value
components (attribution approach – Bagozzi, 1984). Subsequently, hierar-
chies or relationships between construct components (structural approach)
should be identifiable, and their validity assessable in advance by identifying
associations and relations with other constructs (dispositional approach).
Several studies focus on the value for the customer concept (Woodhall,
2003; Woodruff, 1997; Zeithaml, 1988), and although they differ in terms of
method and analytical context, some common concept and methodological
issues emerge.
The literature unanimously considers value for the customer as a
construct based on customers’ simultaneous evaluation of the different
product components that they usually compare to those of one or more
competing products. As a rule, and with consideration of all the risks and
advantages inherent in conceptual abstraction processes, the components of
value for the customer consist of the expected benefits and the costs (both
monetary and nonmonetary, such as efforts and risks) implicit in the
acquisition and enjoyment of these benefits.
The simultaneous evaluation implies awareness that the customer’s
cognitive system profoundly intertwines the benefits and sacrifices.
Furthermore, the value perceived in a given product and the related benefits
always include customers’ subjective evaluation of the company’s/brand’s
ability to produce a certain performance level and, hence, to offer these
benefits with a given intensity. The customer makes a similar evaluation
with respect to the costs to obtain the expected benefits.
A customer’s value perception is not anonymous, but always refers to
specific brands or products or, at least, to specific brand or product
concepts. Thus, the customer value is a relative concept worthy of
consideration only inside a specific market context. Finally, like all
individual cognitive processes, value perception is dynamic and therefore
changes over time under the influence of variables that are external
(technological innovation, as well as economic, social, and cultural changes)
and internal to the consumer (learning effect).
To synthesize the preliminary descriptive framework of the components
of the VC construct, one should note that by nature the framework is
intrinsically:
Experiential
Functional Symbolic
Perceived Benefits
VALUE FOR
THE
CUSTOMER Perceived Costs to Obtain Benefits
the process. On the other hand, the process may undergo structural changes
in keeping with the degree of differentiation and the purchaser involvement
level. The next section will deal extensively with this topic (Fig. 4).
In order to identify the main value components of the customer value chain,
one should carry out a qualitative analysis. The means-end chain theory is
one of the best-known techniques for planning such an analysis (Reynolds &
Olson, 2001). This theory allows one to interpret purchase and consumption
drivers and behaviors according to a conceptual structure of customers’
mental connections, which is similar to a hierarchical chain. According to this
theory, the products (or brands) and the values driving individual behavior lie
at either end of the chain. The theory states that one can interpret the
purchase and use of each product as an instrumental event, a means, for the
achievement of one or more abstract ends, which are coincident or at least
consistent with the end-states of an individual customer.
The values of individuals thus drive purchase and use processes by
suggesting the immediate goals (consumption goals and instrumental
Customer Value Metrics 169
Benefits Benefits
Attributes Attributes
Products/Brands Products/Brands
Fig. 5. Customer Value Chain.
170 BRUNO BUSACCA ET AL.
EXPLICIT IMPLICIT
FUNCTIONAL
Sound quality Obsolescence
Customer service Resistance
symbolic and emotional meanings that originate from the supplier image
and solutions that the supplier offers.
This dichotomy therefore affects the relative importance of product
features in the evaluation process. As pointed out in several studies (Berger,
1986; Claeys, Swinnen, & Van den Abeele, 1995; Park & Young, 1983;
Ratchford, 1987; Rossiter & Percy, 1987, Rossiter, Percy & Donovan, 1991;
Vaughn, 1980, 1986) focusing on functional benefits, customers’ selection
criteria tend to favor technical features directly related to the intrinsic
product quality (e.g., a Smartphone’s storage capacity and speed). However,
when seeking psychological benefits, customers focus on less tangible
attributes (e.g., design, holistic solutions, user profile, usage occasions).
The second dimension clarifies the distinction between implicit and
explicit benefits. The latter have an association with conscious motivations,
which firms can easily identify and they therefore rarely imply opportunities
to translate into long-term competitive advantages. Nevertheless, fulfiling
explicit benefits often means matching competitive points of parity in the
category to enter the set of competing alternatives that the customer
considers – one should therefore not neglect these benefits. In contrast,
implicit benefits are associated with advantages of which the customers
themselves are not fully aware and with needs that they perceive clearly but
do not express for psychological reasons (lack of self-confidence,
conformism, fear of disclosing hidden aspects of their personality, etc.), or
because they do not comply with social conventions, role expectations, or
shared codes of behavior. Furthermore, this dichotomy not only influences
customer cognitive systems’ methods of analysis strongly, but also the link
between competitive potential and the company’s ability to provide a proper
response to customer expectations. Only qualitative, in-depth analyses can
identify the implicit benefits that the customer expects. Consequently, the
Customer Value Metrics 171
Before laying out a map of the value for the customer, however,
researchers will, at their discretion, codify answers and categorize the
attributes, benefits, and values. Reynolds and Olson (2001) propose that
during the categorization process, one should make a distinction between
concrete and abstract attributes, functional and psychological consequences,
individual and organizational goals, and company missions and values.
The researcher must also codify interviewees’ answers in respect of costs
and classify these answers into specific categories relative to monetary or
nonmonetary components, such as efforts (physical or cognitive) and risks.
The different costs are traceable by adopting the total cost of ownership
(TCO) model, including all the stages of the buying behavior process. The
most frequent kinds of costs when following such a model are informa-
tional, searching, psychological (associated with perceived risk), purchasing,
installation, learning, operational, obsolescence, and replacement. The
researcher therefore also needs to formulate interviews (codification and
categorization of answers) in respect of costs to prevent duplication or
omission.
Qualitative research allows a shift from a generic formulation of the
concept of value for the customer to a specific description. Once this
research stage is completed, formal descriptions of customer value emerge in
the following form:
B1 ; B2 ; B3 ; . . . ; Bn
V¼ (7)
C1 ; C2 ; C3 ; . . . ; Cn
with B1, . . . , Bn and C1, . . . , Cn identifying the benefits and costs that
customers expect and as the laddering interviews highlight. Benefits and
costs can be further analyzed with reference to the product attributes and,
therefore, with B1 ¼ f(A1, A2, A3, . . . , An). A similar splitting is possible with
reference to cost components and product attributes that customers perceive
as cost drivers. Consequently, the qualitative analysis of value undertaken
174 BRUNO BUSACCA ET AL.
Instrumental
Final Value Benefits Attributes
Value
Save Time
Speed
Professional
Self-esteem Success
Decreasing Convenience
costs
Punctuality
Activity Decreasing
Peacefulness
control responsibility
Satellite
control
Fig. 7. The Customer Value Chain for a B2B Service Market.
the decision-making unit while converging at other times. The satellite and
web-based monitoring service has a specific association with individual
benefits, such as serenity and security, as well as with organizational benefits
such as the control and effectiveness of activities.
Quantitative surveys become possible by building on the outcomes of
laddering interviews. These surveys aim at measuring the intensity and
centrality of the connected attributes, as well as the benefits and values that
the customer associates with each product or brand. Two simple and
immediate indicators can provide interesting insights into the magnitude
and intensity of the potential impact of each attribute. These insights result
from the various connections with other attributes or benefits and from the
frequency of the connections in the individual cognitive maps. A network
can undergo many other conventional measurements before using the
qualitative output as input to identify the network value for the customer
measurement process.
the role that a product/service may play in the production processes and/
or competitive strategies of the purchasing company;
Customer Value Metrics 177
functional risk related to the fear that the product will not perform as
expected;
physical risk associated with the potentially unsafe consequences of
product use;
economic and financial risks usually associated with the possibility that a
product price will be much higher than its value;
psychosocial risk originating from the product’s potential negative impact
on customers’ self-esteem and/or on their social accountability.
each attribute, they verify the distance between the ideal and perceived levels
of performance. The brand closest to the ideal product profile is the one
preferred. In analytical terms:
X
n
Dj ¼ W i ðBij I i Þ (9)
i¼1
User- 40 6 9 8 8 7 8
friendliness
Design 25 6 9 5 7 9 9
Brand 20 6 9 4 6 5 4
reputation
Size of product 10 5 9 7 6 9 7
range
After-sale 5 5 9 6 6 9 7
service
186 BRUNO BUSACCA ET AL.
According to Fishbein
Customer-based
perspective Conjoint based
3.1. Desk Approaches to Measuring EVC and the Total Cost of Ownership
Forbis and Metha (1981) define the EVC as the measurable value provided to
the customer by comparing the costs/benefits provided and alternative
options. EVC is thus a measure relating to the client or cluster of clients
under investigation, as well as to the reference competitor or competitors
considering alternative products that generate the same benefits for the client.
EVC measurement is management-based and rests on technical attributes
The approach to EVC measurement is the easiest and most widespread
approach in managerial practice. Its measurement process is fast, easy to
apply, and cost effective.
EVC analysis (if the management-based approach is adopted) includes the
analysis and enhancement of the technical characteristics of the product and
organizational processes – based upon the knowledge and business
sensitivity of the company’s management – that mostly affect current and
potential customers’ choice attitudes. The selection of characteristics that
generate value for the customer usually occurs through a simplification
process aiming to reduce the set of crucial attributes to those that mostly
differentiate the company’s product from that of competitors and that are
expressible directly or easily in monetary terms.
EVC analysis for pricing purposes is the extension of the traditional value
analysis process and originated from the inverted engineering techniques
aiming at identifying the crucial technical characteristics of a product,
starting with its functions of use (Miles, 1961; Shilito & De Marle, 1992).
EVC is a family of engineering techniques that evolved over time up
to the development of the quality function deployment – house of quality
Customer Value Metrics 189
(Daetz, Barnard, & Norman, 1995; Hauser & Clausing, 1988; Mizuno &
Akao, 1978).
From a method point of view, EVC analysis involves identifying the
benefits and costs that seem to be most important to the client. Thereafter,
the analysis identifies and measures the technical attributes or attributes
generating the benefits and costs mentioned above, focusing on those
attributes measurable through observation and well-known scales. These
attributes are therefore relatively objective.
However, analysis of the value for the customer clearly focuses on one or
more of the product’s attributes, disregarding the complex composition of
the value for the customer concept and measuring attributes that can be
easily measured, all the more so if they are already expressed in monetary or
easily convertible terms. However, this criterion does not guarantee the
identification of the product’s attributes and characteristics that can express
the composite nature of value for the customer.
The Fishbein approach, which the following section illustrates, is a
further evolution of this method. By extending the value analysis to
attributes and benefits not related to technical attributes, the limits of EVC
analysis in respect of pricing are overcome. Well-known scales include
observing or measuring these nontechnical attributes, even if they are crucial
benefits and attributes in the client’s value perception.
An extension of management-based measurements of value for the
customer allows a dynamic approach. Concepts such as the value analysis of
the product’s life cycle or the TCO are examples of a managerial practice
aimed at determining value and price. Such a practice only allows the
highlighting of the benefits and costs after prolonged use. These analyses are
suitable for business-to-business markets and semidurables or durables, or
even investment goods.
Within these contexts, an EVC analysis is possible by applying, and if
necessary extending, the following formula:
EVC ¼ P R þ M þ S þ G (10)
where P denotes the initial investment (synthesized by the prices), R the
current residual value, M the current value of the maintenance costs, S the
current value of the replacement costs, and G the value of the operating
costs.
Although all management-based methods (specifically those founded on
the EVC analysis) are quite simple to apply, they have a number of crucial
limitations. These are the reductionism-based approach in interpreting
the value components for the customer and managers’ subjectivity
190 BRUNO BUSACCA ET AL.
where Ii denotes the relative importance of the i-th attribute and Pia the
performance perceived in the supply of the product or brand ‘‘a’’ with respect
to the i-th attribute. The result is then equal to a measurement of the value
perceived in product or brand ‘‘a.’’ In other words, an index that synthesizes
the performance perception of a specific brand weighted according to the
importance attached to the product or brand attributes determines the value
perceived in a product or brand.
However, by applying this formula, only a partial measurement of the
value is possible. From an operational point of view, the formula should not
only allow for the performance attributes related to the benefits, but also for
those that the client associates with the costs required to purchase and enjoy
the specific benefits.
Therefore, the same formula is extendable to include the components of
the value denominator, measuring – more or less simultaneously – their
perceived importance, the importance of the attributes generating value, and
the expensiveness of the brand or product investigated. The exhaustive
formula then becomes:
SnI¼1 I i Pia
Va ¼ (12)
Sn1¼1 Ii E ia
Customer Value Metrics 191
VðaÞ VðbÞ
¼ (14)
PðaÞ PðbÞ
with the solution being:
VðaÞ PðbÞ
PðaÞ ¼ (15)
VðbÞ
However, theoretically this value does not represent the price that is
actually chargeable, as consistency implies the full absorption of the
differential value that the product provides to the client. If a higher price
were to counter-balance the differential advantage provided to the
customer, the product would generate indifference in customers, which
would be to the detriment of the offer with a higher nominal price. The price
to be charged should thus be lower than the one resulting from the Fishbein
measurement.
192 BRUNO BUSACCA ET AL.
Measurement of the contribution of each performance level to create the overall value perceived in
the product
Measurement of the unit monetary level of the utility (partial value) as a function of the relationship
between the price gap and the utility/disutility gap linked to the price.
calculating the monetary value of the unit utility: the monetary value of
the unit utility denotes the price of each utility unit and is calculated as the
ratio between the maximum deviation of the price levels and the relevant
utility:
Monetary Value of Utility ¼ ðPmax Pmin Þ ðU max U min Þ (16)
where: Pmax and Pmin are the maximum and minimum price levels; Umax
and Umin are the corresponding utility coefficients (maximum and
minimum).
Multiplying the Monetary Value of the Unit Utility by the differential of
partial utility that customers perceive in association with a better or worse
product level provides the quantification of the monetary value of a given
attribute.
To determine the utility of competitors’ products for customers the
following formula is used:
X
k
U i ¼ b0 þ U j W ji (17)
j¼1
where:
Ui ¼ the value/utility of the product profile that characterizes the brand i;
b0 ¼ constant;
k ¼ total number of attributes/benefit and attributes/cost;
Wji ¼ level of the j-th attribute of the i-th product profile;
UjWji ¼ utility associated to Wji
The delta price that customers are willing to pay for different product
profiles can be easily measured by calculating the utility differential of the
two product profiles and by multiplying this differential for the monetary
value of the utility itself.
Price sensitivity analysis is an additional output of conjoint analysis.
Owing to the conjoint analysis outcomes, a real demand curve – a response
function measured in terms of preference shares – can be constructed base
on price variations.
The outcomes of conjoint analysis are utility values relating to specific
performance values (they are therefore partial values). Based upon the
analysis outputs, the level of total utility that a performance set produced
for customers can be defined. This performance set, which relates to all the
analyzed attributes, is actually a simulated product. The total utility for
several simulated as well as real products is also easy to define. A scenario
196 BRUNO BUSACCA ET AL.
can be built with characteristics that are similar to the market investigated:
the profile of the simulated products are thus fully in line with the real and
new or modified products for which the relationship between the differential
benefits provided to the market, the accessible prices, and achievable
preference levels needs to be analyzed.
With these data, researchers can estimate the customers’ preference
shares. By comparing the value indexes of the different products measured,
their competitive performance is estimable. The literature suggests the
following three different techniques for this estimation process:
the first is the first choice technique. This technique assumes that
customers’ preference is always oriented towards the product with the
maximum total utility. The share estimated for a given product profile is
represented by the proportion of the sample for which that specific profile
attains the highest utility scoring. The first choice model, although quite
simple, is a deterministic model;
the second, defined BTL (from Bradley, Terry and Luce, the three
authors) technique adopts a probabilistic and nondeterministic approach.
This technique assumes that once the n products defining the market
scenario have been identified, the total utility of each complete product
profile is summed and the preference share of a given x product is defined
as the ratio between the x total utility and the summation of the total
utilities of all products defining the scenario;
the third technique uses logit models to mediate the approaches of the first
two techniques. With the logit model, the preference shares of the product
profiles can be calculated by means of the following formula:
eU ij
Pij ¼ (18)
P
n
eU ij
j¼1
where:
Uij ¼ value/utility of the j-th product profile calculated with respect to
the i-th customer
h ¼ number of simulated product profiles;
e ¼ Neperian constant.
The preference shares attained with one of the three techniques –
researchers agree that the third one enables a better model of customer
behavior to be developed – are proximity measures of market shares.
By afterwards changing the price under the linearity constraint of the
Customer Value Metrics 197
(a) conversion of the scale used to measure Fishbein perceptions into values
of equivalent utility in the conjoint measurement by means of the
formula:
U max U min
Ue ¼ (19)
Max scale value Min scale value
where Ue denotes the equivalent utility
(b) weighting of the perception differential with the values of equivalent
utility.
198 BRUNO BUSACCA ET AL.
U e Evaluation X i
where
Ue denotes the equivalent utility and
Xi evaluation denotes the evaluation of the n attributes;
(c) transformation of the value differential attained in the previous stage
into a monetary differential by multiplying the value of the unit utility.
Using the traditional procedure of conjoint analysis as a ratio between
the price deviation and the utility deviation enables calculation of the
monetary value of the utility (Table 2).
4. CONCLUDING REMARKS
Customer value management is the fuel of the powerful engine linking value
for the customer, satisfaction, loyalty, profitability, and firm value. The
introduction to this paper includes a review covering studies that
theoretically and empirically demonstrate these critical links. In order to
prescribe and design proper customer value management strategies, scholars
and managers benefit from a full understanding of customer value analysis
and customer value measurement. With regard to point one, the first part of
this paper’s contribution highlights the critical issues in customer value
analysis by referring to the most important contributions in marketing and
consumer behavior literature. The paper presents some technicalities
relevant to deploying customer value analysis.
With regard to point two, the second part of this contribution refers to
marketing literature by presenting the wide range of techniques available for
200 BRUNO BUSACCA ET AL.
measuring customer value effectively and efficiently. This paper covers desk
techniques like TCO and EVC, as well as field techniques like composition
and decomposition approaches (and their possible hybrid combination).
Although prescriptive and direct managerial implications lie outside the
scope of this contribution, the more careful the value analysis and
measurement process, the better the customer value management process
and, consequently, the more positive its effect on profitability, growth, and
firm value. In terms of further research, the link between rigorous customer
value analysis and measurement and rigorous customer value management
are open to new contributions.
REFERENCES
Anderson, E., Fornell, C., & Mazvancheryl, S. (2004). Customer satisfaction and shareholder
value. Journal of Marketing, October, 172–185.
Anderson, J. C., Jain, D. C., & Chintagunta, P. K. (1993). Customer value assessment in
business markets: A state-of-practice study. Journal of Business to Business Marketing, 1,
1–30.
Anderson, J. C., & Narus, J. A. (1990). A model of distributor firm and manufacturer firm
working partnerships. Journal of Marketing, 54(January), 42–58.
Ansoff, I. (1965). Corporate strategy. New York: McGraw Hill.
Assael, H. (1987). Consumer behavior and marketing action. Boston: Kent Publishing Company.
Bagozzi, R. (1984). A prospectus for theory construction in marketing. Journal of Marketing,
48(Winter), 11–29.
Bagozzi, R. (1994). Principles of marketing research. Cambridge (MA): Blackwell.
Baudrillard, J. (1968). Le systeme des objects. Paris: Gallimard.
Bauer, R. A. (1960). Consumer behavior as risk taking. In: R. E. Hancock (Ed.), AMA
Proceedings, December, pp. 389–398.
Belk, R. W. (1974). An exploratory assessment of situational effects in buyer behavior. Journal
of Marketing Research, 11, 156–163.
Belk, R. W. (1975). Situational variables and consumer behavior. Journal of Consumer
Research, 2, 157–164.
Belk, R. W. (1979). A free response approach to developing product-specific consumption
situation taxonomies. In: A. D. Shocker (Ed.), Analytic approaches to product and
marketing planning (pp. 177–196). Cambridge, MA: Marketing Science Institute.
Berger, D. (1986). Theory into practice: The FCB grid. European Research, January, 35–46.
Berger, P., Eechambadi, N., George, M., Lehmann, D., Rizlet, R., & Venkatesan, R. (2006).
From customer lifetime value to shareholder value: Theory, empirical evidence, and
issues for future research. Journal of Service Research, 5(November), 156–167.
Bettman, J. R. (1970). Information processing models of consumer behavior. Journal of
Marketing Research, 7, 370–376.
Bettman, J. R. (1971). The structure of consumer choice processes. Journal of Marketing
Research, 8, 465–471.
Customer Value Metrics 201
Green, P. E., & Wind, J. (1973). Multiattribute decisions in marketing: A measurement approach.
Hinsdale, IL: Dryden Press.
Green, P. E., & Wind, Y. (1972). Multiattribute decision in marketing: A measurement approach.
Hinsdale: Dryden Press.
Gupta, S., Lehman, D., & Stuart, J. (2004). Valuing customers. Journal of Market Research,
February, 7–18.
Gustafsson, A., Johnson, M., & Roos, I. (2005). The effects of customer satisfaction,
relationship commitment dimensions, and triggers on customer retention. Journal of
Marketing, October, 210–218.
Gutman, J. (1982). A means-end chain model based on consumer categorization processes.
Journal of Marketing, Spring, 60–72.
Hauser, J. R., & Clausing, D. (1988). The house of quality. Harvard Business Review,
May–June, 43–53.
Heider, F. (1958). The psychology of interpersonal relations. New York: Wiley.
Howard, J. A. (1977). Consumer behavior: Application of theory. New York: McGraw Hill.
Howard, J. A. (1989). Consumer behavior in marketing strategy. Englewood Cliffs: Prentice Hall.
Howard, J. A., & Sheth, J. N. (1969). The theory of buyer behavior. New York: Wiley.
Huber, F., Herrmann, A., & Wricke, M. (2001). Customer satisfaction as an antecedent of price
acceptance: Results of an empirical study. Journal of Product and Brand Management, 3,
160–169.
Huber, J., & McCann, J. (1982). The impact of inferential beliefs on product evaluations.
Journal of Marketing Research, 19(August), 324–333.
Johnson, M. D. (1984). Consumer choice strategies for comparing noncomparable alternatives.
Journal of consumer Research, 11(December), 741–753.
Katz, D. (1960). The functional approach to the study of attitudes. Public Opinion Quarterly,
Summer, 163–204.
Kooil, B., & Keiningham, T. (2007). A longitudinal analysis of customer satisfaction and share
of wallet: Investigating the moderating effect of customer characteristics. Journal of
Marketing, January, 67–83.
Kotter, J. P. (1992). Corporate culture and performance. New York: The Free Press.
Krech, D., Crutchfield, R., & Ballachey, E. (1962). Individual in society. New York: McGraw
Hill.
Krugman, H. E. (1965). The impact of television advertising: Learning without involvement.
Public Opinion Quarterly, 29, 349–356.
Krugman, H. E. (1966–1967). The measurement of advertising involvement. Public Opinion
Quarterly, 30, 583–596.
Lehmann, D. R., & O’Shaughnessy, J. (1974). Difference in attribute importance for different
industrial product. Journal of Marketing, April, 36–42.
Lussier, D. A., & Olshavsky, R. W. (1979). Task complexity and contingent processing in brand
choice. Journal of Consumer Research, 6(September), 154–165.
Martin, G. S. (1991). The concept of trust in marketing channel relationships: A review
and synthesis. In: M. Gilly et al. (Eds), Enhancing knowledge development in marketing
(pp. 251–259). Chicago, IL: American Marketing Association.
McGuire, W. J. (1969). An information processing model of advertising effectiveness. Paper
presented at the Symposium on Behavioral and Management Science in Marketing,
University of Chicago, July.
Customer Value Metrics 203
Shilito, M. L., & De Marle, D. J. (1992). Value: Its measurement, design & management.
New York: Wiley.
Stahl, H., Matzler, K., & Hinterhuber, H. (2003). Linking customer lifetime value with
shareholder value. Industrial Marketing Management, 32, 267–279.
Swan, J. E., & Trawick, I. F. (1980). Satisfaction related to predictive vs. desired expectations.
In: H. K. Hunt & R. L. Day (Eds), Refining concepts and measures of customer
satisfaction and complaining behavior (pp. 210–231). Bloomington: Indiana University.
Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management.
Strategic Management Journal, 7, 509–533.
Tversky, A. (1969). Intransitivity of preferences. Psychological Review, 76(1), 31–48.
Tversky, A. (1972). Elimination by aspects: A theory of choice. Psychological Review, 79(4),
281–299.
Vaughn, R. (1980). How advertising works: A planning model. Journal of Advertising Research,
October, 27–33.
Vaughn, R. (1986). How advertising works: A planning model revisited. Journal of Advertising
Research, February–March, 57–66.
Venkatesan, R., & Kumar, V. (2005). A customer lifetime value framework for customer
selection and resource allocation strategy. Journal of Marketing, October, 106–125.
Verona, G., & Prandelli, E. (2006). Collaborative innovation. Roma: Carocci.
Vyas, N., & Woodside, A. G. (1984). An inductive model of industrial supplier choice processes.
Journal of Marketing, 48(Winter), 30–45.
Wayland, R. E., & Cole, P. M. (1997). Customer connections: New strategies for growth. Boston:
Harvard Business School Press.
Wilkie, W. L., & Pessemier, E. A. (1983). Issues in marketing’s use of multiattribute models.
Journal of Marketing Research, 10(November), 428–441.
Woodhall, T. (2003). Conceptualizing value for the customer. An attributional, structural and
dispositional analysis. Academy of Marketing Science Review, 12, 1–44.
Woodruff, R. B. (1997). Customer value: The next source for competitive advantage. Journal of
the Academy of Marketing Science, 25(2), 139–153.
Young, S., & Feigin, B. (1975). Using the benefit chain for improved strategy formulation.
Journal of Marketing, July, 72–74.
Zeithaml, V., Rust, R., & Lemon, K. (2001). The customer pyramid – creating and serving
profitable customers. California Management Review, 118–142.
Zeithaml, V. A. (1988). Consumer perceptions of price, quality and value: A means-end model
and synthesis of evidence. Journal of Marketing, 52(July), 2–22.
VALUE DELIVERY AND
VALUE-BASED PRICING IN
INDUSTRIAL MARKETS
Andreas Hinterhuber
ABSTRACT
Value creation and value delivery in industrial markets face their own
challenges and particularities which differ markedly from similar challenges
in consumer goods markets. Despite the fact that industrial marketing is by
now an established discipline with dedicated journals, interest groups, and
university curricula, widespread misunderstandings subsists regarding
the areas where consumer goods and industrial marketing overlap and
where they intersect. On this topic Narayndas (2005, p. 131) provides the
following view:
Business markets are very different from consumer markets. In consumer markets, large
numbers of buyers have similar wants, transactions are typically small in value, products
can be mass-produced, consumers’ perceptions determine products’ value, and
companies focus on managing brands. In addition, the selling process is brief, retailing
strategies play a vital role, and sales efforts are focused on end users. A business market,
by contract, has fewer customers and transactions tend to be larger. Customers often
need a customized product or price, the usage of the product or service determines its
value, and brands mean very little to customers. Moreover, selling is a long and complex
process, retailing isn’t a factor and the target of the sales pitch may not be the product’s
end user.
Included Excluded
Customer value
Broad (e.g. also non Zeithaml (1988); Anderson and Nagle and Hogan (2006);
financial aspects) Narus (1998); Ulaga and Hinterhuber (2004); Nagle
Chacour (2001); Golfetto and and Holden (2002)
Gibbert (2006);
Narrow (e.g. quality) Sivakumar and Raj (1997) Forbis and Mehta (1983),
Golub and Henry (2000)
It is unwise to pay too much, but it is worse to pay too little. When you pay too much,
you lose a little money – that is all. When you pay too little, you sometimes lose
everything, because the thing you bought was incapable of doing the thing it was bought
to do! The common law of business prohibits paying a little and getting a lot – it can’t be
done. If you deal with the lowest bidder, it is well to add something for the risks you run,
and if you do that, you will have enough to pay for something better.
388 ANDREAS HINTERHUBER
Golfetto and Gibbert (2006) extend this expansive view of customer value.
In analyzing the supply side and taking the perspective of a supplier,
Golfetto and Gibbert find that supplier competencies themselves become a
source of value for industrial customers, in that customers see competencies
as supplier’s ability to add value not only in the short term, but especially
over the long-term, where customers themselves may not even know the
exact product specifications. In addition to competencies, relationships with
suppliers are also a potential source of value for customers (e.g., Walter,
Ritter, & Gemünden, 2001).
On the cost component: Conceptually, researchers interpret the role of
costs and its impact on customer value in two different ways. According to
Flint, Woodruff, and Gardial (1997), Simpson, Siguaw, and Baker (2001),
Ulaga and Chacour (2001), Walter et al. (2001), and Zeithaml (1988),
customer value is the net difference between perceived benefits and
sacrifices. Flint et al. (1997, p. 171), for example, define a customer’s value
judgment as ‘‘the customer’s assessment that has been created for them by a
supplier given the trade-offs between all relevant benefits and sacrifices in a
specific use situation.’’ In microeconomic terms, customer value here is the
difference between the consumer’s willingness to pay and the actual price
paid, that is customer value is equal to the consumer surplus or the excess
value retained by the consumer.
A second line of thought defines customer value in a broad way: Forbis
and Mehta (1983, 2000), Golub and Henry (2000), Nagle and Holden
(2002), Nagle and Hogan (2006), and Priem (2000) define value to the
customer as the customer’s value threshold, as the sum of the combined
benefits that accrue to the customer as a result of purchasing a given
offering. Nagle and Holden (2002, p. 74): ‘‘A product’s economic value is
the price of the customer’s best alternative – reference value – plus the value
of whatever differentiates the offering from the alternative – differentiation
value.’’ Priem (2007, p. 219) refers to this conceptualization as ‘‘consumer
benefit experienced’’ and illustrates the application of this concept also in
business-to-business relationships (Priem, 2007).
This broad conceptualization excludes the acquisition costs of the product
or service from the computation of value. Customer value in this sense is
equal to the microeconomic concept of a customer’s reservation price or the
use value of goods. More precisely, the reservation price is the price at which
the consumer is indifferent between buying and not buying (Moorthy,
Ratchford, & Taludkar, 1997). Recent research (Wang, Venkatesh, &
Chatterjee, 2007) suggests that reservation price is not a single price point,
but a range of values, where the lower bound indicates the price at which the
Value Delivery and Value-Based Pricing in Industrial Markets 389
consumer certainly buys the product, the mid point the price at which the
consumer is indifferent, and the high end the price at which the consumer
would no longer buy the product (Wang et al., 2007). To narrow the range
down to the price at which the consumer is indifferent, which, empirically, is
close to the average value between the extreme ends (Wang et al. 2007).
Customer value here is thus equal to the maximum amount a customer
would pay to obtain a given product, i.e. the price that would leave the
customer indifferent between the purchase and foregoing the purchase.
Although in this conceptualization of value the focus is on benefits, trade-
offs still play a role: The differentiation value, as the net difference between
the positive and negative differentiation values, is able to incorporate also
customers’ negative utilities (e.g., risks, switching costs, negative value
created) – other than price. This conceptualization of customer value
considers two out of the three relationship costs identified by Cannon and
Homburg (2001), namely acquisition and operation costs, while treating the
third component – direct product costs or actual price paid – as a separate
construct, independent from customer value. The next paragraph below
elaborates on this point.
The difficulty of the former approach of defining economic value lies in
the fact that price is part of the definition: each time researchers consider
alternative approaches to value delivery and pricing strategy, value to the
customer will necessarily change. As the objective of this paper is the
conceptual exploration of value creation, delivery and pricing strategies, a
definition of value is required which is independent from price. Regarding
the benefit side of customer value, the author follows the current line of
thinking (e.g., Anderson & Narus, 1998; Zeithaml, 1988) and takes a broad
view.
Chacour (2001, p. 530) note that value is relative to customer segments and
specific use situations.
The concept of value in business market has one additional, fundamental
trait which these characterizations do not capture. Value in business
markets is future-oriented (see also Hogan, 2001; Jackson, 1985). Value
in business markets is necessarily and unconditionally a future-oriented
construct: Two parties exchange resources (e.g., money, goods, services,
rights, or intellectual property) in the expectation of certain future benefits
resulting from consuming these resources. Being a future-oriented concept,
the concept of value in business markets thus necessarily and uncondition-
ally shares the properties of a probabilistic utility function: outcomes have a
certain expected value, a distribution around an expected value, a skewness,
and they are, above all, uncertain. This uncertainty is due to the inherent
uncertainty of the future, and possible opportunism on the part of the
supplier compounds uncertainty (Hogan, 2001), adverse selection, and the
circumstance that value in business relationships is jointly built and may
thus be substantially bigger than initially assessed by mutual will and design
of both the customer and the supplier. This trait of uncertainty and future
orientation could lead to the representation of customer value as a range of
expected values, rather than representing customer value as a single (certain)
number.
Taking Ulaga’s (2003) and Ulaga and Chacour’s (2001) summaries as a
basis and adding the element of uncertainty, the present paper thus
summarize the characteristics of value in business markets as follows: value
is (1) a subjective concept, value is (2) a trade-off between benefits and
sacrifices, value is (3) multidimensional, value is (4) defined relative to
competitors, value is (5) segment specific, and value is (6) future-oriented.
On the dimensions of customer value in business markets Ulaga and
Eggert (2006, p. 120) reiterate that ‘‘research on customer value in business
markets is still in an early stage’’; this paper sees shares this view and sees
this as incentive to further advance current theory.
In a qualitative study with ten purchasing managers of US-based
industrial companies Ulaga (2003) and Ulaga and Eggert (2006) identify
six dimensions along which suppliers create benefits and three dimensions
along which suppliers reduce costs for their customers.
The six benefit dimensions include: (1) product quality, (2) delivery
performance, (3) service support, (4) personal interaction, (5) supplier know
how, and (6) time to market. Costs are subdivided in to (1) direct costs,
(2) acquisition costs, and (3) operation costs (as in: Cannon & Homburg,
2001).
Value Delivery and Value-Based Pricing in Industrial Markets 391
The six benefit and three cost components provide a useful, theoretically
rigorous conceptualization of value in business markets. From the
standpoint of the supplier, this framework allows to assess value delivered
along the nine dimensions. From the standpoint of the customer, the
framework allows to compare value delivered by a set of alternative
suppliers.
The present paper reports a test of this framework in workshops
conducted with 35 marketing managers, general managers, and sales
managers working in four different industrial businesses: the chemical
industry, food/food processing industry, energy delivery, and mechanical
engineering in Germany, Austria, and China. The framework is useful
but not exhaustive: the framework does not capture the full variety of
possibilities for suppliers to add customer value.
In particular, discussions with executives participating in these workshops
spur further efforts to investigate the question whether additional
possibilities for suppliers to add customer value exist. In addition, the
author undertakes an exhaustive literature survey to explore sources of
customer value, both in consumer goods as well as industrial businesses. In a
subsequent round of discussions, practicing executives comment on these
findings.
One construct stands out: the construct ‘‘easy to do business with.’’
Bolton and Drew (1992) examine the impact of this construct on customer
value. They refer to this construct as the customer’s overall assessment of its
supplier’s policies and practices on whether these policies and practices
make the service encounter easy and pleasant. Bolton and Drew (1992) find
that this construct has an important impact on customer perceived value
and is as important as quality in predicting value. More recently, Hammer
(2001, p. 16), one father of the reengineering movement, presents ‘‘a set of
nine emerging business concepts that underlie how the best companies
around are mastering today’s turbulent environment.’’ One of these
concepts is ‘‘easy to do business with’’ or ‘‘ETBW.’’ Hammer (2001) argues
that ETBW will become one of the main competitive features distinguishing
leaders from laggards: ‘‘ETBW isn’t an option. It is a requisite for survival’’
(Hammer, 2001, p. 17).
In extensive empirical tests by telephone interviews with more than 1,000
industrial customers Kumar and Grisaffe (2004) find the impact of the
construct ‘‘easy to do business with’’ (or ‘‘customer focus’’ in their wording)
to have the overall highest impact on both perceived quality and customer
value in B2B purchasing contexts. They conclude: ‘‘This can explain why
it is quite common to see a firm whose quality and prices are comparable
392 ANDREAS HINTERHUBER
(or even slightly lower priced) losing out to competitors perceived as being
easy to do business with’’ (Kumar & Grisaffe, 2004, p. 65).
In addition to order handling procedures, the construct ‘‘easy to do
business with’’ also captures complaint-handling procedures. In an
empirical survey involving more than 2,000 respondents in industrial
companies Homburg and Rudolph (2001) find that satisfaction with
complaint-handling procedures has a strong impact on the overall
satisfaction of industrial customers which exceeds the impact of the
satisfaction with product related items. The construct ‘‘easy to do business
with’’ (i.e., order and complaint-handling procedures) merits to be treated as
a separate source of customer value in business relationships.
Discussions with participating managers lead to the exploration of the
construct self-enhancement, the idea that suppliers can confer to their
customers intangible benefits such as prestige, social status, or other
aspiration benefits. In consumer goods industries this concept is, in contrast
to industrial industries, already well established: BBDO, a leading
advertising agency, uses the terms ‘‘identity-building brands’’ and ‘‘mytho-
logical brands’’ to refer to a product’s ability to allow customers to express
themselves via the brand and to provide social orientation (BBDO, 2001,
p. 18).
Identity-building brands contribute to define the consumer’s perceptions
and self-awareness. This ‘‘identity is the product of interplay between
producer and consumer to create a suitable brand environment. Interactive
communication provides the framework for this, a process which
necessitates active involvement on the part of the consumer. The brand is
integrated into the consumer’s personality (self share), i.e. the brand exhibits
an overlap with the consumer’s own self-image. . . . At this level of brand
leadership, consumers define themselves via the brand (and the brand via its
loyal customers), relying on it for self-expression and identity formation’’
(BBDO, 2001, p. 18). Mythological brands go one step further and assume
‘‘the function of a guide or mentor offering insight into the meaning of life.’’
Coca-Cola, Marlboro, Rolex, and Harley-Davidson and Ferrari are
examples of identity-building and mythological brands, respectively
(BBDO, 2001, p. 19).
Purchase and consumption in industrial contexts are less intertwined with
the customer’s personality and individual values than in consumer goods
industries. However, in industrial businesses also suppliers have the
opportunity to provide intangible benefits to customers such as prestige,
social status, or other aspiration benefits. Ward, Light, and Goldstine (1999,
p. 85) state, ‘‘It is true that most of our knowledge about brand strategies
Value Delivery and Value-Based Pricing in Industrial Markets 393
Graphically, a chart of the type shown below visualizes the value added
by different suppliers. This chart allows comparing the abilities to add value
of different suppliers; this way of graphically representing customer value
furthermore allows tracking supplier value creation over time (Fig. 2).
The author has tested this model of value creation in business markets in
a series of workshops with 35 executives working in four separate industrial
marketing environments. This model is better able to capture the variety of
ways in which suppliers can add value to customers in business-to-business
relationships. Here are comments received after presenting and further
developing this model in these workshops.
This is a really useful way to look at differentiation and value-addition. It focuses the
attention away from providing an ever only marginally better product to other
Value Delivery and Value-Based Pricing in Industrial Markets 395
Self
Delivery capabilities
enhancement 50
Vendor Services
Ease of doing
business
dimensions which we have not systematically investigated before. (Mark, CEO, food/
food processing industry)
The commodity mindset is really in our DNA and for years we have tried, fruitlessly, to
overcome it. I am excited about this model! It helps your operational managers to
understand how we could add value, instead of just looking how to kick out a few cents
of our production costs. (Tom, CEO, energy delivery industry)
From some of our customers we hear that purchasing from competitor X satisfies some
emotional or irrational needs since it confers an aura of prestige. I am glad this
dimension is modelled also here – since this gives us now the opportunity to think
creatively about which factors drive this purchase decision and about what we have to do
to get there as well. (James, VP, engineering industry)
Building on insights from these studies the model includes the following
definition of customer value in business markets. Value to the customer of
a company’s product, service, relationship, competency, or intellectual
property offering is equal to price of the customer’s best alternative plus the
expected (positive or negative) value along the six dimensions – product,
delivery capabilities, services, easy to do business, vendor, self-enhancement –
along which this offering is differentiated from the alternative.
396 ANDREAS HINTERHUBER
Impact on EBIT
COGS (-5%) 10%
Cost-based Competition- Customer- Other Type of study, Industry, region Year Authors Comments
pricing based pricing value based approaches sample size
approach approach pricing
approach
ANDREAS HINTERHUBER
Single answers companies in the
(first choice 3 countries
method)
15% 73% 12% Survey among 61 Industrial & service 2001 Büschken 12% of companies are
marketing and companies, ‘‘active’’ pricers
general Germany where reference is
managers in made to demand and
German customer related
industrial and factors taken into
service consideration
companies
(85% B2B
business);
single answer
14% 85% 1% Survey among 91 US, construction 2001 Mochtar and Arditi
401
multiple
answers
402
Table 3. (Continued )
Pricing Approaches Used in Industrial Markets – an Overview of Empirical Studies
Cost-based Competition- Customer- Other Type of study, Industry, region Year Authors Comments
pricing based pricing value based approaches sample size
approach approach pricing
approach
109% 85% 49% Survey among 178 Industrial goods 2000 Hart, Argouslidis
export (chemicals, and Saren
marketing metals, plastics)
directors of in the UK
industrial
manufacturers
in the UK;
multiple answers
29% 34% 37% Survey among 77 Belgium, industrial 2003 Ingenbleek,
marketing companies Debruyne,
managers of Frambach, &
Belgian Verhallen
electronics and
engineering
ANDREAS HINTERHUBER
companies;
multiple
answers
32 39 29 – Survey among B2B process 2006 Own survey Managers are asked to
160 product industry, distribute 100 points
and marketing worldwide on approach used to
managers of a determine new
global product pricing
industrial policies depending
company; on importance of
multiple method used
answers
Value Delivery and Value-Based Pricing in Industrial Markets 403
37%
29% 29%
25%
20% 20%
12%
6% 8% 7%
4% 1%
1996 1999 1999 2000 2001 2001 2002 2003 2005 2006 2006 2006
Cost-based pricing
approaches: 37%
Docters, Roepel, Sun, & Tanny (2004) refer to value-based pricing as ‘‘one
of the best pricing methods’’ (Docters et al., 2004, p. 16).
On the other hand, as early as in the 1950s Backman (1953, p. 168) notes
that ‘‘the graveyard of business is filled with the skeletons of companies
that attempted to base their prices solely on costs’’. More recent, Myers,
Cavusgil, and Diamantopoulos (2002) assert that cost-based pricing
approaches lead to substandard profitability. Simon et al. (2003) also state
that cost-based pricing approaches lead to lower than average profitability.
Despite these claims, extant research provides little, if not to say no,
empirical evidence to substantiate the claim that value-based pricing
increases or that cost-based pricing decreases firm profitability. Marketing
scholars recognize the lack of empirical evidence. Noble and Gruca (1999,
p. 457) state that ‘‘research on successful pricing process should be a major
priority for future research’’. Also other researchers (see: Cressman, 1999;
Ingenbleek et al., 2003) lament a lack of understanding on the link between
pricing practices adopted and firm success.
Ingenbleek et al. (2003) conduct the first and only study to date to
examine the relationship between pricing practices and new product success.
This study has largely gone unnoticed in extant marketing literature so far:
not a single marketing textbook in which this paper is cited exists. Also the
ISI web of science (Social Citation Index) does not report a single citation of
this paper (website accessed: 1 August 2007).
A summary of this study here adds value to, first of all, provide an
empirical basis to any claims – which so far rely more on speculation than
on data – about performance implications of alternative pricing approaches.
And, second, to spur further research in this area where little is known, in
spite of the fact that the number of papers pretending to know is large.
Ingenbleek et al. (2003) survey 77 marketing managers in two B2B
industries (electronics and engineering industry) in Belgium. Objective of
their research is to explore the link between pricing approach and new
product success. Multi-item measures operationalize pricing practices:
Participants indicate their agreement to questions capturing the influence
of cost-, competition-, and customer-related factors on a 1–10 scale.
Participants self report on new product success: they are asked to indicate,
again on a 1–10 scale, whether new product performance is in line with the
objectives originally set out at product launch.
Customer value-based pricing approaches relate positively to new
product success, while no correlation exists between new product success
and the adoption of cost-based and competition-based pricing approaches.
(Fig. 6)
410 ANDREAS HINTERHUBER
-0,03
-0,09
Value-informed Competition-informed Cost-informed
pricing pricing pricing
Fig. 6. The Link between Pricing Approach and New Product Success.
Source: Ingenbleek, Successful New Product Pricing Practices: A Contingency
Approach, Marketing Letters, December 2003.
The authors further find that pricing practices are contingent to relative
product advantage and competitive intensity: Under conditions of intense
competition, cost-based pricing approaches are ‘‘best practice’’; they are
‘‘bad practice’’ under conditions of low competitive intensity.
Competition-informed pricing is ‘‘bad practice’’ if relative product advantage
is high. Customer value-based pricing is ‘‘best practice’’ when relative product
advantage is high. Unlike for cost- or competition-based pricing approaches,
the authors do not find circumstances when customer value-based pricing is
‘‘bad practice’’: its influence on new product success is at worst neutral.
Ingenbleek et al. (2003, p. 301) conclude that customer value-based pricing
approaches are the overall best approaches to new product pricing decisions.
Empirical work is necessary in the area of examining the consequences of
pricing approaches on company and product performance. The research by
Ingenbleek et al. (2003), although a pioneering work, has limitations:
A small sample size, the fact that new product success is measured on
a self-reported basis and the lack of profitability measures warrant
further research in this area. Of particular interest are performance
Value Delivery and Value-Based Pricing in Industrial Markets 411
6.1. A Myth: Premium Prices and High Market Share are Incompatible
6 Total number of
segments = 30
4
3
0 0
Most Second most Third most Cheapest Other
expensive expensive expensive product
product product product
Fig. 7. High Price and Large Market Share – not as Incompatible as Commonly
Believed. Source: NIHCM Foundation (2001).
This paper analyzes the absolute price level and market share of all main
drugs in each of these 30 market segments. Contrary to expectations, in 9
segments (30% of segments) the most expensive drug is at the same time
also the drug with the largest market share. The second most expensive
product is market share leader in eight segments (27% of segments).
By contrast, the cheapest product has the largest market share in six
segments (20% of segments).
Fig. 7 illustrates the relationship between absolute price and market share
for a number of the 30 market segments analyzed: in practice high prices
and high market share coexist.
Traditionally, most managers hesitate to associate market share leader-
ship with a high-price strategy; the belief is that a premium price strategy is
best suited for small, niche markets.
High market share and high prices can be achieved if prices truly reflect
high customer value. The next section further discusses this point. Before
doing so, one key question warrants further attention: Are customers
really as price sensitive as most managers believe? This question is particularly
relevant given that in empirical surveys marketing managers frequently
mention intensified price competition as the main challenge – ahead of issues
such as product differentiation or new product launches (Simon, 1999).
Value Delivery and Value-Based Pricing in Industrial Markets 413
The first step is a clear definition of goals. Company may pursue a variety
of, sometimes mutually exclusive, goals, such as market share, market share
growth, revenue growth, profitability growth, growth in absolute profits,
share price growth, growth relative to competitors, dividend growth, etc.
Value Delivery and Value-Based Pricing in Industrial Markets 415
COMMUNICATE VALUE
THE CUSTOMER
COMPETITIVE ANALYSIS
COST VOLUME PROFIT (CVP) ANALYSIS
CHANNEL ANALYSIS
THE CHANNEL
These goals are naturally the result of the company’s business or corporate
level strategy.
First of all, good and less good goals exist: In the context of this research
project the author undertakes a study to examine the relationship between
market share and profitability (operating profit margin) in a variety of
industry contexts. For a large number of industries (air transport, chemicals,
automotive parts, automotive) the correlation is not significantly different
from zero, in a few other settings (pharmaceuticals) the correlation is
positive. Researchers generally agree that market share and profitability are
unrelated (Jackson, 2007). Buzzell, one of the cofounders of PIMS –
probably once the most vocal supporter of a positive link between market
share and profitability – declares the program to be effectively ‘‘out of
business’’ in North America (Buzzell, 2004, p. 478). Even more, Anterasian,
Graham, and Money (1996, p. 74) regard market share-oriented goals as
416 ANDREAS HINTERHUBER
The framework (see Fig. 2) for value delivery is useful for examining additional
ways to delivery value to customers. Specifically the framework provides a
coherent and comprehensive tool to examine all options for value creation.
Thus, in this context the product dimension can be analyzed, as well
as delivery capabilities, services, ease of doing business, own capabilities,
and, finally, options to provide other intangible benefits to buyers
(self-enhancement).
Value Delivery and Value-Based Pricing in Industrial Markets 417
Value to the customer has a hard and a soft component: Value to the
customer is the sum of the price of a buyer’s best alternative – i.e. a
specifically identifiable product, service or process that the customer knows
well and for which a clearly identifiable market price exists – plus the
differentiation value – i.e. a subjective source of value of the product’s
differentiating attributes to the customer. In brief, economic value is not an
inherent component of a product, but rather a trait, which executives can
and should manage. The following considerations apply.
a reference point, where losses have larger negative utility than gains of the
same amount, thus proposing a utility function that is steeper for losses than
for gains. Decision makers judge a loss as more painful as they judge a gain
of equal amount as pleasurable.
Marketers use these findings to suggest that products should be
positioned in such a way to offer potential customers a gain rather than
merely preventing a loss. Insurance companies, security agencies, and IT
companies, for example, follow this advice: Remote data backup companies
offer peace of mind and tranquility rather than preventing theft or loss of
valuable data. Similarly, fleet management companies advertise their
services nearly exclusively as mean to gain control and visibility over
expenses rather than as mean to prevent problems, something customers are
more likely to resent to having to pay for.
Prospect theory is also useful when marketers are confronted with the
problem of having to justify steep price increases. They can obscure the
reference price, by selling in unusual packages, formats, or quantities. They
can also implement the price increase in two steps: in a first step, a discount is
offered on an increased price for a certain period of time. Subsequently, the
discount is eliminated. In this way, consumers will experience a gain from
benefiting from the initial price reduction, rather than being confronted at once
with a steep increase (Smith & Nagle, 1995; Mazumdar, Raj, & Sinha, 2005).
delivery value to customers?’’ and finally, ‘‘What is the value of the product
or service in question to different customer segments?’’ Once executives have
answered these questions, value delivery and pricing decisions can be built
on a well-founded basis rather than being the result of the accountant’s cry
for a minimum margin or the sales manager’s desire for competitive price
levels. Consider the case of Schering-Plough’s Claritin in the oral-cold drug
market. The product carries a price premium of over 200% over existing
drugs, yet is the category leader just 2 years after launch. This is possible
only after having gained a profound understanding of the sources of value
of the product to customers.
Traditionally, marketing executives are reluctant to price a new product
significantly above existing price levels – especially if the goal is to gain
market leadership. A profound understanding of the sources of value for
customers helps to avoid one common error in pricing decisions: pricing
truly innovative products too low.
This section discusses tools that will guide both the implementation of
profitable pricing policies as well as the design of effective value delivery
strategies.
customer value analysis: the understanding of the sources of economic
value of a product to different clusters of customers
CVP analysis: the understanding of the implications of price and volume
changes on company profitability
competitive analysis: the understanding of trends in competitive pricing,
product offerings, and strategies
channel analysis: the understanding of channel options, channel
functions, channel perceptions, and the design of instruments to win
channel support.
of the functions examined, the economic value of a given product will have
to be calculated against at least the principal two or three best alternatives.
The set of products used for comparison depends on the customer’s,
not the company’s, assessment of available alternatives. For example, a
company in the agrochemical industry is inclined to think that customers
use a competing product as their alternative upon which other products are
judged and is surprised to learn – after field value in use assessments – that
for a certain customer segment hand weeding is actually the preferred
alternative.
Step 2: Segment the market. The first step of the process immediately
leads to the second step of segmenting the market. Significant differences in
economic value arise from the way in which customers use and value the
product and from how they value their respective reference products. These
differences result from differences in incremental value, which in turn
usually result from distinctive characteristics of the customer, the usage of
the product, or environmental factors.
Already in the 1960s Weir comments on market segmentation: ‘‘It is
assumed that countless individuals comprising ‘‘the market’’ will be waiting
and ready – like the ideal bride – to respond to the appeal and have
consummation result. However, . . . , ‘‘the market’’ is not a single, cohesive
unit; it is a seething, disparate, pullulating, antagonistic, infinitely varied sea
of human beings – every one of them as distinct from every other one as
fingerprints; every one of them living in circumstances different in countless
ways from those in which every other of those is living. How can the most
self-intoxicated writer, realizing this, assume that without genuine commu-
nication, he can ‘‘get through’’, he can convince another human being
(whom he does not physically confront) that he is speaking to him?
If he writes to an unreality like a ‘‘market’’ he is bound to sound unreal’’
(Weir, in: Yankelovich, 1964, p. 90).
A company with a broad, fragmented product line, limited physical space
for inventory, and rapid response times will assign a higher value to just-in-
time delivery than a company with only one product line and ample space
for inventories. This explains why those companies most adept at
implementing value-based pricing decisions – such as software or
pharmaceutical companies – know that no other way of gaining insight
into sources of customer value exists than through observation and intense
field-research into customer habits and requirements. Microsoft, for
example, is known for handing out beta-versions of its latest enterprise
software products to particularly knowledgeable companies and customer
segments. This form of free customer feedback is used to determine which
424 ANDREAS HINTERHUBER
features add most value and to gain a deep understanding on how different
customer segments use and value the product.
Step 3: Identify all factors that differentiate the product from the
competitive offering. The conceptualization of customer value (paragraph 3)
is a useful tool for identifying the set of features differentiating a given value
proposition from competitive offers: product quality, delivery capabilities,
services, ease of doing business, the vendor itself, and self-enhancement can
thus be assessed.
The notion of these differentiating factors is closely related to the concept
of competitive advantage: Duncan, Ginter, and Swayne (1998, p. 7) define
competitive advantage as ‘‘the result of an enduring value differential
between the products and services of one organization and those of its
competitors in the minds of customers’’. The customer, not the company, is
the judge deciding on whether or not the differentiating factors are actually
relevant to better satisfy his needs and ambitions. For companies, this
means nothing less than to define quality the way the customer does.
Step 4: Determine the value to the customer of these differentiating factors.
Once tangible sources of differentiation have been identified, monetary values
are assigned to these factors for each identified segment of the market. The
paragraph below discusses respective methodologies in detail.
This process is straightforward for high-priced industrial equipment,
where expert sales personnel know how to quantify reduced failure rates,
start-up costs, or life cycle costs in monetary terms in order to demonstrate
the value of a certain product to actual or potential customers.
Conjoint analysis is a simple tool which aims to capture trade-offs in
product features in a systematic way and to assign monetary values to
specific attributes (Auty, 1995). Company personnel presents customers
with a set of two similar products differing in price and along other
dimensions and captures customer preferences for different combinations of
product features and price levels.
By presenting options such as (a) a lower price and no technical support
and (b) a higher price coupled with support and guarantees, conjoint
analysis is able to quantify the value of specific product or service attributes
for a group of customers.
Step 5: Sum the reference value and the differentiation value to determine
the total economic value. The product’s value is the sum of the price of
the reference product plus its differentiation value. As the price of the
reference product and the value of differentiating attributes are likely to
vary across customer segments, the result of this process in not likely to be
one monetary value for any given product, but rather a ‘‘value pool’’
Value Delivery and Value-Based Pricing in Industrial Markets 425
reflecting the fact that different customer segments assign different values to
the product or service examined.
Step 6: Use the value pool to estimate future sales at specific price points.
Researchers represent customer value of different market segments via the
value pool or customer value profile. This allows estimating sales at different
value creation and price points. For each price point, sales are expected to
comprise a share of all market segments which value the product higher than
the specific price examined.
To assign a precise number to value, Anderson, Jain, and Chintagunta
(1993) propose one of the following nine quantification tools:
In their empirical analysis they find that focus group value assessments
and importance ratings are the most widely used methods, while conjoint
analysis is reported to have the highest practical success rates.
100
50
0
50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
Price Price change Price
increase decrease
The formula for CVP calculations is the following (Smith & Nagle, 1994):
ð% Price changeÞ
Break even sales change ð%Þ ¼
% Contr: Margin þ ð% Price changeÞ
DP
¼
CM þ DP
DP
Break even-sales change ð%Þ ¼
CM þ DP
Change in Fixed Costs ð$=EuroÞ
þ
‘‘New’’ unit CM initial unit sales
Matsushita enters the market with a fax machine priced 40% below its
American rival. Xerox loses its market share leadership almost overnight.
Xerox prices certainly optimize short-run profitability. Given that these
price levels make new competitive entry extremely profitable the pricing
decision of Xerox probably did not optimize long-term profitability in this
market segment. With hindsight, and in anticipation of new competitive
entry, the company would have been much better off, had the company’s
marketing managers set prices somewhat more conservatively, thus making
competitive entry more costly and/or more risky.
customers; each channel options will thus allow reaching a different set of
revenue, market share, gross margin, profit, and cash-flow targets. Different
channels also differ in their direct costs (margins) and fixed costs
(investments into infrastructure, training, advertising support). This step
compares costs and benefits of alternative channel and function
combinations.
EF 4
Summary Value (Euro/ha) Economic Value Profile of the market (complete)
Fig. 10. Customer Value Analysis and the Pricing Decision for a New Product.
market segment and the segment size (in units). The figure below illustrates
these relationships: (Fig. 10)
The chemical company is able to use this information in a number of ways:
first, the company is able to design a range of products whose features are
uniquely tailored to the needs and perceptions of value of each of the six
segments identified. Secondly, the company is able to design a price struc-
ture for each of these six product offerings which closely track the value these
products create for customers in the respective segment. As a result, the
company is able to radically change its value delivery and pricing policy for
new products: instead of developing and launching one new product to
a market with differentiated needs, expectations of value, and willingness to
pay, the company designs a range of products, each with unique features, and
a unique value/price profile. As a result, revenues increase by more than 80%
compared to the previous ‘‘one size fits all’’ approach; as a secondary benefit,
the array of products the company now has on the market makes the company
much less vulnerable to generic entry, once the patent on the product expires.
Another example of pricing decisions directly influenced by customer value
analysis is the case of a Japanese industrial equipment manufacturer. In
Value Delivery and Value-Based Pricing in Industrial Markets 439
Japan its standard model carries a price equivalent to 80,000 USD compared
to 50,000 USD for a similar model by its main competitor from the United
States. Prices in the US, the second largest market, are slightly different,
although the same absolute price differential between the two models exists.
In Japan, the company sells about 80% more units than its US competitor,
while in the US, where the company has a weaker distribution system, both
companies have roughly the same unit sales – although historical growth
rates of the Japanese company by far exceed the growth rates of its US rival.
What is the reason the Japanese company is able to achieve both a high
relative market share and a significant price premium?
The answer lies in a unique understanding of the sources of value to
customers on the one hand, and in a superior ability to create and deliver
this value to customers on the other hand. For each industry segment, the
Japanese company develops detailed financial models of different cost and
benefit components of its own equipment versus its main competitor.
For a customer in the printing ink industry, the company sales and
marketing personnel quantify the positive and negative differentiation value
as follows:
Under this angle, the price premium of the Japanese company is modest:
if an interest rate of 8% is applied to the net benefits gained over the average
life-cycle of this equipment of 4 years, the positive differentiation value
amounts to over 300,000 USD. Customers are expected to pay only a small
fraction – less than 10% or USD 30,000 US – of the product’s incremental
value to this particular customer segment.
440 ANDREAS HINTERHUBER
Also in this case, the higher priced product ends up costing the
customer less. This is an important lesson for industrial marketing
managers: If researchers and company personnel create, quantify, and
communicate value to customers, high prices and high relative market share
can co-exist.
In a third step, the paper proposes a model of value delivery and value-
based pricing in industrial markets. After taking a company’s objectives into
consideration, the author suggests to create value along the six dimensions
of customer benefits defined (see paragraph 3). The next step is value
communication. The tools of customer value analysis, CVP analysis,
channel analysis, and competitive analysis are appropriate to reflect the
customer, company, channel, and competitor perspective relevant for all
strategic decisions. The last step implements the value delivery and pricing
policy and illustrates ways to overcome challenges industrial companies face
in this respect. Pricing is a process with a feedback loop: assumptions need
to be revisited, environmental dynamics, changes in customer desired value
need to be taken into consideration, which requires a reiteration of the steps
outlined.
Customer value analysis receives heavy emphasis in this respect. A solid
understanding and quantification of customer value is a key to value
delivery and value-based pricing. This understanding can suggest where to
increase prices and where to launch new (premium) products while at the
same time increasing sales and profitability. Customer value analysis is a
tool which can be used to justify price increases to customers;
customer value analysis is furthermore vital in the new product development
process.
This paper also shows that a relentless focus on competitiveness has major
drawbacks: instead of attempting to create and to communicate value
to customers, companies risk paying an unjustified attention to current
product features of competitors, regardless of whether these features meet
customer requirements and truly create superior customer value.
Empirical research supports this claim: In a field study involving 20 US
Firms over an extended period of time Armstrong and Collopy (1996)
find that companies with a pure competitor-oriented strategy are less
profitable and less likely to survive than companies with a strong customer
orientation.
Differentiation from competitors does not per se add value. Differentia-
tion might lead to a sustained investment in product features which do not
add any value for customers. Product differentiation strategies have to be
preceded by an understanding of the real sources of value for customers,
which then will lead to appropriate positioning and pricing. Customer value
analysis is a valuable tool even when products are relatively undiffer-
entiated: in this case, insights in the way in which the product adds value can
lead to ways to develop the product further and to position the product in
ways which add value to customers.
Value Delivery and Value-Based Pricing in Industrial Markets 443
REFERENCES
Alldredge, K., Griffin, T., & Kotcher, L. (1999). May the sales force be with you. The McKinsey
Quarterly, 36(3), 110–121.
Anderson, J., Jain, C., & Chintagunta, P. (1993). Customer value assessment in business
markets: A state-of-practice study. Journal of Business-to-Business Marketing, 1(1), 3–29.
Anderson, J., & Narus, J. (1998). Business marketing – understand what customers value.
Harvard Business Review, 76(6), 53–61.
Anderson, J., & Narus, J. (1999). Business marketing management – understanding, creating, and
delivering value. Upper Saddle River, NJ: Prentice Hall.
Anderson, J., Narus, J., & Rossum, W. (2006). Customer value propositions in business
markets. Harvard Business Review, 84(3), 91–99.
Anderson, J., Thomson, J., & Wynstra, F. (2000). Combining value and price to make
purchase decisions in business markets. International Journal of Research in Marketing,
17, 307–329.
Anterasian, C., Graham, J., & Money, R. (1996). Are US companies superstitious about market
share? Sloan Management Review, 37(4), 67–77.
Armstrong, G., & Kotler, P. (2006). Marketing – An Introduction (8th ed.). Prentice Hall.
Armstrong, J., & Collopy, F. (1996). Competitor orientation – effects of objectives and
information on managerial decisions and profitability. Journal of Marketing Research,
33(2), 188–199.
Auty, S. (1995). Using conjoint analysis in industrial marketing – the role of judgement.
Industrial Marketing Management, 24, 191–206.
Avila, R., Dodds, W., Chapman, J., Mann, K., & Wahlers, R. (1993). Importance of price in
industrial buying. Review of Business, 15(2), 34–48.
Avlonitis, G., & Indounas, K. (2006). How are prices set? An exploratory investigation in the
Greek services sector. Journal of Product and Brand Management, 15(3), 203–213.
Backman, J. (1953). Price Practices and Policies. New York: Ronald Press.
Barback, R. (1979). The pricing of industrial products. European Journal of Marketing, 13(4),
160–166.
BBDO (Eds). (2001). Brand equity excellence, Vol. 1: Brand equity review. White paper,
Düsseldorf.
Beukert, L. (2003). Edelsprit lockt Raser an die Zapfsäule. Handelsblatt, 107(5 June), 19.
Brucks, M., Zeithaml, V., & Naylor, G. (2000). Price and brand name as indicators of quality
dimensions for durables. Journal of the Academy of Marketing Science, 28(3), 359–374.
Bolton, R., & Drew, J. (1992). Mitigating the effect of service encounters. Marketing Letters,
3(1), 57–70.
Bonoma, T. (1982). Major sales – who really does the buying? Harvard Business Review, 60(3),
111–119.
Büschken, J. (2001). Umfrage zum Status Quo der Nutzung von Preisstrategien in Deutschland.
Working Paper Katholische Universität Eichstätt.
Buzzell, R. (2004). The PIMS program of strategy research: A retrospective appraisal. Journal
of Business Research, 57, 478–483.
Cannon, H., & Morgan, F. (1990). A strategic pricing framework. Journal of Service Marketing,
4, 19–30.
Cannon, J. P., & Homburg, C. (2001). Buyer–supplier relationships and customer firm costs.
Journal of Marketing, 65(January), 29–43.
444 ANDREAS HINTERHUBER
Chang, T.-Z., & Wildt, A. (1994). Price, product information, and purchase intention – an
empirical study. Journal of the Academy of Marketing Science, 22(Winter), 16–27.
Chia, J., & Noble, P. (1999). Industrial pricing strategies in Singapore and the US: Same or
different? Asia Pacific Journal of Management, 16(2), 293–303.
Clancy, K., & Shulman, R. (1993). Marketing with blinders on. Across the Board, 3, 33–38.
Corey, R. (1989). Industrial buyer behavior. Harvard Business School note, nr. 9-582-117, April.
Corey, R. (1996). Industrial marketing strategy – an overview. Harvard Business School note,
nr. 9-589-102, October.
Cressman, G. (1999). Commentary on: industrial pricing: Theory and managerial practice.
Marketing Science, 18(3), 455–457.
Cunningham, D., & Hornby, W. (1993). Pricing decisions in small firms – theory and practice.
Management Decision, 31(7), 46–55.
D’Aveni, R. (2006). Hypercompetition – managing the dynamics of strategic maneuvering.
New York, NY: Free Press.
DeVincentis, J., & Rackham, N. (1998). Breadth of a salesman. McKinsey Quarterly, 35(4), 32–43.
Dickson, P., & Sawyer, A. (1990). The price knowledge and search of supermarket shoppers.
Journal of Marketing, 54(July), 42–53.
Docters, R., Roepel, M., Sun, J., & Tanny, S. (2004). Winning the profit game – smarter pricing,
smarter branding. New York: McGraw-Hill.
Dodds, W., Monroe, K., & Grewal, D. (1991). Effects of price, brand, and store information on
buyers product evaluations. Journal of Marketing Research, 28, 307–319.
Dolan, R. (2000). Going to market. Harvard Business School note, nr. 9-599-078, revised
October 2000.
Drucker, P. (2005). The five deadly business sins. The Wall Street Journal, 128(21), 3–5.
Duncan, W., Ginter, P., & Swayne, L. (1998). Competitive advantage and internal competitive
assessment. The Academy of Management Executive, 12, 6–16.
Elling, E., Fogle, H., McKhann, C., & Simon, C. (2002). Making more of pharma’s sales force.
McKinsey Quarterly, 39(3), 86–95.
Erdönmez, M., & Nützenadel, C. (2006). Pricing-strategien in der Motorfahrzeug-Versicherung.
Presentation at the University of St. Gallen, Switzerland, May.
Evanschitzky, H., Kenning, P., & Vogel, W. (2004). Consumer price knowledge in the German
retail market. Journal of Product and Brand Management, 13, 390–405.
Flint, D., & Woodruff, R. (2001). The initiators of changes in customers’ desired value – results
from a theory building study. Industrial Marketing Management, 30, 321–337.
Flint, D., Woodruff, R., & Gardial, S. (1997). Customer value change in industrial marketing
relationships: A call for new strategies and research. Industrial Marketing Management,
26, 163–175.
Flint, D., Woodruff, R., & Gardial, S. (2002). Exploring the phenomenon of customers’
desired value change in a business-to-business context. Journal of Marketing,
66(October), 102–117.
Forbis, J., & Mehta, N. (1983). Value-based strategies for industrial products. Business
Horizons, 24(3), 32–42.
Forbis, J., & Mehta, N. (2000). Economic value to the customer. The McKinsey Quarterly,
37(3), 49–52.
Forman, H., & Lancioni, R. (2002). The determinants of pricing strategies for industrial
products in international markets. Journal of Business-to-Business Marketing, 9(2),
29–62.
Value Delivery and Value-Based Pricing in Industrial Markets 445
Golub, H., & Henry, J. (2000). Market strategy and the price-value model. The McKinsey
Quarterly, 37(3), 47–49.
Golfetto, F., & Gibbert, M. (2006). Marketing competencies and sources of customer value in
business markets. Industrial Marketing Management, 36, 904–912.
Govindarajan, V., & Anthony, R. N. (1983). How firms use cost data in price decisions.
Management Accounting, 65(1), 30–35.
Guidry, F., Horrigan, J., & Craycraft, C. (1998). CVP Analysis – a new look. Journal of
Managerial Issues, 10(1), 74–85.
Hammer, M. (2001). The agenda: What every business must do to dominate the decade.
New York, NY: Crown Business.
Hinterhuber, A. (2004). Towards value-based pricing – an integrative framework for decision
making. Industrial Marketing Management, 33, 765–778.
Hoch, S., Dreze, X., & Purk, M. (1994). EDLP, Hi-Lo, and margin arithmetic. Journal of
Marketing, 58(October), 16–27.
Hogan, J. (2001). Expected relationship value – a construct, a methodology for measurement,
and a modelling technique. Industrial Marketing Management, 30, 339–351.
Homburg, C., Küster, S., Beutin, N., & Menon, A. (2005). Determinants of benefits in business-
to-business markets – a cross cultural comparison. Journal of International Marketing,
13(3), 1–31.
Homburg, C., & Rudolph, B. (2001). Customer satisfaction in industrial markets – dimensional
and multiple role issues. Journal of Business Research, 52, 15–33.
Ingenbleek, P., Debruyne, M., Frambach, R., & Verhallen, T. (2003). Successful new product
pricing practices: A contingency approach. Marketing Letters, 14(4), 289–305.
Jackson, B. (1985). Winning and keeping industrial customers. Lexington,MA: Lexington Books.
Jackson, R., Niedell, L., & Lunsford, D. (1995). An empirical investigation of the differenced
between goods and services as perceived by organizational buyers. Industrial Marketing
Management, 24, 99–108.
Jackson, S. (2007). Market share is not enough: Why strategic market positioning works.
Journal of Business Strategy, 28(1), 18–25.
Kahnemann, D., & Tversky, A. (1979). Prospect theory – an analysis of decision under risk.
Econometrica, 47(March), 263–291.
Kumar, A., & Grisaffe, D. (2004). Effects of extrinsic attributes on perceived quality, customer
value, and behavioral intentions in B2B settings. Journal of Business-to-Business
Marketing, 11(4), 43–74.
Lamb, C., Hair, J., & McDaniel, C. (2000). Marketing (5th ed.). Cincinnati, OH: South-Western
College Publishing.
Lancioni, R., Schau, H., & Smith, M. (2005). Intraorganizational influences on business-to-
business pricing strategies – a political economy perspective. Industrial Marketing
Management, 34, 123–131.
Leavitt, H. (1954). A note about some empirical findings on price. Journal of Business, 27, 205–210.
Lepak, D., Smith, K., & Taylor, M. (2007). Value creation and value capture – a multilevel
perspective. Academy of Management Review, 32(1), 180–194.
Lindgreen, A., & Wynstra, F. (2005). Value in business markets: What do we know? Where are
we going? Industrial Marketing Management, 35, 732–738.
Malhorta, N. (1996). The impact of the academy of marketing science on marketing
scholarship – an analysis of the research published in JAMS. Journal of the Academy
of Marketing Science, 24(4), 291–298.
446 ANDREAS HINTERHUBER
Matzler, K., Hinterhuber, H., Bailom, F., & Sauerwein, E. (1996). How to delight your
customers. Journal of Product and Brand Management, 5(2), 6–18.
Mazumdar, T., Raj, S., & Sinha, I. (2005). Reference price research: Review and propositions.
Journal of Marketing, 69(10), 84–102.
Mills, R. (1988). Pricing decisions in UK manufacturing and service companies. Management
Accounting, 66(10), 38–39.
Mochtar, K., & Arditi, D. (2001). Pricing strategy in the US construction industry. Construction
Management and Economics, 19, 405–415.
Monroe, K. (2002). Pricing – making profitable decisions (3rd ed.). New York: McGraw Hill.
Moorthy, S., Ratchford, B., & Taludkar, D. (1997). Consumer information search revisited –
theory and empirical analysis. Journal of Consumer Research, 23(4), 263–277.
Moriarty, R., & Moran, U. (1990). Managing hybrid marketing systems. Harvard Business
Review, 68(6), 146–155.
Morris, M., Avila, R., & Pitt, L. (1996). Pricing under conditions of environmental turbulence –
a conceptual and empirical assessment. Journal of Marketing Management, 6(2), 1–16.
Myers, M., Cavusgil, S., & Diamantopoulos, A. (2002). Antecedents and actions of export
pricing strategy. European Journal of Marketing, 36(12), 159–188.
Nagle, T., & Hogan, J. (2006). Strategy and tactics of pricing – making profitable decisions
(4th ed.). Englewood Cliffs, NJ: Prentice-Hall.
Nagle, T., & Holden, R. (2002). Strategy and tactics of pricing (3rd ed.). Englewood Cliffs, NJ:
Prentice-Hall.
Narayndas, D. (2005). Building loyalty in business markets. Harvard Business Review, 83
(9, September), 131–139.
NIHCM. (2001). Prescription drug expenditures in 2000 – the upward trend continues. NIHCM
Report, Washington DC.
Noble, P., & Gruca, T. (1999). Industrial pricing: Theory and managerial practice. Marketing
Science, 18(3), 435–454.
Ofir, C., & Winer, R. (2002). Pricing – economic and behavioral models. In: B. Weitz &
R. Wensley (Eds), Handbook of marketing (pp. 267–281). London: Sage Publications.
Ohmae, K. (1982). The mind of the strategist – the art of Japanese business. New York: McGraw-Hill.
Ohmae, K. (2000). Getting back to strategy. The McKinsey Quarterly, 37(3), 57–60.
Penttinen, E., & Palmer, J. (2007). Improving firm positioning through enhanced offerings and
buyer–seller relationships. Industrial Marketing Management, 36, 552–564.
PhRMA. (2001). Annual survey 2001, New York.
Priem, R. (2000). The business level RBV: Great Wall or Berlin Wall? Academy of Management
Review, 26, 499–501.
Priem, R. (2007). A consumer perspective on value creation. Academy of Management Review,
32(1), 219–235.
Rangan, R. (1994). Designing channels of distribution. Harvard Business School note,
nr. 9-594-116, May.
Reichheld, F. (1996). The loyalty effect: The hidden force behind growth, profits, and lasting
value. Cambridge, MA: Harvard Business School Press.
Reichheld, F., & Sasser, W. (1990). Zero defections – quality comes to services. Harvard
Business Review, 68(5), 105–111.
Schroeder, J., & Perry, J. (2002). Lohnen sich Investitionen in die Marke? Die Relevanz von
Marken für die Kaufentscheidung in B2C-Märkten. McKinsey & Company Marketing
Practice, working paper.
Value Delivery and Value-Based Pricing in Industrial Markets 447
Shapiro, B. (1987). Buy low, sell high: Creating and extracting customer value by enhancing
organizational performance. Harvard Business School Note nr., 9-597-071.
Shapiro, B., & Jackson, B. (1978). Industrial pricing to meet customer needs. Harvard Business
Review, 56(5), 119–127.
Shell (2005). Shell V-Power is America’s best-selling premium gasoline: Shell V-Power zooms
ahead of the competition. Shell press release, 28 February.
Shipley, D., & Jobber, D. (2001). Integrative pricing via the pricing wheel. Industrial Marketing
Management, 30, 301–314.
Simon, H. (1999). Pricing as a strategic weapon. Presentation at PRICEPRO 1999, 25–26
January.
Simon, H., Butscher, S., & Sebastian, K.-H. (2003). Better pricing processes for higher profits.
Business Strategy Review, 14(2), 63–67.
Simpson, P., Siguaw, J., & Baker, T. (2001). A model of value creation – supplier behaviors
and their impact on reseller-perceived value. Industrial Marketing Management, 30,
119–134.
Sivakumar, K., & Raj, S. (1997). Quality tier competition: How price change influences brand
choice and category choice. Journal of Marketing, 61(7), 71–84.
Smith, G., & Nagle, T. (1994). Financial analysis for profit-driven pricing. Sloan Management
Review, 35(1), 71–84.
Smith, G., & Nagle, T. (1995). Frames of reference and buyers’ perceptions of price and value.
California Management Review, 38(1), 98–116.
Solberg, C. (1997). A framework for strategy analysis in globalizing markets. Journal of
International Marketing, 5(1), 9–30.
Solberg, C., Stöttinger, B., & Yaprak, A. (2006). A taxonomy of pricing practices of exporting
firms – evidence from Austria, Norway, and the United States. Journal of International
Marketing, 14(1), 34–48.
Strategic Pricing Group. (2005). The fundamentals of value-based pricing. Presentation at the
Professional Pricing Society Meeting, April 2005.
Stephenson, R., Cron, W., & Frazier, G. (1979). Delegating pricing authority to the
salesforce – the effects on sales and profit performance. Journal of Marketing, 43(1),
21–28.
Stremersch, S., & Tellis, G. (2002). Strategic bundling of products and prices – a new synthesis
for marketing. Journal of Marketing, 66(1), 55–72.
Sudarshan, D. (1998). Strategic segmentation of industrial markets. Journal of Business and
Industrial Marketing, 13(1), 8–21.
Thaler, R. (1985). Mental accounting and consumer choice. Marketing Science, 4(3), 199–214.
Tsokas, N., Hart, S., Argouslidis, P., & Saren, M. (2000). Industrial export pricing practices in
the United Kingdom. Industrial Marketing Management, 29, 191–204.
Ulaga, W. (2003). Capturing value creation in business relationships – a customer perspective.
Industrial Marketing Management, 32, 677–693.
Ulaga, W., & Chacour, S. (2001). Measuring customer-perceived value in business markets – a
prerequisite for marketing strategy and implementation. Industrial Marketing Manage-
ment, 30, 525–540.
Ulaga, W., & Eggert, A. (2006). Value-based differentiation in business markets – gaining and
sustaining key supplier status. Journal of Marketing, 70(January), 119–136.
Vanhuele, M., & Dreze, X. (2002). Measuring the price knowledge shoppers bring to the store.
Journal of Marketing, 66, 72–85.
448 ANDREAS HINTERHUBER
Walter, A., Ritter, T., & Gemünden, H. G. (2001). Value creation in buyer–seller relationships –
theoretical considerations and empirical results from a supplier’s perspective. Industrial
Marketing Management, 30, 365–377.
Wang, T., Venkatesh, R., & Chatterjee, R. (2007). Reservation price as a range – an incentive
compatible measurement approach. Journal of Marketing Research, 44(May), 200–213.
Ward, S., Light, L., & Goldstine, J. (1999). What high-tech managers need to know about
brands. Harvard Business Review, 77(4), 84–95.
Webb, K., & Hogan, J. (2002). Hybrid channel conflict: Causes and effects on channel
performance. Journal of Business and Industrial Marketing, 17(5), 338–356.
Webb, K., & Lambe, C. (2007). Internal multi-channel conflict – an explanatory investigation
and a conceptual framework. Industrial Marketing Management, 36, 29–43.
Webster, F. (1994). Defining the new marketing concept. Marketing Management, 2(4), 23–31.
Webster, F., & Keller, K. (2004). A roadmap for branding in industrial markets. Journal of
Brand Management, 11(5), 388–402.
Yankelovich, D. (1964). New criteria for market segmentation. Harvard Business Review, 42(2),
83–90.
Zeithaml, V. (1988). Consumer perceptions of price, quality, and value: A means-end model and
synthesis of evidence. Journal of Marketing, 52, 2–22.
VALUE CREATION OPTIONS FOR
CONTRACT MANUFACTURERS:
MARKET STRATEGY TRANSITION
AND COEVOLUTION IN
NETWORKS
ABSTRACT
the one hand and with relationships and networks features on the other
hand. Specifically, conclusions are drawn on how companies must upgrade
their network/partnership capabilities and on how relationships and
networks can act as inhibitors/drivers of a value creation strategy.
In this paragraph, we present (1) the research context, (2) the research
problem and methodology, and (3) the research design.
The research is situated in the upper right-hand corner of the Golfetto and
Gibbert (2006) matrix on value creation competencies. The study focuses on
a potential (ex ante) value creation strategy from the suppliers’ perspective.
The study identifies migration paths to new value-added strategies together
Value Creation Options for Contract Manufacturers 453
with their key success factors. In this process, the study focuses on the
problems these companies encountered and how they tried to succeed in
their endeavor of market strategy reorientation. Knowledge of the industry
is crucial in this process. The essence of the metalworking industry is that it
supplies to other industries. The historical reason of existence of these
contract manufacturers is that they can offer certain products/services at a
lower cost than the contractor. By specializing in certain types of operations,
product sizes, and/or services, they can have considerable cost advantages
compared with their contractors. The key success factors are thus based on
clearly defined economic variables, such as economies of scale and
economies of scope. ‘‘Economies of scale’’ (for instance, in production and
purchase) occur when the average production costs decrease as the produced
volume increases. ‘‘Economies of scope’’ occur when, for example,
production resources can be used to serve several customers with different
metal products, or when a cross-fertilization of expertise takes place.
Combining economies of scale and scope becomes more and more essential
for contract manufacturers. The latter is supported by the availability of
multipurpose metalworking machines.
454 PAUL MATTHYSSENS ET AL.
The research design was conceived as follows. In first phase of this research
project (year 2005), 20 CEOs from metalworking companies were
interviewed. Discussions centered around how trends and tendencies
(societal, technological, organizational, market and supply chain) have a
potential impact on the strategies of metalworking companies.
A second wave, carried out during 2006–2007, includes an additional six
in-depth interviews with CEOs and commercial managers (duration from
1.5 to 2.5 h), a focus group (discussion of nearly 3 h) with 12 managers from
metalworking companies (as well specialized as more general contract
manufacturers), 2 suppliers, and 2 industry experts (1 technical and 1 market
expert). Two managers from the steel federation specialized in metalworking
were interviewed as experts. The interview guides and focus group guides
focused on identifying trends, successful market strategies, value-added
and differentiation efforts, and perceived critical success factors (CSFs;
internally and externally).
An expert from the sector federation participated in all interviews to
enhance understanding and interpretation, and was involved in a discussion
with the two interviewing authors in generating a summary report after each
interview. By doing this, and by using diverse types and sources of data in the
two waves of data gathering, This study fulfills the data triangulation
requirements in qualitative research (Eisenhardt, 1989; Yin, 1994; Woodside &
Wilson, 2003). Also, existing theories on strategic positioning enrich
preliminary findings. In this way, the empirical data gathering and analysis
process is in line with the ‘‘iterative grounded theory’’ method from Orton
(1997) who describes a continuous and ‘‘systematic combining’’ (Dubois &
Gadde, 2002) of theoretical and empirical insights during interviews.
3. FINDINGS
This section starts, first, with an elaboration of the specific market position of
metalworking contract manufacturers. Second, trends and challenges
456 PAUL MATTHYSSENS ET AL.
3.2.1. Globalization
A first set of trends is related to the increasing globalization of customers
and competitors and the exploitation of cost advantages on a global scale.
Value Creation Options for Contract Manufacturers 457
Focal
metalworking
contract
manufacturer OEMs
End
markets
1st tier
suppliers
3.2.3. Challenges
One of the consequences of the trends is that contract manufacturers in
metalworking have specialized in and focused on specific markets,
customers, and processes. Two broad categories of contract manufacturers
have arisen. The first category is the application supplier, which focuses on
specific customers/markets and offers total solutions or components to
contractors/OEMs. For these application suppliers, the application and the
product are of crucial importance. The second category is the process
supplier, which specializes in parts of the production process, such as forges,
foundries, finishers, and other specialized fabrication applications and
technologies (machining). For process suppliers, the process and the
specialized knowledge of this process are of main importance (e.g., surface
treatment). In many cases the process suppliers are called into the
production process of application suppliers.
The above processes produce challenges that concern all companies in the
metalworking industry. Below, these challenges are represented as ‘‘dualities’’
(Dittrich, Jaspers, van der Valk, & Wynstra, 2006) between two extremes. In
this way, they can be seen as paradoxes that need to be managed. The basic
paradox has to do with the unnatural split between efficiency and
effectiveness. Efficiency requires standardization and a certain scale in the
entire organization; effectiveness refers to alignment, custom-made goods,
460 PAUL MATTHYSSENS ET AL.
EFFICIENCY EFFECTIVENESS
(standardization) (1 on1 relations)
This section of the paper discusses the pathways followed by application and
process suppliers in order to strengthen their market position. A stronger
position on the market is only possible if the contract manufacturers realize
extra customer value. The creation of customer value implies that the
contract manufacturer can make a significant contribution to the
contractor’s profitability. Important is that the contract manufacturer can
add value by integrating into the customer’s processes. A variety of
strategies used by contract manufacturers in their quest for value addition
are observed. These efforts can be grouped along the two axes of the value
augmentation model presented by Matthyssens and Vandenbempt (2008).
Along the first dimension, the contract manufacturer seeks further
integration in the production process of the customer. For instance,
Value Creation Options for Contract Manufacturers 461
Development path 1:
Evolve through technical integration and business
re-engineering into an
Efficient Capacity Supplier
Process
supplier
Development path 2:
Evolve through business process integration into a
Super Customer Bonder
Development path 1:
Evolve through technical integration into a
Design Partner
Application
supplier Development path 2:
Evolve through technical and
business process integration into a
Strategic Partner
Table 1. (Continued )
The Efficient The Super The Design Partner The Strategic
Capacity Supplier Customer Bonder Partner
Cost efficient
technical execution
of specifications
(re-active)
Pro-active thinking
with customer
on technical issues
(offeringfunctionality)
Cost efficient
technical execution
of specifications
(re-active)
Pro-active thinking
with customer
on technical issues
(offeringfunctionality)
breakthrough market
value/cost performance
co-
Added value engineering
functionality+ product
value/cost performance
Original Equipment
Supplier Manufacturer-Contractor
system Co-
integration development
breakthrough market
value/cost performance
co-
Added value engineering
functionality+ product
value/cost performance
5. CONCLUSION
To make sure these market strategy changes have the desired effect, it seems
vital that the development path is followed ‘‘together’’ with the contractors,
so-called coevolution. A relational model was introduced to illustrate what
to focus on in each step of the ‘‘coevolution ladder.’’
The above analysis indicates that the market strategy transitioning path
toward value added is far from evident. Contract manufacturers in this
industry face a daunting task in upgrading their own resources/competences
and in coevolving with their partners. This case study has the potential to
enrich and contribute to different streams of literature. The paper
contributes to B2B marketing and strategic marketing theory by enhancing
the understanding of value addition through business model innovation in a
commoditized industry facing the backside of enduring arm’s length
relations and having difficulty of reaching constructive (and mutually
beneficent) collaboration. Thus, this study contributes to the integration of
the theories of service-based value addition (Ulaga & Eggert, 2006),
organizational alignment (Beer, Voelpel, Leibold, & Tekie, 2005), and
IMP-based notions of value creation through partnering and networking
(Möller & Törrönen, 2003; Helander & Möller, 2007).
5.2. Limitations
Like all studies, this one also has its limitations. The research focuses on the
metalworking industry, and the ideal types and development paths
suggested are thus valid only for this specific industry. They can neither
be generalized nor applied ‘‘copy–paste’’ in other industries. Nevertheless,
as a reviewer suggested, several industries nowadays are experiencing similar
threats and challenges, such as wholesaling, providers of textile machines,
chemicals, providers of tank storage, cargo and logistics services. In such
commoditized settings, suppliers seek to rethink their customer solutions
(Tuli et al., 2007) and move up the value ladder. Additional studies in such
industries are likely to result in similar models.
Another limitation of this study is that the model describes only the
dyadic relationship between contractor and contract manufacturer in the
model of coevolution and not the entire network. Modeling the entire
network was impossible to do for the metalworking industry as networks
and network pictures differ for each of the actors involved. A crucial
precondition for advancing along the development path, however, is to look
Value Creation Options for Contract Manufacturers 475
All practitioners seeking additional value creation can learn from this paper,
even if they come from other B2B industries. First, the four development
paths might inspire them and they can draw analogies. Second, the gap
analysis method might be applied also in their case. A comparison of intended
strategy to present competences is at the heart of an evolution toward value
addition. Third, the staircase model can be used by marketing and accounting
managers when developing account strategies for key customers. Relational
strategies can be optimized that way. Networks are inherently unstable and a
company also has to be careful not to fully focus on a certain contractor/path.
One must find a balance between commitment versus freedom to act, which
can be seen as an extra duality that needs to be managed.
ACKNOWLEDGMENTS
The authors thank Agoria, the Belgian technology federation, for their
valued support in realizing this study and the editors and anonymous
reviewers for their valued criticisms and suggestions.
REFERENCES
Beer, M., Voelpel, S. C., Leibold, M., & Tekie, E. (2005). Strategic management as organiza-
tional learning: Developing fit and alignment. Long Range Planning, 38(5), 445–465.
Dittrich, K., Jaspers, F., van der Valk, W., & Wynstra, F. (2006). Dealing with dualities.
Industrial Marketing Management, 35(7), 792–796.
Dubois, A., & Gadde, L.-E. (2002). Systematic combining – An abductive approach to case
research. Journal of Business Research, 55, 553–560.
Eisenhardt, K. M. (1989). Building theories from case study research. Academy of Management
Review, 14(4), 532–550.
Ford, D., & Håkansson, H. (2002). How should companies interact in business networks?
Journal of Business Research, 55, 133–139.
Ford, D., Gadde, L.-E., Håkansson, H., Lundgren, A., Snehota, I., Turnbull, P., & Wislon, D.
(1998). Managing business relationships. Chichester: John Wiley & Sons.
Ford, D., Gadde, L.-E., Håkansson, H., & Snehota, I. (2003). Managing business relationships
(2nd ed.). Chichester: John Wiley & Sons.
476 PAUL MATTHYSSENS ET AL.
Gebauer, H., & Friedli, T. (2005). Behavioral implications of the transition process from
products to services. Journal of Business & Industrial Marketing, 20(2), 70–78.
Golfetto, F., & Gibbert, M. (2006). Marketing competencies and the sources of customer value
in business markets. Industrial Marketing Management, 35(8), 904–912.
Helander, A., & Möller, K. (2007). System supplier’s customer strategy. Industrial Marketing
Management, 36(6), 719–730.
Hodgkinson, G. P. (1997). The cognitive analysis of competitive structures: A review and
critique. Human Relations, 50(6), 625–654.
Huff, A. S. (1997). Mapping strategic thought. New York: Wiley.
Jacob, F. (2006). Preparing industrial suppliers for customer integration. Industrial Marketing
Management, 35(1), 45–56.
Laukkanen, M. (1994). Comparative cause mapping of organizational cognitions. Organization
Science, 5(3), 322–343.
Matthyssens, P., & Vandenbempt, K. (2008). Moving from basic offerings to value-
added solutions: Strategies, barriers and alignment. Industrial Marketing Management,
37(3), 316–328.
Matthyssens, P., Vandenbempt, K., & Berghman, L. (2006). Value innovation in business
markets. Breaking the industry recipe. Industrial Marketing Management, 35(6),
751–761.
Möller, K., & Törrönen, P. (2003). Business Suppliers’ value creation potential. A capacity-
based analysis. Industrial Marketing Management, 32(2), 109–118.
Oliva, R., & Kallenberg, R. (2003). Managing the transition from products to services.
International Journal of Service Industry Management, 14(2), 160–172.
Orton, J. D. (1997). From inductive to iterative grounded theory: Zipping the gap between
process theory and process data. Scandinavian Journal of Management, 13(4), 419–438.
Patton, M. Q. (1990). Qualitative evaluation and research methods. Sage: California.
Penttinen, E., & Palmer, J. (2007). Improving firm positioning through enhanced offerings and
buyer–seller relationships. Industrial Marketing Management, 36(5), 552–564.
Pettigrew, A. (1992). The character and significance of strategy process research. Strategic
Management Journal, 13(8, Special Issue), 5–16.
Ploetner, O., & Ehret, M. (2006). From relationships to partnerships – New forms of
cooperation between buyer and seller. Industrial Marketing Management, 35(1), 4–9.
Snehota, I. (2003). Market-as-network; so what? Online available on http://www.impgroup.org
Spekman, R. E., & Carraway, R. (2006). Making the transition to collaborative buyer–
seller relationships: An emerging framework. Industrial Marketing Management, 35(1),
10–19.
Spender, J. C. (1989). Industry recipes: The nature and sources of managerial judgement. Oxford:
Basil Blackwell.
Tuli, K. R., Kohli, A. K., & Bharadwaj, S. G. (2007). Rethinking customer solutions: From
product bundles to relational processes. Journal of Marketing, 71(July), 1–17.
Ulaga, W., & Eggert, A. (2006). Value-based differentiation in business relationships: Gaining
and sustaining key supplier status. Journal of Marketing, 70(January), 119–136.
Vargo, S. L., & Lusch, R. F. (2004). Evolving to a new dominant logic for marketing. Journal of
Marketing, 68(January), 1–17.
Vollmann, T. E., Berry, W. L., Whybark, D. C., & Jacobs, F. R. (2005). Manufacturing planning
and control systems for supply chain management. New York: McGraw-Hill.
Value Creation Options for Contract Manufacturers 477
Wagner, S. M., & Hoegl, M. (2006). Involving suppliers in product development: Insights from
R&D directors and project managers. Industrial Marketing Management, 35(8), 936–943.
Weick, K. E. (1979). Social psychology of organizing. New York: McGraw-Hill.
Windahl, C., & Lakemond, N. (2006). Developing integrated solutions: The importance of
relationships within the networks. Industrial Marketing Management, 35(7), 806–818.
Woodside, A. G., & Wilson, E. (2003). Case study research method for theory building. Journal
of Business and Industrial Marketing, 18(6/7), 482–493.
Yin, R. K. (1994). Case study research: Design and methods. Thousand Oaks: Sage.