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Executive summary and implications for managers and executives
Article Type: Executive summary and implications for managers and executives From: Journal of Business & Industrial Marketing, Volume 23, Issue 4.
This summary has been provided to allow managers and executives a rapid appreciation of the content of the issue. Those with a particular interest in the topics covered may then read the issue in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefit of the material present.
As partnering and sustained relationships increasingly become bywords for good and mutually beneficial business practice, and as both B2B buyers and sellers recognize the added value which can ensue from working together in a relationship, it is necessary for practitioners to have an easy-to-understand conceptualization and framework in which to make decisions.
Such a framework is the result of James Barry’s and Tamara S. Terry’s “Empirical study of relationship value in industrial services” which tests determinants and outcomes of relationship value relevant to global industrial services for the purposes of the study, industrial after-sales service of aircraft components.
While researchers and practitioners talk in terms of switching costs, cost advantage, core benefits, sourcing benefits, affective commitment and economic and strategic relationship values, and put them in context, those at the sharp end of the service buying business use a more forthright language to demonstrate the same concepts: “We need answers within hours”, “We look for suppliers that know how to return an aircraft to service”, “We don’t want our fate to be in their hands”, “We are looking for suppliers that are easy to do business with and are willing to adjust their terms. Now and then I need an emergency turn time on repairs”, “It all comes down to best value, where we look at total life cycle costs”, “They come here in droves during proposal time and then disappear until the next major procurement. We need vendors that work with us every day”.
In other words buyers are influenced not only by the transfer of services, but with the value of interaction with their service providers. The benefits weighed against the costs of a relationship frame the buyer’s choice to either maintain or withdraw from future interactions with their service provider. In the particular case of industrial services, buyers will rationalize the value gained from their relationships as a way to streamline their vendor programs and weed out unprofitable relationships. These evaluations often transcend beyond economic assessments into the strategic aspects of the relationship.
The key to building sustainable value is for service providers to balance aspects of the offer with that of the relationship itself. Service providers must be in tune with buyer tensions and their perception of relative cost savings including those incurred from switching suppliers. Moreover, suppliers should administer their own scorecards on work performance, responsiveness in handling requests, and willingness to be flexible.
And just as buyers form cognitive judgments of the service provider’s perceived value to their organization, they also form affective attachments from the commitment shared with their suppliers.
Barry and Terry’s examination of value from a relational perspective is especially relevant to industrial services because of the personal contact between parties. It offers a model of high explanatory power that predicts relationship value from the standpoint of the relational behaviours of service providers.
The intangibility of service attributes often emerges over several transactions from which the buyer can predict future performance. Consequently, buyers of services are more likely to seek longer-term partnerships than those in the market for goods. Despite the major distinction of tangibility between goods and services provision, both have in common the drive to reduce suppliers in their search for efficiencies, risk sharing and value creation.
Buyers examine “hard” and “soft” quality evidence of what they expect to achieve, and how i.e. buyers seek confirmation of capabilities and competence. The study treats relationship value as a higher-order construct that begins with economic value and proceeds to strategic (goal-oriented) value.
Behavioural outcome was found to be largely influenced by the perceived value of the relationship and the buyer’s affective commitment to the provider. Also, relationship value has a strong influence on commitment, lending credence to the mediating influence commitment has on relationship value and intentions. This also resonates with relationship marketing literature suggesting that a buyer’s cognitive assessment of value precedes affective attachments.
Strong support was shown for the impact that work performance has on relationship value, and support is also shown for the impact that sourcing and operational benefits have on relationship. This confirms the relevance of “soft” aspects of relationship value such as personal interaction, service efficiency and reliability, business understanding and flexibility. While buyers calculate the comparative cost savings from selecting one supplier over another, similarly there is some evidence that switching costs do in fact serve as an exit barrier that ties buyers to the service provider.
Buyers, it is suggested, consider the costs of starting up new supplier arrangements when considering long-term relationships. Buyers examine costs of switching much like opportunity costs. To ignore these costs, buyers would essentially be underestimating the buyer savings from sticking with their incumbents (i.e. relationship value would be understated).
A further contribution of this study is that it supports recent findings that relationship value encompasses more than simply an economic but also a strategic dimension.
While maintaining competitive advantage is a highly desired and anticipated consequence of relationship value, it is widely acknowledged that, for many firms, new product development is key to both gaining and sustaining such advantage as a means to growth, profitability and survival.
To compete more effectively in this critical activity, firms are collaborating more actively with global partners and drawing on resources that are often geographically dispersed. Furthermore, advances in technology are allowing them to interact with business partners in new, cost-effective ways (i.e. extranets and mobile technologies).
These changes are fuelling the emergence of virtual teams (i.e. teams that use technology to work across locational, temporal, and relational boundaries). Given the advances in communication technologies, and the complexities involved in organizing face-to-face interactions among new product development (NPD) team members, firms are recognizing the value of “going virtual”.
Bearing in mind the scarcity of insight into such teams in the literature, Vishag Badrinarayanan and Dennis B. Arnett’s “Effective virtual new product development teams: an integrated framework” is beneficial in that it develops a conceptual framework to outline key factors influencing NPD team effectiveness. The need for systematic research on virtual NPD teams comes against a background of:
the success rate of even traditional, co-located teams being low, with just 5 per cent of them meeting desired performance goals;
failure rates in NPD teams remain high because of misapplication and mismanagement; and
given the unique challenges that virtual interactions entail, managing virtual teams is more complex than managing co-located teams.
According to the framework, the nature and frequency of communication in virtual NPD teams fosters the formation of relationships among team members, promotes knowledge acquisition and integration, and facilitates interpersonal networking among the team members. These, in turn, have a direct bearing on the virtual team climate. That is, they affect the quality and speed of product development decisions. Ultimately, team climate enhances NPD effectiveness, which is characterized by creativity, innovativeness, and speed.
An important antecedent to effective teams is the development of this constructive team climate one that allows teams to more easily perform their assigned tasks. Two factors decision quality and decision speed are important indicators of a desirable team climate, decision quality being team members’ confidence in the decision outcome and their perceptions of the usefulness of the decision outcome, and decision speed the time a team spends finding and implementing solutions.
Success results from both the resources that the team members bring to the team and the resources that are developed within the team over the course of time. Pooling resources allows the team to develop new ones, called idiosyncratic resources, comprising both tangible features (e.g. the development of new computer software) and intangible features (e.g. efficient processes for functioning as a cohesive team).
Although a fundamental advantage of virtual NPD teams is that members can take part in projects regardless of where they are based, this in itself can cause problems not least the shifting work hours to overlap with team members in other time zones, and a risk that the lack of physical proximity can result in little direct contact. If members are from different countries, there is also the risk that cultural differences may adversely affect communication and cohesiveness.
Virtual teams rely heavily on advanced information technology (which can change rapidly) to synchronize communication and collaboration. As a result, virtual team members, more so than traditional team members, must master current technologies and develop an ability to integrate newer technologies as they are developed.
As important as positive relationships and high trust are in all teams, they are even more important in virtual ones. The lack of daily face-to-face time, offering opportunities to quickly clear things up, can heighten misunderstandings. For many distributed teams, trust has to substitute for hierarchical and bureaucratic controls.
Relationship commitment is at the core of all successful working relationships, and among virtual NPD teams, should provide members with a solid base from which additional characteristics important to the development of relationships can be built upon (i.e. social norms). Consequently, higher levels of relationship commitment and within-team trust in virtual NPD teams are expected to foster greater degrees of decision quality and decision speed as are connectedness and social integration.
Research suggests that frequent and predictable communication among virtual team members improves coordination. Many virtual teams are only moderately, and not completely, virtual as they might intersperse direct face-to-face interactions with technology-aided communication to either initiate and complete tasks or for socialization purposes. Personal contact and socialization, especially during team formation stages, could potentially aid the formation of closer personal connections.
The authors concede that there is still much to be known about effectively managing virtual teams. One suggestion for future examination is the role of team leaders and their mentoring qualities.
Few would doubt that, when firms are considering competitive advantage, the ways in which they can satisfy their customers over periods of time, how they can influence their customers’ perceptions of satisfaction, and how they can ensure their loyalty, are vital considerations.
Also key to achieving those objectives, particularly when customers seek service and support, is the role of the employee. After all, isn’t it often the front-line employee who is the only “face” of the organization that the customer might ever see, and the person upon whose shoulders much of the company’s reputation and longevity depends?
But what happens if the customer suddenly finds these skilled employees have become a bit thin on the ground due to “downsizing”/“streamlining”/“cost-cutting” at the organization, and that those that have escaped the lay-off are expected to spread themselves more thinly?
If there is simply less time for the remaining employees to spend sorting out each customer’s query, are those customers getting the satisfaction they expect, or have they ended up with a poor deal? What are customers who have been promised the value-added services by which an organization tries to differentiate itself from a competitor to think if they discover that the most experienced sales and support personnel who were to have provided them have gone?
No guessing what a competitor will be thinking if it notices that its downsized rival supplier is finding it difficult to give the service it did when it had a bigger payroll. All this against the significantly increased importance over recent years of industrial suppliers’ service and support personnel in the face of the availability of acceptable substitutes for many traditional industrial products.
In their paper “The impact of supplier downsizing on performance, satisfaction-over-time, and repurchase intentions”, Jeffrey E. Lewin and Wesley J. Johnston find that downsized suppliers tend to be doing a significantly poorer job of satisfying business customers. Those customers, more satisfied with their non-downsized suppliers, are more likely to continue to purchase from these suppliers into the foreseeable future. The authors cast doubt not only on the benefits organizations hope to gain from downsizing, but also question the validity of the reasons for taking such action in the first place.
While some organizations are forced into downsizing as a “last option”, healthy firms have been systematically ridding themselves of employees as a proactive strategy to continually reduce costs. Critics, however, argue that downsizing has serious negative effects, including decreases in employee morale, increases in employee workloads, fatigue and turnover, and decreases in the organization’s ability to learn and adapt as a result of disruptions in informal communication networks. Furthermore, given the disparity between the anticipated gains and a growing body of empirical evidence indicating that most firms are not realizing these expected gains, downsizing has become a dubious and risky practice especially dubious in that present-day downsizing decisions may not be so much related to economic considerations as they are related to socio-cognitive organizational schemas that view downsizing as effective, necessary and inevitable, even if the consequences for the organization are uncertain.
Lewin and Johnston, whose study questioned purchasing professionals from a wide range of industries about their suppliers, conclude: “In those cases where downsizing cannot be avoided, carefully planning for all contingencies of the downsizing initiative is critical”.
For example, where possible, it may be advisable to be selective in choosing which functional units are downsized, and to avoid “across-the-board” cuts in personnel. This may be especially salient when considering cuts in sales, service, and support personnel. Also, when cuts in these customer-sensitive areas cannot be avoided, it is crucial to develop strategies to minimize the negative effects both for employees who have survived the job losses, and for customers. For example, downsizing firms will want to ensure that survivors have the training and resources they require to maintain desired levels of customer service and support.
In addition, while monitoring customer satisfaction is always important, it becomes significantly more important when customer support personnel are eliminated. Management throughout the organization should pay careful attention to shifts in customer satisfaction ratings and make requisite adjustments to policies and practice in an attempt to avoid customer defections.
On the other hand, from a competitor’s perspective, customers of downsizing firms may become attractive targets. As these customers become increasingly dissatisfied with their downsized supplier they will become more receptive to competitive proposals, especially from those competitors they perceive as having the ability to perform well in various areas of customer service and support. These opportunities may take time to emerge, but patient competitors are likely to be rewarded with new business they might otherwise not have received.
While partnering and sustained relationships among industrial channel members and the strong link between customer satisfaction, loyalty and profit are the focus of much good business practice, there is a business relationship which has its own unique possibilities and pitfalls that of the franchisor and the franchisee.
These interdependent partnerships with relational exchanges bounded by contractual agreements account for a huge number of businesses (it is said that about one in ten US retailers is a franchise), including fairly modest enterprises and also globally recognized household names. In such a partnership the role of both franchisor and franchisee is essential to achieve sustainable profitability, with the former setting performance standards, managing brand image and economic efficiencies, and also having the power to terminate the agreement.
However, the profitability of the franchisor is very much dependent on the effectiveness and success of the franchisee. The consequent importance of considering the relationship from the standpoint of the franchisee prompts Tracy R. Harmon and Merlyn A. Griffiths to develop a conceptualization of franchisee perceived relationship value (FPRV), which they describe as “the trade-off between perceived net worth of tangible and intangible benefits and costs to be derived over the lifetime of the franchisor-franchisee relationship, as perceived by the franchisee, taking into consideration the available alternative franchise relationships”.
In their paper “Franchisee perceived relationship value” they say: “If the franchisee perceived value of this alliance is unbalanced, dissatisfaction, conflict and poor performance could ensue. Thus understanding relationship value as perceived by the franchisee and implications on both behavioral and objective franchisee performance is necessary”.
Most franchises attempt to standardize and regulate behaviour while maintaining entrepreneurial initiative and energy, providing perhaps a unique context in which to investigate value. Franchisor action is ultimately driven by the desire to maximize profitability while maintaining a high degree of control, but the overall success and sustainability of the partnership depends on perceptions of each other’s value not to mention issues such as trust, and the ability to adapt to any hanged circumstances.
The authors’ conceptualization proposes that franchisee perception of franchisor role integrity, flexibility, mutuality, solidarity, and restraint in the use of power all directly relate to the franchisee’s perceived relationship quality. Furthermore, the franchisee’s perception of relationship satisfaction and of relationship trust relate directly to the franchisee’s perceived relationship benefits. The franchisee’s perception of franchisor relationship commitment directly relates to the franchisee’s perceived relationship benefits, and franchisees who have greater trust in the franchisor will be more committed to the franchise relationship.
Franchisee perceived relationship benefits are positively and directly related to perceived relationship value; franchisee perceived relationship costs are negatively and directly related to perceived relationship value; franchisee perceived relationship value is directly related to franchise behavioural outcomes; franchisee perceived relationship value will be positively related to franchisee loyalty and overall satisfaction; Franchisee perceived relationship value will be negatively related to relationship dissolution, opportunism, shirking, and manifest conflict; and franchisee perceived relationship value will be positively related to financial performance outcomes.
As far as flexibility is concerned, it is probable that at least one party in the exchange will feel the need to adapt parts of the original agreement after a time, and inflexibility by either party will result in dissatisfaction and conflict. The attitudinal disposition of mutuality deters either party from maximizing individual benefits to the detriment of the other. As for solidarity, the degree to which it is expressed in a relationship signifies the importance that actor puts on the long-term orientation of the relationship (a notable demonstration of a lack of solidarity was when a well-known global franchisor initially distanced itself from the actions of its franchisees in a bitter and violent dispute for union recognition).
A franchisor’s restraint in using its power to take advantage of a franchisee in a bargaining position might seem counterproductive, as it might eventually weaken the franchisee’s ability to perform. It would also seem in the franchisor’s interest to do all it can to ensure job satisfaction. That, along with relationship satisfaction, benefits overall franchise relationship quality and enhances franchisees’ performance.
As with job satisfaction, trust in the relationship is important. As franchisees sometimes misinterpret a franchisor’s motives for making certain decisions, communication is needed to establish mutual trust. For trust to have a lasting effect, it must influence attitudes and behaviours of both parties, specifically through relationship commitment. Such commitment is operationalized as the franchisor’s commitment to the franchisee. To the extent the franchise believes the franchisor will be open and honest, relationship uncertainty is reduced.
Franchisees who believe the franchisor is concerned about their best interests will feel less threatened about their livelihood as the franchisor balances profitability and franchise revenue in the face of variable demand.
Keeping track of an organization’s relationships with its customers has developed into a science all of its own with concepts such as customer data management, database marketing, customer segmentation, analytical customer relations management, and customer information systems becoming familiar terms to managers.
The problem is that some organizations might not know what to do with the information they hold, or have the potential of gathering which is about as much use as giving an expensive, top-of-the-range spanner to a workman who hasn’t a clue how to use it.
In “Successful B2B customer database management” Debra Zahay says managers seeking to understand how to effectively develop customer databases need more details, particularly on data quality, which data to collect, and how to share it in the organization.
In terms of specifically defining how customer information can be used as an organizational asset, marketing orientation capabilities, with their emphasis on the generation, dissemination and utilization of market information as well as good cross-functional communication throughout the organization can provide some guidance.
However, knowledge about what specific types of customer information and customer information management activities create advantage is somewhat vague. It is known that differences exist between firms due to the implementation of CRM systems which have a substantial customer database component, but these differences are smaller than would be expected given the widespread acceptance of CRM as a customer information management practice.
In a series of studies of B2B firms to find out what distinguishes those that manage customer information well, and what internal processes are necessary to success, one outstanding organization spoke an entirely different language than the others. At all levels, says Debra Zahay, people in the organization referred to terms such as retention rate, lifetime customer value and customer knowledge with ease and a shared understanding throughout the firm.
Managing customer information well to create value for customers is complex and should be an evolving task in the firm. The studies supported the existence of the learning processes that comprise customer information management practices, the role of strategy selection in customer information management and performance, and the importance of the management of relational data and overall data quality processes. Organizational factors such as teamwork and vision and the overall trust/data quality relationship are necessary to manage customer information well in B2B firms.
The primary asset relevant to customer information management is the marketing or customer database. If marketing assets are resources that the firm has acquired that can contribute to firm advantage, then clearly a marketing database, in addition to other intangible assets, must be counted a resource that can convey advantage. Equally, the individuals who work on the databases and maintain their structure and content can also be considered to be assets to the firm.
These human resources work to turn customer data into valuable information that can be processed internally. The success of this transformation process is in part a function of the quality of information available within the organization, how well the collected data draws from multiple functional areas, how well the organization communicates and shares information, and overall information quality.
However there are some wide discrepancies and food for thought for managers in the comparisons shown in the studies of the principles employed by the ideal company versus the more typical firm. For instance:
Establish quality standards. Organization speaks the language of data quality and quality data are an organizational priority, with processes in place to manage. (In reality companies complain about data quality but have no processes to manage data and to create quality.)
Use data to create value. Organization selects strong competitive strategy and develops customer information management capability to support. (In reality, many firms have no strategy or an average customer information management capability.)
Involve functional departments. Functional areas, particularly marketing, are involved in the development of data warehouse and applications. Marketing and IT areas work together to manage customer information. (In reality customer information management is the responsibility of each functional area.)
Use relational and transactional data. Company is organized to integrate data, as the highest form of knowledge management, using appropriate systems; relational as well as transactional data are emphasized. (In reality informational “silos” and multiple systems abound and not all systems can talk to each other; no central data repository or way to access data, emphasis is on integration of transactional data.)
Use data to create future value. Information about the customer from information systems as well as other sources is integrated into the new product development (NPD) effort, often held in a single repository. (In reality customer data are scattered throughout the organization and not integrated into NPD efforts).
Organize for success. Company uses a dedicated team, middle management plays a key role translator, top executives in turn support effort. (In reality a team may be established but is not dedicated; top management has little understanding of the need to manage customer information in the organization.)
An intriguing B2B relationship is that of manufacturers who, in addition to supplying their own branded products to the retailer, also supply the retailer with products which can be sold as “private” labels (or “store” or “own brands”).
Store brands now account for one of every five items sold in US supermarkets, drug chains and mass merchandisers, represent more than $65 billion of current retail business and are achieving new growth levels every year.
Retailers’ benefits are obvious. Even when additional merchandising and inventory costs are taken into account, private labels can have up to 20-30 per cent wider gross margins than manufacturer brands. Feedback on sales is faster allowing a quicker response to market changes, and they generate brand awareness and consumer loyalty throughout the store, while differentiating the store from the competition, enhancing the retailer’s negotiating position with suppliers and offering a higher degree of strategic flexibility and control for the retailer. Manufacturers’ benefits are far from obvious, especially for those who sell their own brands but also make retailer brands competing against their own. So why do they do it?
Asking the question “Why do leading brand manufacturers supply private labels?”, J. Tomas Gomez-Arias and Laurentino Bello-Acebron say there is more to it than commonly voiced arguments that manufacturers have an incentive to supply private labels in order to fill idle capacity; that the use of private labels is a buffer between leading brands and follower brands; and that supplying private labels has been justified in terms of the increasing power of retailers who condition the purchase of branded products to the supply of private labels or make it part of a wider collaborative effort.
Instead, they show that the production of private brands by brand-name product manufacturers can be explained exclusively by the strategic interplay of manufacturers and retailer, with results indicating that:
a high-quality manufacturer will make a private label only if the retailer positions it as a premium private label;
a low-quality manufacturer will be willing to make a store brand, independently of its positioning;
if the retailer positions the store brand below the low-quality brand, the low quality manufacturer will price it out of the market;
a low quality manufacturer who makes a store brand positioned between the existing brands will drop his own brand and become a private-label specialist; and
the retailer will choose the high-quality manufacturer to make a premium store brand.
At first sight it would seem that the best course of action for the high-quality manufacturer is to yield to pressure from a retailer to manufacture a private label in an effort to avoid third-party encroachment into his market share. The authors’ economic model, however, suggests otherwise. In the case of a high-quality manufacturer, the pressure posed by the threat of entry by another manufacturer is strongest when the store brand enters the market as a premium private label at a quality level above the high-quality brand because the store brand would compete directly with the high quality brand, but not with the low quality brand, and the low-quality manufacturer can be very aggressive in its private label pricing knowing it will have a very small effect on sales of its existing brands.
Conversely, if the store brand enters the market between the quality levels of existing brands (a traditional private label) or below the low-quality brand (a generic), the low-quality manufacturer cannot be very aggressive in pricing the store brand because it would cannibalize its own brand. In fact, the model shows that a high-quality manufacturer’s profits are higher if it allows the low-quality brand manufacturer to make the private label rather than making it himself. So the high-quality brand manufacturer is better off making the private label when it is a premium private label, but not when the retailer launches a traditional private label or a generic. The managerial implications are clear: a high-quality manufacturer should make a private label only if the retailer positions it as a premium private label, and not for generic or traditional private labels.
For the low-quality manufacturer, the threat of entry from another brand is strong independently of its positioning. The model shows that when the store brand enters below the low-quality brand as a generic, the competition is so direct that, given the chance to make the store brand, the low-quality manufacturer should drop its prices low enough to make the generic product unprofitable for the retailer.
Manufacturers of brand name products clearly have a strong incentive to make private labels, whether their brands are perceived in the market as high quality or low quality.
(A précis of the special issue “Selected papers from the B2B Track of the 2006 Academy of Marketing Science Conference”. Supplied by Marketing Consultants for Emerald.)