Executive summary and implications for managers and executives
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While the emergence and rapid expansion of value networks is generally regarded by businesses as a positive concept with advantageous practical and profitable benefits for their organizations, the consequent growth of business markets – in many guises – can hold dangers for the unwary.
Like most business challenges, those dangers can be overcome. However, before that happens you have to identify them and in the complex world of collaborative relationships that have dramatically altered the modes of economic organization in recent decades, they are often hidden in the puzzles that are relationship theory and practice.
A situation that is exacerbated by the vast array of different and sometimes contradictory definitions of relationship domains, which also hinders the development of relationship-related research.
Professor Dr Michael Kleinaltenkamp and Dr Michael Ehret help to make sense of these puzzles in their paper “The value added by specific investments:a framework for managing relationships in the context of value networks”,by evaluating the contribution of relationship related theories – giving a transaction related definition of customer relationship in order to distinguish between different kinds of relationships and to provide a framework of how relationship management is able to enhance marketing activities.
While recognizing that a coherent theory capable of uniting the divergent fields of relationship marketing and customer relationship management is still a distant goal, the interrelation of relationship-based approaches is beginning to be realized.
Kleinaltenkamp and Ehret say:
The most important step is to evolve contract-based theories of relationships in order to relate them with the value dimension of specific investments. Such an approach moves away from the established framework of contract-based theories, such as property rights or transaction theories. One valuable approach is based on the entrepreneurial theory of the company. In contradiction to established contractual theories, the entrepreneurial theory of the company focuses on the role of property rights in arbitrage processes, in contrast to the focus on costs associated with the administration of property rights typically portrayed by institutional economics.
Within such a framework, relationships would be perceived as an antecedent to the identification and realization of business opportunities or as a way to add value to the property rights owned by the company. Specific investments in relationships are then placed, in order to maximize the value of the property rights of the company.
A key component of relationship marketing is considering the emphasis of why the company exists; in other words asking if it exists to sell a product or satisfy a need. Is a drill manufacturer’s business to sell a drill or provide a customer with a hole? Accepting that less emphasis might be placed on how to sell a product, and more on how to create value for the customer and, in the process, for the company, is a key component of relationship marketing.
Keeping in mind that, to the customer, the product is just a means to improve their processes, interaction within the customer relationships enables a company to explore and define the elements of what they offer in order to maximize value for the customer.
Investments in relationships are the first step towards creating positive exchange, maximizing both value for the customer and profit for the company. The decisive characteristic of relationships, in this perspective, is that by investing in relationships, companies can improve their position and establish favorable market exchanges. As value creation stems from the customer process,previously unnoticed modes of resource use can enable entrepreneurs to identify and exploit profit opportunities based on improved customer processes.
Customer relationships enable the company to identify value propositions within the customer sphere, which can be translated into profit opportunities in the value network sphere. The profitable use of a company’s assets relies on the access to customers and the superior management of customer relationships.
Kleinaltenkamp and Ehret observe:
The differentiation between transaction based relationship concepts enables managers to understand the impact of their relationship-related investments to the value added to market transactions. One basic implication is that relationships necessarily involve specific investments. The decisive contribution from marketing activities is to direct these specific investments to differentiated offerings, creating customer value, which translates into cash-flows and profits for the company.
In industries showing a growing share of collaboration, suppliers are forced to up-front specific investments in R&D or customer specific knowledge in order to be perceived as a potential business partner by a customer. In such cases management is advised to relate these investments to the expected cash-flows. One way is to perceive the relevant level of marketing activity with respect to the transaction:investments should be placed in accordance with either the transaction, the customer relationship, the customer group or the value network.
For instance, a construction project company might invest in the acquisition of a project and relate its investments to the expected volume of the project contract. It might consider bidding for the continuing offer of facility management services within the finished building, which would justify and probably also require additional specific investments. When a company is targeting specific customer groups, it might invest in customers deemed unprofitable, when valued by expected cash-flows, because of reputation or word-of-mouth effects.
Kleinaltenkamp’s and Ehret’s observation that relationship marketing can take many forms is reiterated in the paper “The explanatory foundations of relationship marketing theory” by Shelby D. Hunt, Dennis B. Arnett and Sreedhar Madhavaram, who take the positive view that the variety of relationship marketing theory has the potential to increase our understanding of many aspects of business strategy.
They investigate three “why” questions:
- 1.
Why is relationship marketing so prominent now?
- 2.
Why do firms and consumers enter into relationships with other firms and consumers?
- 3.
Why are some efforts at relationship marketing more successful than others?
The prominence of relationship marketing is due not just to the rise of services, technology, and information-oriented firms, but also to the rise of strategic network competition. This competition, which involves independently owned and managed firms agreeing to become partners within a network, emphasizes the importance of interfirm co-operation as a means to compete successfully with other networks. To be successful (both individually and as a network), the firms in a strategic network must become proficient at relationship marketing.
Additionally, relationship-marketing theory implies that consumers enter into relational exchanges with firms when they believe that the benefits derived from such exchanges exceed the costs.
Hunt et al. identify those benefits to include:
the belief that a particular partner can be trusted to reliably,competently, and non-opportunistically provide quality market offerings;
the belief that the partnering firm shares values with the consumer;
the customer experiences decreases in search costs;
the customer perceives that the risk associated with the market offering is lessened;
the exchange is consistent with moral obligation; and
the exchange allows for customization that results in better satisfying the customer’s needs, wants, tastes, and preferences.
The costs include:
the premature exclusion of market offerings from other firms that might potentially be superior;
the monetary and time costs of co-production;
the decreased prices that might result from accepting standardized market offerings; and
the increased potential vulnerability of the consumer to the partner’s opportunistic behavior.
They argue that firms engage in relationship marketing because it increases their competitiveness. In other words, they do so when relationships contribute to the firm’s ability to efficiently/effectively produce market offerings that have value for some market segment(s). It is envisaged that those relationships will evolve into relational resources with the potential to improve the firm’s marketplace position and financial performance.
Firms enter into relational exchanges with individual customers when, as a result of the relationships, firms are better able to develop market offerings that are customized to the tastes and preferences of the individual consumers. Firms enter into strategic alliances with other firms when the relationship between the firms results in the acquisition or development of complementary and/or idiosyncratic resources. Firms enter into relational exchanges with non-profit organizations when it is likely to increase the value of the firm’s market offerings to consumers – and so on.
Formally speaking, a network is a group of independent firms that agree to be partners rather than adversaries. Because each partner’s individual success is tied to the success of the overall network, they actively pursue common goals. They engage in cooperative behaviors and coordinated activities in such areas as marketing, production, finance, purchasing, and R&D. Although each firm is independently owned, the extent of cooperation and coordination among them is so great that company boundaries become blurred.
Hunt et al. say:
Network competition best describes the current situation in the auto industry. Ford no longer just competes with Nissan and Volkswagen; rather Ford and all its partners compete with Nissan and its partners and Volkswagen and its partners. Although, arguably, not as far along as the auto industry, competition in such industries as computers, communications, and consumer electronics increasingly is leaning toward a network orientation. Firm after firm is turning from discrete, short-term, arms-length exchanges with large numbers of suppliers toward long-term, relational exchanges with a smaller number of partners.
When independent organizations, as Hunt et al. note, agree to be partners rather than adversaries, they free themselves to act with more flexibility in reacting to changing circumstances. Rather than establish comprehensive plans for joint action (complete contracts), they prefer, says Bjorn Sven Ivens in his paper “Norm-based relational behaviors: is there an underlying dimensional structure?”, to form common goals in a rather rough and open manner which allows that flexibility.
To replace the rigidity that has been discarded, the acceptance of and adherence to certain modes of behavior – relationship norms –reduces the risk of disharmony among the partners. Norms such as long-term orientation, role integrity, relational planning, mutuality, solidarity,flexibility, information exchange, conflict resolution, restraint in the use of power, and monitoring behavior.
Whatever the definition that is given to these labels, they are clearly stated expectations of a high level of cooperation, respect and trust among the partners. In addition to laying out a foundation for agreed, acceptable conduct and expectations, Ivens says:
They represent reference points for evaluating the behavior an actor actually shows in a given situation. They permit judging the conformity of a party’s actions with established standards.
Knowing about the existence of governance norms and their effects is one important issue in relationship marketing. But companies wishing to use them as principles that govern their customer-directed policies need to understand how they differ from one another,and to what extent they may overlap and how that might have a bearing on their particular relationship.
Testing such norms among companies in the packaging industry and in market research – two sectors in which long-term relationships play an important role – Ivens says common wisdom among managers in the B2B field holds that buyers mainly rely upon hard factors (e.g. price) when evaluating business relationships. The results obtained in his study, however, clearly indicate that customers’ perceptions of supplier behavior have a strong impact on important relationship goals such as satisfaction, trust and commitment. Hence,marketers should adopt a broader view of what determines customer perceptions of utility in a relationship.
One explanation of why practitioners as well as academics find the norm concept confusing may be its lack of structure, but Ivens believes that categorizing norms may be possible and policies made which integrate current knowledge of norm-based behavior into customer management.
He says:
Customer managers, such as key account managers, area sales managers and the like, would have to analyze their customer portfolio and decide which behaviors to show in which relationship.
Because customer relationships are important for companies’ economic success, and because relational behaviors influence the success of customer relationships, senior management should accompany the process of designing behavioral policies. Furthermore, leading managers’involvement in this process may be required because the degree to which customer managers can show certain relational behaviors depends upon the support they receive from colleagues in other functions.
Ivens says:
Consider, for example, flexibility. Aspects such as production quantity, date of production, or place of delivery must be seen in the light of company-wide processes. Hence, the degree of flexibility the sales manager can offer his customer is the result of inter-functional coordination that is often facilitated by clear statements from top-level managers.
He notes that relational approaches to value claiming, such as restraint in the use of power,informal and flexible conflict resolution approaches, or monitoring the long-term balance of both parties’ inputs into the relationship rather than transaction-by-transaction verification positively influence the customer’s perception of relationship quality.
The stronger lever for relationship quality, however, lies in suppliers’efforts to enlarge the pie both parties can share. Suppliers showing behaviors such as flexibility or information sharing are highly appreciated by their customers because they create added value for the customer. This value comes from a gap deliberately created between obligations from written or oral agreements and actual behaviors.
When being flexible or when sharing confidential information, suppliers usually go beyond what customers may expect based upon formal agreements. In order to obtain comparable value outside the relationship, customers might have to spend important amounts of money or time.
Ivens warns, however, to handle with care. He observes that situational factors, such as the power relationship between the parties, the duration of the relationship, the level of uncertainty surrounding the relationship or specific investments made, might moderate the effect of his observations of the industries he studied.
Although goodwill towards partners in a relationship, adherence to the values enshrined in the norms of behavior, and actions that are wholly trustworthy can provide value for all, there must also be a strategy for self-protection if your trustworthiness is not reciprocated.
Professor Dr Frank Jacob and Dr Michael Ehret say:
Unfortunately there are no means to outwardly detect an actor’s opportunistic motivations. Therefore, the mere existence of some black sheep can motivate a good-willing actor to assume that all other actors act opportunistically.
In their paper “Self protection vs opportunity seeking in business buying behavior – an experimental study” they say:
Entrepreneurial theory states that companies are built on arbitrage opportunities. Companies generate revenues by exploiting price differences between different market stages and value-add activities. In this framework, the emergence of relationships can be viewed as a way for a supply side market actor to actively influence his customer’s arbitrage positions.
The most significant difference between business buying and consumer buying situations is their purpose. While consumer buying aims at final consumption, business buying aims at feeding a value chain. In a business customer’s value chain, value generation by suppliers can manifest itself in a cost reduction or preference formation. Two critical areas for value generation by suppliers can be identified:
- 1.
Suppliers can directly influence the preferences of their customers’customers or the price of these offerings, as is the case in pure arbitrage situations dominantly sought after by retailing companies.
- 2.
Suppliers can influence the process quality as well as the process costs of their direct customers, effectively addressing production stage arbitrage opportunities typically sought after by manufacturers or providers.
The authors contrast “self protection” and “opportunity seeking” as two alternative explanations for buying behavior in business markets. They note that theories of new institutional economics (looking at relationships built up to overcome the uncertainty which a potential customer perceives in a market transaction) and of market process theory which claims that once competing suppliers offer superior value, entrepreneurial buyers will quickly act to take advantage of added value. In this case the manager of the supply firm should focus on offerings that comply with the “opportunity seeking” need of his customers.
New institutional economics (NIE) assumes that any market partner will act opportunistically as soon as he can do so. In NIE transactions only take place if there is perfect protection from one’s partner’s propensity to cheat. Economic activities consist of selecting that kind of institutional arrangement that offers perfect protection from this threat at the lowest level.
Market process theory (MPT) deviates from the NIE position in that management of uncertainty is not conceived as the primary factor influencing the design of transactions. For instance, partners might put up with a certain amount of risk by saving on transaction costs.
In contrast to new institutional economics, the primary rationale behind business buying behavior based on market process theory would state that the customers have to be alert. They need to actively search for opportunities arising in the course of transactions. The advice for planning the selling process would then be to offer buyers opportunities and to clearly communicate the benefits of these opportunities.
MPT and NIE come to conclusions that are somewhat contradictory; only under very specific circumstances can economic actors pursue the rationale of complete self-protection and the rationale of alertness simultaneously. NIE recommends defensive action while MPT supports a more offensive stance for decision makers. Jacob and Ehret introduce a third theoretical framework – prospect theory– in an attempt to resolve the contradiction.
Prospect theory assumes two stages of decision behavior of economic agents. First decisions and consequences are disassembled (“editing” and“framing”). The decision maker defines a point of reference for all possible outcomes of a decision and categorizes all outcomes as either gains or losses with respect to this point of reference. During the second stage (“evaluation”)all consequences are evaluated based on gains and losses as well as their probabilities. Basically, prospect theory supports the assumption that a decision maker has different preferences for gains and losses depending on the decision context. Prospect theory would, therefore, offer sales and market managers a much broader set of policy options than the new institutional economics framework.
Jacob and Ehret say:
In its initial stage business buying behavior analysis based on prospect theory could provide marketing and sales managers with a basic understanding of economic motivations influencing the actual decision process of customer firms. Thus, an understanding of business buying behavior would facilitate the development of successful marketing programs. If customers are found in a“gain” situation, i.e. out-performers, the best advice for marketing managers would be to develop trust building programs. If customers are found in a “loss” situation, i.e. under-performers, marketing managers should rely more on advertising the opportunities arising from their offerings to their customers.
As the reduction of vertical integration tends to favor suppliers able to engage in collaborative relationships, the above and other relationship related concepts are variously developed and applied in what Kleinaltenkamp and Ehret describe as “this challenging transformation of business markets.”
(A précis of the special issue “Relationship theory and business markets”. Supplied by Marketing Consultants for Emerald.)
