Download Customer relationships and the heterogeneity of firm performance

Customer relationships and the heterogeneity
of firm performance
Kaj Storbacka and Suvi Nenonen
Hanken School of Economics Finland, Helsinki, Finland
Abstract
Purpose – The purpose of this paper is to examine how, taking customer relationships as the unit of analysis, the heterogeneity of customer
relationship performance influences the heterogeneity of firm performance, and how firms can balance the heterogeneity of customers, customer
relationships, and customer portfolios by differentiated business models.
Design/methodology/approach – The approach to the topic is one of theoretical analysis and conceptual development.
Findings – Value capture is defined as the discounted present value of all future economic profit from the relationship. Three sources of value capture
heterogeneity are identified: the customer, the relationship with the customer, and the interdependence between customers in a customer base.
Relationship performance can be improved by investing in business model differentiation, in order to facilitate controlled adaptation to specific
customer relationships and/or customer portfolios. Firms have to manage parallel business models and a central capability is the ability to create
internal fit between the elements of a specific business model.
Research limitations/implications – The research presented relates to business-to-business customer relationships. Some of the conceptual thinking
will not be applicable in consumer relationships.
Practical implications – A firm should have an optimum mix of customer relationships in its customer base, in relation to firm goals and strategy.
Management needs to recognize the heterogeneity of customer relationship performance, and manage customer portfolios accordingly. In order to deal
with the heterogeneity, it may be necessary to manage parallel business models. This will necessitate new capabilities, such as customer insight
generation, account management, modularized production platforms, and relationship performance control.
Originality/value – For a scholarly audience the paper contributes to the discussion on how marketing improves firm performance by assuming
responsibility for increasing firms’ market value. For a practitioner audience it offers ideas for genuinely customer-centric management.
Keywords Buyer-seller relationships, Organizational performance
Paper type Conceptual paper
resources that contribute to performance in the form of
competitive advantage. Researchers have argued that
resources that are valuable, rare, inimitable, and nonsubstitutable, create the foundation for sustainable
competitive advantage (Barney, 1991; Conner and Prahalad,
1996; Peteraf, 1993). Hence, RBV assumes resource
heterogeneity between competing firms, and further that
these resources are not mobile, which makes long term,
sustainable competitive advantage possible based on internal
configuration of strategically relevant resources. Priem and
Butler (2001) note that the value of any firm resource is
ultimately determined by demand-side characteristics. This
indicates that the effectiveness of the firm’s strategy will be
dependent on exogenous factors – primarily customers.
A shortcoming in the RBV literature is that it “views the
firm as the primary unit of analysis” (Dyer and Singh, 1998,
p. 660), and seldom acknowledges that “a firm’s critical
resources may span firm boundaries and may be embedded in
inter-organizational practices”. The value of relationships has
been recognized by researchers within the industrial
marketing and purchasing group (IMP). Håkansson (1987)
argues that relationships are one of the most valuable
resources that a firm possesses. Ritter et al. (2004) conclude
that they provide benefits in terms of the functions they
perform and the resources they help create and provide access
to, including knowledge and markets.
The role of customers and customer relationships in value
creation is accentuated as we move from a productiondominated, “inside-out”, value chain paradigm towards a
1. On the heterogeneity of firm performance
A key ingredient of a theory of the firm is its ability to explain
performance heterogeneity among firms – an issue that has
been in the focus of strategic management research over the
years. There have been many different approaches to explain
heterogeneity. Early work in strategic management discussed
both internal strengths and weaknesses of the firm, as well as
external issues related to opportunities and threats in the
market space (Ansoff, 1965).
The competitive strategy school (Porter, 1980) seeks to
explain the differences in performance by looking at industry
structures and the firm’s positioning in the industry. This
school of thought implicitly assumes resource homogeneity
and resource mobility among competing firms in an industry.
This means that firms cannot build competitive advantage
based on controlling strategically relevant resources as all
firms will acquire the resources necessary to execute the
selected strategy from factor markets.
Wernerfelt (1984) introduced the resource-based view of
the firm (RBV), which focuses on characteristics of firm
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Journal of Business & Industrial Marketing
24/5/6 (2009) 360–372
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[DOI 10.1108/08858620910966246]
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Customer relationships and the heterogeneity of firm performance
Journal of Business & Industrial Marketing
Kaj Storbacka and Suvi Nenonen
Volume 24 · Number 5/6 · 2009 · 360 –372
2. Relationship performance: dyadic co-creation
of value
knowledge-intensive, collaborative value network paradigm
where firm boundaries, as well as industry and country
boundaries, are becoming increasingly permeable, fuzzy and
fleeting (Day, 1994; Dyer and Singh, 1998). Simultaneously,
the liquification of resources (Normann, 2001) makes
reconfigurations of business operations much easier, not
only enabling rapid change but rather emphasizing that the
ability to understand changes in the value network logic and
reconfigure the firm in relation to the network actors will
become a competitive advantage.
These reconfigurations will ultimately manifest themselves
as redefined offerings to the customers. Firms are increasingly
building offerings that require totally new relationship
patterns, linkages, and continuous adaptations of firm and
customer processes (Cannon and Perreault, 1999), called
“partnering” (Anderson and Narus, 1991), or collaborative
relationships (Day, 1994). In this context relationships will
become a source of performance heterogeneity. Hence, the
focus of analysis has to be expanded from the firm as the unit
of analysis to the firm’s relationships with suppliers, alliance
partners and customers as the units of analysis.
This article will focus on the relation between a firm and its
business customers. The customers’ role is changing in
fundamental ways, and this may require a total redefinition of
how we view the firm, even change the theory of the firm
(Conner, 1991; Dyer and Singh, 1998; Priem and Butler,
2001; Slater, 1997; Woodruff, 1997). The argument is that
previous theories suffer from myopia in that they do not
sufficiently acknowledge the role of the customer, nor the
relationship to the customer as a resource and as a supplier of
resources, and, furthermore, do not recognize the importance
of the capabilities related to managing customer relationships
in the increasingly dynamic market environment.
In order to understand how customer relationships influence
firm performance, we examine the content and logic of
relationship performance by defining how value is created in
customer relationships.
Firms use their resources and capabilities in order to create
value. Drawing on Barney (1991), Daum (2002), Edvinsson
and Malone (1997), Eisenhardt and Martin (2000), Kalafut
and Low (2001), and Morgan and Hunt (1999), a firm’s
resources are the physical (e.g. specialized equipment,
geographic location), human (e.g. skills and knowledge),
structural (e.g. routines, practices and processes), and
relational (e.g. relationships to suppliers, partners, alliances
and customers) assets that can be used to implement valuecreating strategies. Day (1994, p. 38) defines capabilities as
“complex bundles of skills and accumulated knowledge,
exercised through organizational processes, that enable firms
to coordinate activities and make use of their [resources]”.
Drawing on this and on Morgan and Hunt (1999), we define
capabilities as a firm’s ability to utilize its resources effectively
(to achieve goals).
Central to the service dominant (S-D) logic, proposed by
Vargo and Lusch (2004), is a focus on the value-creation
process that occurs when a customer consumes, or uses, a
product or service, rather than when the product is
manufactured. Vargo and Lusch (2004) articulate this in
their sixth foundational proposition by claiming that “the
customer is always a co-creator of value: there is no value until
an offering is used – experience and perception are essential
to value determination”. Grönroos (2000) argues that it is the
customer that creates value and that this value creation is
supported by interaction throughout the relationship with the
supplier. He adds that focus should be on the customer’s
value-creating processes.
With this definition follows that the customers are not to be
viewed as passive recipients of value created by the firm.
Prahalad and Ramaswamy (2000) describe the evolution of
customers from “passive audiences” to “active players”.
Firms do not exist in order to distribute value along a value
chain, but rather to support customers in the value-creating
process (Day, 1994; Normann and Rafael Ramirez, 1993;
Storbacka and Lehtinen, 2001).
Building on the above discussion and on Payne et al.
(2008), we define customer relationships as longitudinal
social and economic processes for the co-creation of value.
Business-to-business customer relationships consist of three
main processes (Figure 1): the customer value-creating
process, in which the customer organization applies its
capabilities on its resources in a series of activities and
management practices to achieve particular goals (Woodruff,
1997); the firm value-creating process, in which the firm
applies its capabilities on its resources in a series of activities
and management practices to improve firm performance; the
encounter process, in which dyad actors use relational
capabilities in collaborative activities and practices of
interaction and exchange for the co-creation of value.
Ulaga (2003) claims that measurement of value creation in
buyer-seller relationships is still in its infancy. Recent research
(Flint and Mentzer, 2006) argues that business customer
value can be viewed in several ways. Pardo et al. (2006) have
Purpose
This article examines customer relationships as drivers of firm
performance. The purpose of the article is twofold. First, we
take customer relationships as the unit of analysis and focus
on understanding how relationship performance
heterogeneity influences firm performance heterogeneity. As
suggested by Dyer and Singh (1998), Storbacka and Lehtinen
(2001), and Storbacka (2006), dyad or network routines and
processes could be an important unit of analysis. The analysis
is primarily dyadic, but dyads are also parts of networks.
Hence, the process, the value and the heterogeneity of the
dyad may be influenced by chains of activities involving more
than two firms, and constellations of resources controlled by
more than two firms (Anderson et al., 1994). We claim that an
under-investigated source of performance heterogeneity is the
firm’s ability to build and manage a set of customer
relationships (i.e. a customer base) in order to support the
effectiveness of the selected strategy, and, hence, firm
performance (Dyer and Singh, 1998).
Second, we argue that firms can actively manage the
heterogeneity of customers, customer relationships, and
customer portfolios with differentiated business models.
Business models are defined as configurations of interrelated
capabilities, governing the content, process and management
of exchange in customer relationships.
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Customer relationships and the heterogeneity of firm performance
Journal of Business & Industrial Marketing
Kaj Storbacka and Suvi Nenonen
Volume 24 · Number 5/6 · 2009 · 360 –372
Figure 1 Dyadic co-creation of value
Improving a firm’s financial performance is acknowledged
by various researchers as the main objective of marketing
(Day and Fahey, 1988; Srivastava et al., 1998; Doyle, 2000;
Zou and Cavusgil, 2002; Kumar and Petersen, 2005). Vargo
and Lusch (2004) emphasize the need to create new
objectives and metrics for marketing strategies that are
linked to financial performance: “Marketing practice accepts
responsibility for firm financial performance by taking
responsibility for increasing the market value rather than the
book value of the organization as it builds off-balance-sheet
assets such as customer, brand, and network equity” (Vargo
and Lusch, 2004, p. 14).
Firm performance is ultimately judged by the shareholders
of the firm. Thus, it can be argued that optimal firm
performance is reached when long-term shareholder value is
maximized. Hence, an appropriate way to measure value
capture of a customer relationship is to measure its
contribution to the development of shareholder value.
Shareholder value can be measured by capital market based
and accounting based measures. Examples of capital market
based measures are: market-to-book ratio (Hogan et al.,
2002), Tobin’s q, which is the ratio of a firm’s market value to
the current replacement costs of its assets (Tobin, 1969;
Lewellen and Badrinath, 1997; Anderson et al., 2004), and
MVA, market value added, which is the difference between a
firm’s market value and its capital employed (Stewart, 1991;
Griffith, 2004). Accounting based measures are for instance
discounted future cash flows (Black et al., 1998; Rappaport,
1998), return on investment (Buzzel and Gale, 1987;
Jacobson, 1988, 1990), sales (Dekimpe and Hassens, 1995),
price (Boulding and Staelin, 1995), cost (Boulding and
Staelin, 1993), and economic profit of economic value added
(Stewart, 1991, Kleiman, 1999).
Eggert et al. (2006) conclude that the focus of marketing
metrics is shifting from aggregated measures like market
share, profit, and sales, towards performance indicators on the
individual dyad level: relationship performance. Accounting
based measures have major advantages as they enable analysis
on an individual dyad level. One of the most commonly used
accounting based measures, customer profitability (i.e.
accounting profit per customer per annum), has been shown
to vary significantly between customers (Mulhern, 1999;
Kaplan and Narayanan, 2001; Storbacka, 1997; Storbacka
et al., 1999). Thus, the heterogeneity of annual profit per
customer is a driver of the heterogeneity of firm performance.
However, the retrospective and cross-sectional (legal
accounting based) analysis has significant weaknesses. First,
it does not take into account the capital invested in order to
serve customers. Selden and Colvin (2003) call for the use of
economic profit, while Ryals and Knox (2005) propose the
calculation of risk-adjusted customer value that is based on
customer revenue, risk and cost forecast, and also exposed to
the weighted average cost of capital in net present value
calculations. In this article it is suggested that economic profit
should be used as a starting point for measuring shareholder
value creation. Economic profit defines the net operating
profit after tax (NOPAT) and subtracts the cost of capital for
the economic book value of firm’s assets used in the customer
relationship under analysis. Thus, the key components of
economic profit on a dyad level are: revenue from the
relationship, total cost incurred by the relationship (defined as
identified three categories of value in an account management
context: exchange value, which is the value originating in
activities by the firm and being consumed by the customer;
proprietary value, being created and consumed only by the
firm as it creates and operates its account activities for its
efficiency or effectiveness exclusively; and relational value, the
co-produced value (for firm and customer) that emanates
from being party to a relational constellation embedded in
collaborative and co-operative activities.
We define relationship performance as the total value
formed during the interaction between firm and customer
over time. An essential managerial aspect of relationship
performance is to determine how this value is shared between
the firm (value capture) and the customer (value creation).
Blois and Ramirez (2006) argues that although firms exist to
help customers and organizations create value they only do so
in order to capture part of that value for themselves. However,
it is important to note that long-term value capture is not
possible if the customer does not perceive that the relationship
creates value. Value creation is hence a prerequisite for longterm value capture (e.g. Gosselin and Bauwen, 2006).
3. Aspects of value capture heterogeneity
The resources and capabilities to perform value-creating
practices are heterogeneous among customers. Customers’
willingness (and/or a firm’s ability) to engage in encounter
processes that create value also varies. Hence, relationship
performance heterogeneity will play a significant role in
determining the heterogeneity of firm performance.
Matching the heterogeneous need in the market (by
segmenting) with the heterogeneous resource base in a firm
has been explored already by Alderson (1957, 1965), and
more recently by Priem (1992), Hunt (1997, 2000), and
Hunt and Morgan (1995). Many previous studies approach
heterogeneity by examining the heterogeneity of customer
attributes, and creating segmentation models based on this.
Central to our research has been to understand heterogeneity
on a dyad level, based on process thinking, and specifically
focusing on value capture heterogeneity.
Building a bridge between value capture and
shareholder value
In order to understand how relationship performance and the
value captured influence firm performance we need to find an
agreement on how firm performance is measured, and how
practices in customer relationships contribute to favorable
development of these measures.
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Kaj Storbacka and Suvi Nenonen
Volume 24 · Number 5/6 · 2009 · 360 –372
total cost of delivery), and the capital invested in the
relationship (see Selden and Colvin, 2003).
Second, legal accounting is cross-sectional, whereas
customer relationships should be viewed on a longitudinal
basis, focusing both on the history of the relationships (over
several financial years) in order to understand longitudinal
heterogeneity as well as migration effects, and also on
estimating the future development of revenue (growth) and
economic profit. In the current marketing literature, the
customer lifetime value (CLV) is most often proposed as the
measure for estimating longitudinal customer profit (e.g.
Dwyer, 1989; Blattberg and Deighton, 1996; Hogan et al.,
2002). Most CLV models are built around three main
components: expected profit generated by the customer, the
firm’s retention rate and a discount rate.
Based on the above discussion, we suggest that value
capture can be measured by the discounted present value of
all future economic profit that the customer relationship
generates, and that this can be used as a proxy for the
shareholder value creation. Discounted future economic
profit combines several attractive features for effectively
assessing value capture: in addition to the traditional
accounting profit, it takes into account the capital costs,
allows analysis on an individual customer relationship level,
and takes a longitudinal view on customer relationships. Also,
empirical evidence has shown that positive economic profit
leads to an increase in shareholder wealth (Bacidore et al.,
1997; Kleiman, 1999).
Varadarajan and Cunningham, 1995). Morgan and Hunt
(1999) argue that firms can get access to critical resources
through partnerships, and by combining such resources with
its own resources a firm can produce a competence that
results in competitive advantage.
Second, there is customer relationship heterogeneity, which
relates to the characteristics of the relationships the firm has
been able to build for its customers. Although a customer may
be very valuable, and have a major growth potential, the firm
might not be able to create a relationship that helps it to tap
into this growth opportunity (in terms of, for instance, share
of wallet). The central determinant of customer relationship
heterogeneity would be the business model used to manage
relationships: what is the strategy used to attract customers,
what is the competitive advantage, what are the value
propositions, how are the customer relationships managed,
how much cost is incurred by the exchange process, what
retention mechanisms are used, etc.
A particularly interesting viewpoint, when analyzing the
customer relationship heterogeneity, is longitudinal
heterogeneity. This relates partly to the volatility of
economic profit over time (Stahl et al., 2003). Another key
ingredient of longitudinal heterogeneity is the loyalty or
retention of the customer. Wernerfelt (1984) suggests that
customer loyalty is an attractive resource as it builds resource
position barriers that can act as entry barriers. Liljander and
Strandvik (1995) and Storbacka et al. (1994) have suggested
that there are bonds present in all customer relationships that
influence the longitudinal development of the relationship. To
reduce customer relationship heterogeneity, bonds can be
analyzed, planned and managed (Storbacka and Lehtinen,
2001).
The third way of analyzing value capture heterogeneity
relates to the interdependence between customers in a
customer base. Groups of customers, as in portfolios, can
be reviewed in order to understand the correlation and
concentration of customers and customer relationships (risk
and the synergies between customers and customer
relationships). It is important to understand these linkages,
and to locate the source of correlation or concentration. If the
source is an external factor, such as geo-political situations,
currencies or industries, firms need to reduce its magnitude
by allocating resources to less risky customers or portfolios. If
the source is internal, it can be actively managed or “hedged”,
depending on the capabilities of the firm.
Selden and Colvin (2003, p. 7) suggest that firms should be
viewed “not as groups of products or services or functions or
territories, but as portfolios of customers”. Nenonen and
Storbacka (2007) have used empirical data to create
relationship portfolios based on the cross-sectional
economic profit of the relationships. Based on this evidence
there is major heterogeneity in how customer relationships
generate profit to a firm. Most firms will need to group
customer relationships based on value capture heterogeneity
in order to be able to manage the need for differentiation
between the relationships.
Sources of value capture heterogeneity
Variations in customer relationship economic profit can be
caused by four different factors: revenue, total cost to serve,
capital invested, and risks. Based on the model in Figure 1
and on Storbacka (2006) we conclude that there are three
sources of value capture heterogeneity: the customer, the
relationship with the customer (or the encounter process),
and the interdependence between customers in a customer
base that may influence the encounter process.
First, there is customer intrinsic heterogeneity, which
relates to the magnitude and relevancy of customers’ extant
resources, and their propensity to apply these resources in
their supply relationships. It is evident that customers with
larger value creation potential are more valuable than
customers with a low potential. There are risks associated
with customers, and these relate partly to customer specific
issues (resources and capabilities) and partly to the industry
or geographical areas where the customer is active. Some
industries are more risky than other, but regardless of the
industry there may be differences among customers, as to
their ability to execute their strategy and sustain their growth.
The value of individual customers is always relative. A
customer can be more valuable to one firm (or business
model) than to another. The value has to be related to the
firm’s strategy and objectives. Therefore, the value of a
customer can be analyzed in terms of the fit between the
strategic objectives of the utilized business model and the
resources of the extant customer base. It is important to note
that value capture dimensions should not be analyzed in
isolation. A customer that may not be valuable from a cash
flow perspective may bring resources to the firm that can be
used to develop new technologies or offerings, or help the firm
enter new relationships or markets (Ford et al., 2003;
4. Balancing value capture heterogeneity with
business model differentiation
Sirmon et al. (2007) argue that in order to capture value,
firms must structure their resource portfolio, bundle
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Journal of Business & Industrial Marketing
Kaj Storbacka and Suvi Nenonen
Volume 24 · Number 5/6 · 2009 · 360 –372
resources to build capabilities, and leverage capabilities to
exploit market opportunities. In this article it is suggested that
the firm’s use of its resources and capabilities, and thus the
relationship performance and the balance between value
creation and value capture, is determined by the firm’s way of
conducting business operations, i.e. its business model.
Business models have traditionally been discussed in an
internet context (Afuah and Tucci, 2000; Osterwalder, 2004).
Increasingly the business model concept is used as a general
construct explaining how a firm is interacting with suppliers,
customers and partners (Zott and Amit, 2003). Several
business model definitions have been proposed (Afuah, 2003;
Amit and Zott, 2001; Chesbrough and Rosenbloom, 2002;
Magretta, 2002; Osterwalder et al., 2005; Storbacka, 2006).
Building on these, and Miller (1996), business models are
defined as configurations of interrelated capabilities,
governing the content, process and management of
interaction and exchange in customer relationships (i.e. the
business model defines the content, process and management
of the interaction and exchange process in Figure 1). Content
of exchange refers to the resources applied in the exchange.
Process of exchange refers to the structure and activities of the
encounter process (parties involved, ways and channels of
interaction, and relation to firm and customer value-creating
processes). Management of exchange refers to how the dyad
actors control and coordinate the allocation of resources
during the exchange process.
There is, as shown in the discussion in the previous section,
considerable value capture heterogeneity among customer
relationships in a customer base. This heterogeneity relates to
the customer’s extant resources and talent in using them, to
the aptitude of the customer relationship to generate
economic profit, and to different kinds of elements that
influence the longevity of relationships and volatility of
economic profit over time. It has also been suggested that this
heterogeneity can be controlled by grouping customers into
portfolios.
In order to balance this heterogeneity, and improve the
firm’s performance, the business model of the firm cannot be
homogeneous across customer relationships or portfolios.
Hence, one way to improve the overall relationship
performance is to invest in business model differentiation, in
order to facilitate controlled adaptation to specific customer
relationships and/or portfolios of customer relationships.
There is an abundance of opportunities for business model
differentiation; the literature discusses issues like “partnering”
(Anderson and Narus, 1991), moving “from products to
integrated solutions” (Brady et al., 2005; Davies et al., 2008),
“moving downstream in the value chain” (Wise and
Baumgartner, 1999), “transitioning from products to
services” (Oliva and Kallenberg, 2003). Whatever the
differentiation logic is, it will ultimately aim at redefining
the content, process and management of interaction and
exchange in customer relationships.
understood by describing the value proposition; the
structure of the offering, and the earnings logic used by the
firm. We will next discuss these aspects separately.
Frow and Payne (2008) have described the development of
the value proposition concept, from a managerial, rather
mechanistic “delivery of value” concept towards more
interactive, experiential and relationship-based theoretically
central construct. According to Vargo and Lusch (2004),
firms can only make value propositions: since value is always
determined by the customer (value-in-use), it cannot be
embedded through manufacturing (value-in-exchange). In a
similar vein, Lanning (1998) defines a value proposition as:
“the entire set or resulting experiences, including . . . price,
that an organization causes some customers to have”.
Anderson et al. (2006) suggest that is useful to divide the
elements of the value proposition into three types:
1 points-of-parity elements, with essentially the same
performance or functionality as those of the next best
alternative;
2 points-of-difference elements, that make the supplier’s
offering either superior or inferior to the next best
alternative; and
3 points-of-contention elements, about which the supplier
and its customers disagree regarding how their
performance or functionality compares with those of the
next best alternative.
We define a value proposition as the firm’s suggestion to the
customer on how its resources and capabilities, expressed as
artefacts (goods, service, information, and processual
components, such as experiences), can enable the customer
to create value (Anderson et al., 2006; Flint and Mentzer,
2006; Normann, 2001; Storbacka and Lehtinen, 2001).
Thus, value propositions can be seen as resource integration
promises – firms suggest ways to enhance value creation by
providing resources that “fit” into the practice constellations
of customers (Korkman et al., 2008).
The usage of the constructs “value proposition” and
“offering” are overlapping in literature, indicating that there is
a need for further clarification of the differences. We suggest
that whereas the value proposition can be viewed as an idea or
a promise, the offering can be viewed as a description of the
resources or components needed to co-create the promised
value. Normann (2001, p. 114) defines offering as “artefacts
designed to . . . enable and organize value co-production”.
One approach is to articulate offerings as providers of
service, as Gummesson (1995, p. 251): “customers do not
buy goods or services: they buy offerings which render
services which create value”. Storbacka and Lehtinen (2001,
p. 5) claim that “the traditional distinction between goods and
services is meaningless” (see also Araujo and Spring, 2006)
and argue that the offering will consist of a mixture of goods,
services and information components and that offerings need
to be viewed as processes. Pekkarinen et al. (2008) presents an
analysis of the various conceptualizations of the offering
construct in literature and conclude that elements such as
technology, information, capabilities, financial elements,
quality, benefits and sacrifices, risk sharing, and even image
have been suggested.
A key capability in designing value propositions and
offerings relates to the determination appropriate earnings
logic, i.e. how the value created in the exchange is shared
Content – value proposition, offering, and earnings
logic
The content of exchange refers to the resources applied by
both parties in the dyad. The parties co-create value by
integrating their resources – a process that requires exchange
to ensure access to resources that help the dyad actors reach
their goals. The content of exchange can be further
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Customer relationships and the heterogeneity of firm performance
Journal of Business & Industrial Marketing
Kaj Storbacka and Suvi Nenonen
Volume 24 · Number 5/6 · 2009 · 360 –372
between the customer and the firm. The earnings logic is
either based on the value of the resources provided by the
firm, or based of the impact that the exchange has on the
customer’s business process, and, thus, on its ability to
effectively achieve its goals. If the logic is based on the
resources provided pricing can be cost-plus based or marketvalue based. A key ingredient in designing earnings logic
relates to the choice of price carrying elements in an offering
(does all elements carry a separate price, or are some elements
expected to subsidize other elements), and to the degree of
price bundling, i.e. the relation between price carrying and
only cost carrying elements in an offering (see Storbacka,
2006; Stremersch and Tellis, 2002).
wide network player orientation, key personnel share and
support the achievement of joint goals, and mobilization and
maintenance of multilevel and multifunctional contacts
between several actors), or a “capability of mastering the
customer’s business” (i.e. track record of understanding the
business logic of the customer, track record of proposing
major suggestions leading to business improvements or new
business concepts, and capability of offering “externalization”
of some key business processes or complete business).
Relationship practices are defined by the encounters needed
for the co-creation of value in a specific business model.
These encounters will be handled by different functions and
on different organizational levels. Price and Schultz (2006)
argue that as one actor/function will be involved in giving
promises that another actor/function is supposed to deliver, a
key issue is to create capabilities to generate a cross-functional
view of the encounter process and to supervise the firm’s
“promises management” process. Matthyssens and Johnston
(2006) discuss the resources and information flows between
marketing and sales management processes, and conclude
that cooperation between marketing and sales should be
improved. But also other functions may impact the
relationship practices: production/operations management
often “owns” the physical asset, i.e. production capacity and
may influence the availability of necessary resources, whereas
finance is concerned with financing the differentiation efforts
and in interested in understanding financial returns of various
resource allocation efforts. Improvement of relationship
performance will, hence, require capabilities to coordinate
encounter processes cross-functionally.
The management of relationship performance usually
entails the establishment of retention and/or collaboration
practices (such as account management programs and joint
research and development activities). The differentiation
between “transactional” and “collaborative” encounter
processes, however, generates a need for relationship
practices that are distinctly different from each other. The
capabilities needed to set up an effective strategic account
management program are quite different from the capabilities
needed to create success in channel sales, particularly in the
use of electronic channels. The capability to generate and
disseminate customer insight, however, forms a common
thread for all different types of business models. Customer
insight is generated by combining all available data related to
customer relationships – behavioral, attitudinal, research
based and legacy system based.
When differentiating business models, a firm has to do
trade-offs between standardization and differentiation
(Heikkilä and Holmström, 2006), as an increase in variation
of offering elements typically increases the average unit cost.
The typical outcome of standardization/differentiation
optimization is to create the capability to efficiently
assemble different module combinations (Miller 1996) in
order to create platforms for “repeatable solutions” (Foote
et al., 2001).
Process – the encounter process and relationship
practices
The interest in understanding processes related to external
stakeholders is increasing as the locus of value creation
increasingly extends traditional firm boundaries. According to
Vargo and Lusch (2004) even customers that want only
discrete transactions are not freed of relational participation,
as they are active participants in the exchange process. “What
precedes and what follows the transaction as the firm engages
in a relationship (short- or long-term) with customers is more
important than the transaction itself” (Vargo and Lusch,
2004, p. 12). Tuli et al. (2007) reports (in a solution context)
that customers view a solution as a set of customer-supplier
relational processes comprising:
.
customer requirements definition;
.
customization and integration of goods and/or services;
.
their deployment; and
.
post-deployment customer support.
The complexity of the encounter process will be dependent on
the strategy, and the value proposition of the firm. Encounter
processes can be analyzed and described on a continuum
ranging from purely transactional to purely collaborative
(Anderson and Narus, 1991). The process of exchange will
vary dependent on the type of relationship: from thinner to
thicker information, from distributive to integrative
negotiations, from routine to extensive problem solving,
from mechanistic to organic coordination, and from unilateral
to joint adaptation, as relationships become more
collaborative (Narus and Anderson, 1995).
Möller and Törrönen (2003) have suggested a framework
for categorizing capabilities required to conduct valuecreating (encounter) processes, based on a relational value
continuum where the extremes are “low relational complexity
combined with current time orientation” and “high relational
complexity combined with future orientation”. The argument
is that moving towards relationships that are more focused on
future value creation potentials, and thus involves more
complex encounter processes, requires a more complex set of
capabilities. Examples of such capabilities could be a
“relational capability” (i.e. working key account
management, qualified technological support personnel,
committed personnel with team working skills, ability to
view things from the customer’s perspective, organizationwide relational orientation, sharing of proprietary
information, making propositions that enhance the
customer’s business processes, and information systems
integration), a “networking capability” (i.e. organization-
Managing interaction and exchange
The differentiation of the content and the process of
interaction and exchange will have an immediate impact on
the organizational structure and management practices used
to govern the customer relationship. Most organizations tend
to have an organizational structure focusing on product and
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Kaj Storbacka and Suvi Nenonen
Volume 24 · Number 5/6 · 2009 · 360 –372
geography. Galbraith (2002) and Homburg et al. (2000) have
done a robust analysis of companies moving from productfocused and geography-focused structures towards customerfocused structures. Adding the “third dimension” i.e. the
customer viewpoint raises questions relating to efficiency,
complexity and flexibility. Within a product-focused
organizational structure sales people are essentially product
specialists (Homburg et al., 2000). Improving relationship
performance will ask for customer specialists, actors who have
the ability to influence the content and the process of
exchange. This means that the management of interaction
and exchange cannot be confined to the sales or marketing
functions, but rather it crosses the boundaries between several
functions, product areas, geographical areas, and hierarchical
levels.
Hannan et al. (1996 p. 506) suggest that an organizational
element is part of the “organizational core if changing it
requires adjustments in most other features of the enterprise
. . . coreness means connectedness, elements in the core are
linked in complicated webs of relations with each other and
with peripheral elements”. Based on this we suggest that the
management of the interaction and exchange will be a core
element of the organization. This, essentially, means that
organizations should be built around the differentiated
business models in use.
From a structural point of view the customer-focus issue is
only one viewpoint. The organizational challenge is actually
part of the fundamental concern for any organizational
structure: the capability of a firm to balance exploitation with
exploration (March, 1991). The challenge may relate to
simultaneously managing the efficiency of a “product”
business model and the flexibility needed by a “solution”
business model. Or it may stem from the fact that some
customer relationships or portfolios are strategic as they
enable an efficient utilization of existing resources and
capabilities, whereas others may be geared towards
exploring for new resources and competencies; for renewal
and long term shareholder value.
Organizations are always faced with some degree of conflict
(e.g. differentiation versus standardization, transactional
versus collaborative) and Gibson and Birkinshaw (2004)
suggest that success therefore requires ambidextrous
organizations. They propose that structural ambidexterity
relates to dual organizational forms, or organizational
architectures that are composed of tightly coupled subunits
that are themselves loosely decoupled from each other.
Tushman and O’Reilly (1997), and Sutcliffe et al. (2000)
suggest that within subunits, the tasks, culture, individuals
and organization arrangements are consistent, but across
subunits, tasks and cultures are inconsistent and loosely
coupled. This indicates that business units should be formed
around business models: some focus on exploration
(adaptation), while others focus on exploitation (efficiency).
A key management capability issue relates to measurement.
Firms need to develop their capability to measure relationship
performance – both to the firm and to the customer. This
could be called “relationship performance controlling”. For
finance, the measures relate to value capture: present and
future revenue, total cost of delivery, capital invested and risk.
The measure may be different for each business model. A
“product” business model may need to focus on revenues and
efficiency, whereas a “solution” business model may need to
focus on profits, investments, share of wallet and longevity of
relationships. As customer relationships are long-term
investments, it is of particular importance not to rely only
on retrospective (“lagging”) indicators of value, but also take
a longitudinal view (“developments over periods of analysis”),
and identify prospective (“leading”) indicators, such as
number of long term contracts, order backlog, work-inprocess, or sales funnel size (Storbacka, 2006).
Equifinality and configurational fit
In the previous sections we have shown that in order to
balance the heterogeneity of customers, customer
relationships and portfolios, firms have to simultaneously
develop differentiated business models. Business models are
configurations of inter-related capabilities; the success of
these models is not defined by individual capabilities but their
configurational fit.
Configurations are, according to Meyer et al. (1993),
constellations of design elements that commonly occur
together because their interdependence makes them fall into
patterns. Miller (1996, p. 509) suggests that configuration
“can be defined as the degree to which an organization’s
elements are orchestrated and connected by a single theme”.
Miller suggests that typical themes could be “innovation” or
“efficiency”. It is suggested that business models created
around specific portfolios of customer relationships could also
be such a theme, around which a pattern or program can be
orchestrated (Hui Shi et al., 2004).
Business model elements are interlinked: it is not possible
to change the content of exchange and expect that the process
and management of exchange will remain the same, and vice
versa. Hence, a particularly important aspect of the
configuration of the elements is to create harmony,
consonance, or fit between the elements (Normann, 2001;
Meyer et al., 1993; Miller, 1996).
Elements of a business model interact if the value of one
element depends on the presence of the other element;
reinforce each other if the value of each element is increased
by the presence of the other element; and are independent if
the value of an element is independent of the presence of
another element. A firm with many organizational elements
that reinforce each other is said to have a high degree of
internal fit (Siggelkow, 2002). Creating a successful
configuration implies that the core elements are reinforcing,
so that the overall system is in a state of coherence or
consistency (Siggelkow, 2002). Reinforcing elements can be
called framing elements as they set the scene and determine
the prerequisites for other elements.
Central to success in managing relationship performance is
the configurational fit between different sets of capabilities.
Johnston et al. (2006) have, additionally, suggested that “fit”
could be relevant also in characterizing network structures
and interactions, suggesting that firms should focus on intraorganizational configurations.
Ramirez and Wallin (2000) and Blois and Ramirez (2006)
have suggested a way to categorize capabilities based on
whether the value finally created is internally or externally
focused. Internal capabilities aim at improving the efficiency
and operational performance of key business processes, such
as manufacturing processes. Relational (inter-organizational)
capabilities are the firm’s abilities to effectively manage
practices related to the content and structure of interaction
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Kaj Storbacka and Suvi Nenonen
Volume 24 · Number 5/6 · 2009 · 360 –372
and exchange between and supplier and customer, i.e.
referring both to supplier and customer relationships.
Building on Ritter et al. (2004), it is suggested that a
particularly important driver of relationship performance is
the configurational fit between internal and relational
capabilities.
Homburg et al. (2002) report that several approaches to key
account management are equally successful. This supports
the argument often discussed in the configurational approach
(Meyer et al., 1993; Miller, 1996), i.e. the idea of equifinality.
Equifinality implies that different types of configurations lead
to equally good end-results as long as they are configured in
such a way that there is internal fit or congruence between the
elements. Thus, the central capability in managing
relationship performance will not be to find the “best”
business model, but rather the ability to develop parallel
business models that are internally coherent, and
heterogeneous enough to cover the heterogeneity of the
selected market.
develop business models in a way that there is internal fit or
congruence between internal and relational capabilities within
each specific business model.
Building on our review of the content, process and
management of exchange in customer relationships as well
as on Ramirez and Wallin (2000) and Blois and Ramirez
(2006), we propose that a key “meta-capability” in creating
and managing differentiated business models is customer
relationship performance management (CRPM). Customer
relationship performance management can be defined as
a relational capability, involving task-dedicated actors, who
orchestrate resources and practices of the firm, and its present
and future customers, through alignment of business model
elements, in order to improve the relationship performance,
and ultimately shareholder value creation. Based on the
discussion in the article, examples of such capabilities are:
customer insight generation and dissemination crossfunctionally, collaboration practices such as account
management, retention programs and joint research and
development programs, modularized production platforms for
cost efficient differentiation, earnings logic development
(including pricing logic), cross-functional promises
management, structural ambidexterity (the ability to
organize and manage parallel business models), and
relationship performance controlling (including risk
management: management of relationship performance
volatility).
5. Discussion – customer relationship
performance management
Using customer relationships as the unit of analysis, this
article has examined how the heterogeneity of customer
relationship performance influences the heterogeneity of firm
performance, and how firms this heterogeneity by
differentiated and internally coherent business models.
We developed a model describing dyadic value co-creation
and defined relationship performance as the total value
formed in the encounter process during the interaction
between firm and customer over time. A central construct of
model is value capture, i.e. how much value the firm can
capture from the relationship. Firm performance and value
capture can be measured by shareholder value and we
concluded that the discounted present value of all future
economic profit that the customer relationship generates can
be used as a proxy for the shareholder value creation.
There are three sources of value capture heterogeneity: the
customer, the relationship with the customer (or the
encounter process), and the interdependence between
customers in a customer base. Variations in value capture
heterogeneity may exist in terms of differences in revenue,
total cost to serve, capital invested, and risks. It is concluded
that one way to deal with the heterogeneity is to create
customer portfolios that create more transparency into the
sources of heterogeneity.
In order to balance value capture heterogeneity and
improve the firm’s performance, the business model of the
firm cannot be homogeneous across customer relationships or
portfolios. Hence, relationship performance can be improved
by investing in business model differentiation, in order to
facilitate controlled adaptation to specific customer
relationships and/or customer portfolios. Business models
are defined as configurations of interrelated capabilities,
governing the content, process and management of exchange
in customer relationships.
It was concluded that firms have to become ambidextrous
and develop parallel business models for different customer
portfolios. A central capability in managing relationship
performance in a context of multiple business models is not
be to find the “best” business model, but rather the ability to
Further research avenues
The article opens up a number of interesting research avenues
relating to relationship performance management and
business model differentiation.
In order to deepen our understanding of the role of
customer relationships as drivers of long-term firm
performance, more conceptual and empirical research on
longitudinal value capture is needed. The current CLV
research needs to be expanded to analyse longitudinal
economic profit (not just accounting profit). Nenonen and
Storbacka (2007) have done empirical analysis of economic
profit creation, but this research was not aimed at forecasting
future economic profit. Forecasting the future development of
economic profit would create a platform for marketing to
enter into the top management agenda, as well as support the
enhancement of information provided to the investor
community.
The research presented in this paper concentrated more on
the value capture from customer relationships rather than on
the overall relationship performance or the value creation for
the customer. Therefore a more thorough conceptualization
and empirical research is needed on, e.g. the drivers of
customer’s value creation. Such understanding is needed as a
successful business model differentiation leading to a
sustainable competitive advantage needs to be based on a
thorough comprehension of both value capture and value
creation.
The article only briefly touched on the use of customer
relationship portfolios as a means for managing customer
relationship heterogeneity. The portfolio construct would
require further conceptualization. Key issues to explore are
among others: how do customer portfolios differ from
customer segments; what is the difference between
investment portfolios and customer portfolios; and what are
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Customer relationships and the heterogeneity of firm performance
Journal of Business & Industrial Marketing
Kaj Storbacka and Suvi Nenonen
Volume 24 · Number 5/6 · 2009 · 360 –372
the favourable characteristics of a customer portfolio models
targeted at customer relationship performance management?
A promising and still somewhat unexplored research avenue
would be the expansion of the business model construct, in
order to better understand the possible opportunities for
business model differentiation. The elements of a business
model (content, process and management of exchange)
should be further conceptualized in order to identify subelements. An interesting question to investigate is to identify
elements that are reinforcing or that are critical in that they set
the foundation for configuring effective business models, i.e.
are framing elements of a business model. Furthermore, we
believe that it is possible to identify other continuums or
generic typologies for business model differentiation than the
“product versus solution” typology discussed in the article.
This being a conceptual article, an important research
avenue is to conduct empirical research on business models
and business model differentiation. Anecdotal evidence
suggests that firms in business-to-business markets are
differentiating their business models, but little research
exists as to the types of differentiation implemented
(business model typologies), the level of formalization (does
differentiation need to be formalized in order to be effective)
and the effectiveness of managing parallel business models.
finance, as success may be dependent on the firm’s ability
to create modularized production platforms that enable
“mass-customization” and change the fundamental earnings
logic of the firm - eventually leading to changed pricing logic.
These are strategic issues that cannot be solved by sales and/
or marketing alone; they need to be addressed by all functions
of the organization.
A specific issue that may require redefinition is the
investment in renewal, research and product development.
Increasingly these practices are carried out together with the
customer as a part of the encounter process. Firms are
beginning to recognize that many investments in product
development, new distribution and communication channels,
different kinds of collaborative initiatives (such as retention
programs and strategic account management programs) and
IT solutions are spurred by needs to improve relationship
performance, and are, in fact, business model investments.
Traditionally, investments have been regarded as an
allocation of resources where the cost associated with the
resource is activated into the balance sheet. Hence, the
investment is assumed to have an impact not only on the
ongoing year, but on future accounting periods as well.
However, cost items in the profit and loss statement can also
be seen as “investments” from a customer relationship
performance management point of view. This view is
supported by the fact that certain resource allocations
between different customer relationships and portfolios
(such as sales and management time, offering and
operations development, allocation of physical resources)
influence the cost side of the profit and loss statement. These
allocations will have a long term impact on the firm’s
possibility to create and capture value in the future – even
though they cannot be activated into the balance sheet in
accordance with current accounting standards.
Managerial implications
The present research poses several managerial implications as
it indicates that there is major heterogeneity in current and
potential value capture between customer relationships. This
implies that customer bases should be grouped into portfolios
and that firms should be interested not only in their business
and product mix, but also in their customer (relationship)
mix. This has three implications for a firm aiming at
improving its performance. First, the firm has to secure that is
has the optimum mix of customer relationships in its
customer base, in relation to firm goals and selected
strategy. Second, the firm needs to recognize the
heterogeneity of customer relationship performance, and
create and manage customer portfolios accordingly. Third, in
order to deal with the heterogeneity the firm may need to
differentiate its business models between relationship
portfolios or even between individual relationships and
manage parallel business models.
Managing parallel business models requires a new set of
management and leadership capabilities. Differentiation
increases complexity and puts pressure on managing costs.
Hence, a prerequisite for moving in this direction is the
establishment of robust measurements. The business models
need to be made transparent; people in the organization have
to understand the principles that govern the different models
and understand the reasons behind the differences (as they in
practice may imply lower service levels to some customers and
higher to others). A central issue to focus on is promises
management: articulating differentiated promises to different
customers and securing that the specific functions deliver on
the promise.
The findings of this research imply that improving value
capture cannot be delegated to any single function in the
organization. Business model differentiation cannot be
effectively executed if it only relates to the customer facing
parts of the organization. Genuine differentiation requires the
involvement of operations/production management and
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371
Customer relationships and the heterogeneity of firm performance
Journal of Business & Industrial Marketing
Kaj Storbacka and Suvi Nenonen
Volume 24 · Number 5/6 · 2009 · 360 –372
Stremersch, S., Wuyts, S. and Frambach, R. (2001),
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value framework for customer selections and resource
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pp. 106-25.
publications have appeared in Journal of the Academy of
Marketing Science, Journal of Business Research, Journal of
Marketing Management, International Journal of Service
Industry Management, European Journal of Marketing, as well
as in many conference proceedings. His books include
Customer Relationship Management – Creating Competitive
Advantage through Win-Win Relationship Strategies and Driving
Growth with Customer Asset Management. He is the
corresponding author and can be contacted at:
[email protected]
Suvi Nenonen is a doctoral student at Hanken School of
Economics and Business Administration. Her thesis examines
how customer portfolios can be used in customer asset
management in business-to-business context. Her research
interests include customer asset management, customer
portfolios and market configurations.
About the authors
Kaj Storbacka is Professor of Marketing Strategy at Hanken
School of Economics, Finland, and board member of the
Strategic Account Management Association, Chicago,
Illinois. His main research interests include strategic
account management, customer asset management,
customer profitability and relationship marketing. His
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