Creating and Managing Superior Customer Value (Advances in Business Marketing and Purchasing) (2008)

ADVANCES IN BUSINESS MARKETING
AND PURCHASING
Series Editor: Arch G. Woodside
Recent Volumes:
Volume 7: Advances in Business Marketing and

Purchasing
Volume 8: Training Exercises for Improving Sensemaking
Skills
Volume 9: Getting Better at Sensemaking
Volume 10: Designing Winning Products
Volume 11: Essays by Distinguished Marketing Scholars of
the Society for Marketing Advances
Volume 12: Evaluating Marketing Actions and Outcomes
Volume 13: Managing Product Innovation
LIST OF CONTRIBUTORS
Fabio Ancarani University of Bologna, Bologna, Italy

Enrico Baraldi Uppsala University, Uppsala, Sweden
Roger Baxter Business School, AUT University,
Auckland, New Zealand
Dan N. Bellenger Georgia State University, Atlanta,
GA, USA
Bruno Busacca Bocconi University, Milan, Italy
Michele Costabile University of Calabria, Arcavacata,
Calabria, Italy
Bernard Cova Euromed Marseille, Marseille, France
Andreas Eggert University of Paderborn, Paderborn,
Germany
Michael Gibbert Bocconi University, Milan, Italy
Francesca Golfetto Bocconi University, Milan, Italy
Stephan C. Henneberg Manchester Business School, University
of Manchester, Manchester, UK
Andreas Hinterhuber Hinterhuber & Partners and Bocconi
University, Milan, Italy
Wesley Johnston Georgia State University, Atlanta,
GA, USA
Paul Matthyssens University of Antwerp, Antwerp, Belgium
Stefanos Mouzas Lancaster University, Lancaster, UK
Gabriela Herrera Georgia State University, Atlanta,
Piscopo GA, USA
vii
viii LIST OF CONTRIBUTORS
Thomas Ritter Copenhagen Business School,

Frederiksberg, Denmark
Robert Salle E.M. LYON, Lyon, France
Torkel Strömsten Stockholm School of Economics,
Stockholm, Sweden
Wolfgang Ulaga HEC School of Management, Paris,
France
Koen Vandenbempt University of Antwerp, Antwerp, Belgium
Achim Walter Christian-Albrechts-University of Kiel,
Kiel, Germany
Sara Weyns University of Antwerp, Antwerp, Belgium
Arch G. Woodside Boston College, Boston, MA, USA
Fabrizio Zerbini Bocconi University, Milan, Italy
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ADVANCES IN BUSINESS MARKETING AND
PURCHASING VOLUME 14
CREATING AND
MANAGING SUPERIOR
CUSTOMER VALUE
EDITED BY
ARCH G. WOODSIDE
Boston College
FRANCESCA GOLFETTO
Bocconi University
MICHAEL GIBBERT
Bocconi University
United Kingdom – North America – Japan

India – Malaysia – China
EDITORIAL REVIEW BOARD
Fabio Ancarani Mette P. Knudsen

University of Bologna, University of Southern
Bologna, Italy Denmark, Odense, Denmark
Stefania Borghini J. David Lichtenthal

Bocconi University, Baruch College, City University
Milan, Italy of New York, NY, USA
Michele Costabile Hans Mühlbacher

University of Calabria, University of Innsbruck,
Arcavacata, Calabria, Italy Innsbruck, Austria
Michael Gibbert Chezy Ofir

Bocconi University, Hebrew University, Jerusalem,
Milan, Italy Israel
Francesca Golfetto Diego Rinallo

Bocconi University, Milan, Italy Bocconi University, Milan, Italy
Stephan C. Henneberg Günter Specht

Manchester Business School, Technical University Darmstadt,
University of Manchester, Darmstadt, Germany
Manchester, UK
Andreas Hinterhuber Arch G. Woodside

Hinterhuber & Partners and Boston College, Boston,
Bocconi University, Milan, Italy MA, USA
Wesley J. Johnston Fabrizio Zerbini

Georgia State University, Bocconi University,
Atlanta, GA, USA Milan, Italy
ix
CUSTOMER VALUE: THEORY,
RESEARCH, AND PRACTICE
Arch G. Woodside, Francesca Golfetto and

Michael Gibbert
ABSTRACT
This first paper examines total benefits and total costs of product–service
designs as antecedents to customer value assessment. It introduces the
reader to all the papers in this volume. The first half of the paper offers a
model of customer value assessment. This section describes research
studies in industrial marketing contexts that illustrate the core proposi-
tions in the model. The second half of the paper provides brief
introductions to the papers in this volume; these papers offer further
evidence supporting the view that discontinuous innovations offer superior
customer value but customers tend to eventually become increasingly
comfortable with the status quo and move away from adopting superior
proven technologies. This paper advocates being mindful of the market-
place dynamics affecting value. The volume serves to increase knowledge
and understanding of the dynamic forces affecting changes in customer
value.
This first paper includes two objectives. First, the paper illustrates the use of
value theory and measurement in business-to-business (B-to-B) contexts.
Creating and Managing Superior Customer Value

Advances in Business Marketing and Purchasing, Volume 14, 3–25
Copyright r 2008 by Emerald Group Publishing Limited
All rights of reproduction in any form reserved
ISSN: 1069-0964/doi:10.1016/S1069-0964(08)14001-7
3
4 ARCH G. WOODSIDE ET AL.
Second, the paper introduces advances in research in describing and

understanding product–service value in business markets – the second half
of this introductory paper provides synopses of the papers in this volume.
STRATEGIC STANCE FAVORING THEORY AND

MEASUREMENT OF VALUE
Achieving highly useful sense making about value concept and value metrics
is important because of the substantial evidence that (1) customer
assessments of total value in a product–service offering strongly affect
acceptance and initial purchase, (2) customer evaluations of value
experiences relate strongly with retaining them and growing the share of
business that these customers award specific suppliers, and (3) increases in
delivered-value implemented strategies relate positively to increases in
profitability (Best, 2009).
Understanding and having the skill to apply useful value metrics are
useful steps in creating alternative product/service-implemented strategies
that offer high- versus low-value evaluations by customers. Also, such skill
helps reduce the value overconfidence bias that is prevalent among
marketing executives: ‘‘Only 8% of customers describe their experiences
as superior, yet 80% of companies believe the experience they provide is
indeed superior’’ (Meyer & Schwager, 2007). Dividing executive perception
of customer share by actual customer share of superior value provides an
overconfidence bias equal to 80/8, or 10.0. Certainly, this share varies
among a set of competing firms in a product market, but most firms can
expect to find an overconfidence bias greater than 1.0 for most of their
products–services.
Value, from the perspectives of customers and marketers, is a multi-
dimensional concept. Value as a concept represents a net score that includes
measurement of total benefits perceived or realized and total costs of
acquiring, using, and disposing of a product or service. Eqs. (1) through (4)
are example value metrics appearing in the B-to-B marketing literature:
relative sum of weighted benefits perceived

Value ¼ (1)
relative total costs perceived
Value ¼relative sum of weighted benefits perceived

relative total costs perceived ð2Þ
Customer Value: Theory, Research, and Practice 5
relative sum of total consequences

Value ¼ (3)
relative total costs perceived
Value ¼ relative sum of total consequences relative total costs perceived

(4)
Measuring total consequences experienced in acquiring, using, and
disposing of a product or service represents a product or service quality
metric. Customer evaluations of total quality experienced is critical to the
measurement of value realized, but such evaluations represent only one of
the variables in the formulation of the concept of postexperience value
metrics. The point is that value is a concept distinct from quality.
MEASURING PERCEIVED BENEFITS VERSUS

CONSEQUENCES REALIZED
Note that the numerator in Eq. (1) calls for measuring benefits perceived for
a given product–service design. Such measurement is often done in studies
probing customers’ acceptances of alternative product–service designs
before the marketer finalizes what designs to manufacturer and what
designs to reject. The objective of such studies is to collect customer
judgments useful for marketers in designing product–service prototypes for
further testing.
The numerator in Eq. (3) calls for measuring consequences experienced by
customers. Such measurement is often done in studies probing the reasons
for customer retention, customer decisions to eliminate suppliers, and
customers’ decisions to increase or decrease the shares of purchase
requirements among competing suppliers.
Eqs. (1) and (3) provide ratios indicating the relative value of competing
product–service designs – potentially new designs in the case of Eq. (1) and
existing competing designs in the case of Eq. (3). Assume for a moment that
a customer judges product–service design (say, design R) and concludes that
R has a weighted benefit sum equal to 120 and that the average among four
alternative product–service designs have a weighted benefit sum equal to 90.
Design R’s relative sum of weighted benefits perceived equals 120/90 ¼ 1.33.
The relative total benefit of R is quite high with respect to at least one of the
other three product–service designs – possibly all three of these alternatives.
(The calculations for the components of overall benefit appear later in this
chapter.)
Assume that a customer has the following information available for four
alternative product designs. How might the customer go about assessing and
selecting among these four competing designs?
Design Relative Total Benefits Relative Total Costs Value
R 1.33 1.80 .74

S 1.10 .90 1.22
T .80 .60 1.33
V .70 1.10 .64
Using Eq. (1) to calculate the relative values of the four designs results in
design T having the highest ratio of total benefits to total costs. Using these
calculations indicates that design T is the design that the customer will
decide to buy. In real life, most customers will not select design T even when
using such an evaluation method; most customers will set a minimum level
of total benefits that a design must achieve and select the design that meets
or surpasses the minimum while offering cost savings – if such an alternative
exists (Woodside & Wilson, 2000). In this example, most customers are
likely to reject design T due to its low relative total benefits (.80) and select
design S. While design S has lower relative total benefits than design R,
design S has above-average relative total benefits in combination with
below-average relative total costs.
The price-benefit performance map in Fig. 1 illustrates four product–
service value locations. The dashed boundary region in Fig. 1 illustrates the
product–service design values that most customers are willing to buy, and
the three-dimensional box illustration depicts the ideal value location of
substantially above-average relative value and substantially below-average
relative total costs. The ‘‘fair-value line’’ represents location points where
total relative benefits equal total relative costs.
Discontinuous innovations offering exceptionally high total benefits
sought by a customer at exceptionally low total costs are examples of an
ideal product–service design – location I in Fig. 1. Possibly surprisingly to
read, some customers are unwilling to consider such designs for several
reasons. These reasons include inertia, status quo bias, and the primacy
effect (i.e., because prior purchases from existing suppliers are resulting in
acceptable outcomes, why change?). Fear of failure of the new product–
service design, additional work in examining test data, and search for
evidence supporting the superior value of the discontinuous innovation
work against its adoption by many customers.
200 Fair Value Line

R
150
Relative Total Costs
V
100
S
T
50
I
0
0 50 100 150 200
Relative Total Benefits
Acceptable value region Ideal value region I = Ideal product-service design
Fig. 1. Price-Benefit Value Map. Source: Adapted in part from Best (2009),
Fig. 4-17, p. 119, and Gale (1994).
A recurring pattern across many industries includes early adoption of

discontinuous innovations offering superior value by customers with very
low purchase requirements – with big customers continuing to be
comfortable with placing large orders with existing suppliers. After two to
five years, rapid growth in purchases and shifts to buying product–services
built using the new technology occurs; both large suppliers and buyers are
slow to buy and build via the new technology platform (Christensen, 2003;
Woodside, 1996).
Creating a ‘‘blue sky ocean’’ is the label given to designing marketing
strategies that include building supplier value into product–service designs
focused on attracting large numbers of customers with low purchase
requirements – thereby avoiding large competitors. Such blue ocean
strategies often result in growing new markets and conversion of large
customers to product–services built on new technology platforms. See Kim
and Mauborgne (2005) for a full exposition of blue ocean strategies.
Thus, three points are worth taking away from this discussion. Due to the
high-technology electronic revolution, the occurrences of ideal value
product–service designs may be infrequent, but they are not rare in the
21st century. Such ideal product–service designs frequently do not cause a
rush to adopt among all customers (Christensen, 2003; Woodside, 1996).
Conflicts inside both the marketer and customer firms occur among the
forces (i.e., individuals and departments) favoring inertia versus the forces
favoring change – during strategic window instances when product–service
designs offering superior value become apparent (Huff, Huff, & Barr, 2001).
Eqs. (2) and (4) represent calculating difference scores for relative total
benefits or consequences versus relative total costs. The difference scores for
the four designs
Design Relative Total Benefits Relative Total Costs Value
R 1.33 1.80 .47

S 1.10 .90 þ.20
T .80 .60 þ.20
V .70 1.10 .40
result in a tie for the highest score for design S and T. Similar to calculating
benefit/cost ratios, benefit-minus-cost difference scores are fraughted with
problems of interpretations (Teas, 1993). Visualizing the data (Tufte, 2001)
becomes a necessity for making useful sense of the metrics. Visualizing the
data includes constructing price-benefit value maps similar in form as Fig. 1.
ESTIMATING TOTAL BENEFITS OF ALTERNATIVE

PRODUCT–SERVICE DESIGNS
Customers recognize several categories of benefits that accrue from physical

attributes as well as service attributes for competing suppliers’ product–
service offerings. This recognition is rarely totally explicit. Unconscious
thinking affects (1) recognizing the benefits relevant to evaluating competing
product–service designs, (2) the evaluation process, and (3) the heuristics
(decision rules) that apply to selecting and rejecting designs based on
benefits (Woodside & Wilson, 2000). Even when relative importance weights
are assigned to benefits and a customer multiplies benefit scores by the
weights, customers do not rely on the total scores in judging alternative
designs. Rather than applying such a compensatory heuristic, customers
apply decision rules that are noncompensatory and most often only partially
explicit. Customers may go through compensatory computations to learn
something about what such evaluation scores and then create and use
noncompensatory rules.
Such noncompensatory rules often include simple subroutines. ‘‘Give
exiting suppliers a second look’’ in the bidding process if a new untried
vendor offers a low price is an example of one such simple heuristic. ‘‘Never
buy from a vendor that I do not know’’ is another simple heuristic.
Thus, while asking customers to estimate relative importance scores for
different benefits may have some research value, the value of such research
has severe limits. Multiplying relative importance by benefit ratings
and summing does not provide accurate or relevant assessment as to the
steps that customers take to estimating overall values of competing
product–service designs (Gigerenzer, Todd, & ABC Research Group, 2000;
Woodside, 2003).
As an example of possible benefits that customers may use to evaluate
product–service offerings, Fig. 2 includes four categories of possible
benefits. This example is for relatively new product–service: fiberglass-
reinforced plastic (FRP) lampposts for on-street and off-street lighting
applications. The benefit categories include product benefits, service and use
benefits, company and brand benefits, and emotional benefits for the buying
firm. Each product–service design under consideration by a buying firm has
some benefits relating to its physical components – its product benefits.
Service benefits include ease of use, ease of repair, and ease of installation,
among other processes. Company and brand benefits relate to the
reputation and industry awareness of the vendor. Emotional benefits relate
to personality traits, and summary gist executives in the buying firm attach
to the personalities of vendors. See Best (2009) for a full exposition.
• No painting
• ½ the concrete in base
compared to alternatives
• 30% longer lifespan Product Benefits
• Non life threat when hit
• Ease of installation:
two-person crew Service Benefits Overall
• 50% less time to install Customer
• Guaranteed delivery dates Benefits
• Supplier reputation for quality Company or Brand Benefits

• Supplier commitment to customers
• Competence Emotional Benefits

• Ruggedness
Fig. 2. Perceived Benefits and Value Creation for New Lamppost Standard
(Fiberglass-Reinforced Plastic).
In the United States, the customer segment buying the largest share of
lampposts are electrical utility firms. Among these firms, most standards
(lamppost requirements) specify a component material: aluminum. Such
requirements prevent consideration of FRP lampposts. Also, work to
rewrite and gain approval for new requirements among large customers
requires substantial time and involvement of several departments. The
results include higher acquisition costs of FRP versus aluminum lampposts,
at least for initial considerations of buying FRP lampposts.
Fig. 3 includes five categories of costs relating to buying product–service
designs. The categories include prices paid, acquisition costs (i.e., cost of
approving the vendor and product–service design as acceptable for
purchase), ownership costs (including inventory costs and internal firm
shipping costs), maintenance and usage costs, and disposal costs (e.g.,
damaged or deteriorating lampposts need replacing).
Fig. 4 illustrates the value creation process from the perspective of an off-
street building subcontractor who is considering the purchase of 24
lampposts for a shopping mall – a relatively small purchase requirement
in comparison to the annual purchase requirements of 1,500–4,000
Price
Paid
Acquisition
Costs
Overall Costs
Ownership
Costs
Maintenance and
Usage Costs
Disposal
Costs
Fig. 3. Perceived Benefits and Value Creation for New Lamppost Standard
(Fiberglass-Reinforced Plastic).
Current Standard New Technology Standard

(Aluminum Lamp Posts) (Fiberglass Reinforced Plastic Lamp Posts)
Benefits Costs Benefits Costs
Product
Product Customer Value Benefits Customer Value
Benefits
Service Price Paid

Benefits Price Paid
Service
Benefits
Company or Acquisition Costs
Brand Benefits Acquisition Costs
Ownership costs
Company or Ownership costs
Maintenance Brand Benefits Maintenance
Emotional Costs Costs
Benefits Emotional
Disposal Costs Benefits Disposal Costs
Fig. 4. Customer Value Analysis for Two Competing Products Built on Two
Different Platforms.
lampposts by many electrical utility firms. Customer value here includes

comparing the difference between total benefits versus total costs for each of
two competing lamppost product–service designs. This subcontractor
recognizes higher product and service benefits associated with the RFP
versus aluminum lampposts and that these differences substantially more
than offset the lower company, brand, and emotional benefits associated
with the RFP versus aluminum lampposts.
The estimates for total costs of the RFP are lower for the RFP versus
aluminum lampposts. The difference is mainly due to the lower price paid
for the RFP versus aluminum lampposts.
In this example, the net customer value by this subcontractor for the FRP
lampposts is more than double the customer value estimate for the
aluminum lampposts. Such subcontractors examining the two competing
product–service designs frequently came to this conclusion. Consequently,
80% of the purchases of FRP lampposts were to small subcontractors;
median sales were five lampposts annually per customer.
The benefit and cost estimates for the two competing lampposts made
by large customers did not conclude higher customer value for the
FRP lampposts. Consequently, RFP standards did not achieve approval
among almost all large customers during the first 10 years of purchase
availability of FRP lampposts. While most marketers of FRP lampposts
directed sales calls to large electrical utility firms, only one of these firms
placed a sizeable order for these lampposts. Most large firms continued to
view total costs to be greater than total benefits for FRP lampposts, even
though the price quotes were lower for FRP versus aluminum lampposts
(Woodside, 1988).
IDENTIFYING CUSTOMER VALUE HEURISTICS
Customers do not think and purchase on the bases of ‘‘key drivers’’ or

importance ratings. They think and act on the bases of contingency
heuristics. Here is one example of a contingency decision rule: ‘‘I’m willing
to pay relative price 10 percent higher for product-service from vendor X if
the total costs are 30% lower and the total benefits for vendor X’s offering
are within 95 percent of vendor Y’s product-service design.’’ Collecting
information using methods other than asking importance ratings or the
identification of key drivers are possible and often more useful.
Think aloud methods include asking buyers and users to describe their
ongoing thinking in considering and selecting/rejecting specific competing
product–service designs [e.g., see Woodside & Wilson (2000) for an
application of the think aloud method in an industrial purchasing context].
The think aloud method is one approach for uncovering customer value
heuristics. Building forecasting models of customers’ choices among various
combinations of benefits and costs is another method. B-to-B studies into
customer preferences frequently apply this second method – often referred
to as conjoint analysis or trade-off analysis.
Asking importance and key driver questions do not accurately capture
customer thinking heuristics in relevant contexts. ‘‘We can more accurately
determine the benefits that customers value by asking them to make choices
among products that have different benefits and different prices’’ (Best,
2009, p. 130; cf. Louviere & Islam, 2008).
This section illustrates conjoint analysis in an industrial product–service
context. The application reported here was done by an industrial service
division of a large US chemical manufacturing firm. The problem faced by
the division was to select and design a new industrial MRO (maintenance,
repair, and operating) service that substantial shares of one or more market
segments would buy. The service, shotblasting, is a relatively new furnace
tube cleaning innovation introduced commercially as a furnace cleaning
service in the early 1980s. The positive features of the new service include the
following: (1) scale as well as coke removal; (2) no need to remove furnace
plugs, if present; (3) an entire pass is cleaned in one operation (thus, furnace
downtime is substantially less compared to the time required using
competing cleaning methods); and (4) cleaning is conducted in a
nonflammable, dry nitrogen environment. A negative feature of the new
service was the high operator skill and attention required to balance the flow
of propellant in the nitrogen carrier gas to prevent tube damage.
CENTRAL MANAGEMENT ISSUES
The shotblasting development and marketing team identified several

marketing issues related to gaining customer acceptance of the new service.
Four service features were selected to learn customer response to substantial
changes in the levels of each attribute. The four attributes were:
price
cleaning time required
energy efficiency achieved by the cleaning
tube damage that may result from the cleaning
Each of these attributes could be changed substantially by management

action; each was believed by two or more members of the shotblasting
development and marketing team to substantially influence customer
acceptance of the new service. Specific high, medium, and low levels of
each attribute were selected for testing based on comparisons with existing
attribute levels of competing services. For example, the new service was
introduced into several targeted markets at $22,500, a price believed by
management to be close to the very high end of the relevant range of prices
that would be considered for a cleaning service. The lowest price level
selected for testing was $13,000, substantially above the average cost to
customers for a steam air decoking application but substantially below the
cost for turbining (a competing cleaning technology). A price below $13,000
for the shotblasting service was not viewed as feasible by the new service
development and marketing team. Three members of the new service team
believed that substantial market share increase would be achieved at the
expense of turbining if the price of the shotblasting service was set 10%
below rather than 12% above the customer’s cost for turbining; thus, a third
price of $18,000 for the shotblasting service was tested.
Table 1. Competing Product–Service Design in the Conjoint Study.

Steam Air Decoking
Price $6,000
Cleaning time 36 h
Energy efficiency 75%
Tube damage 0.020v carburization loss and thermal fatigue
Shotblasting
Price $13,000, $18,000, $22,500
Cleaning time 4, 7, 14 h
Energy efficiency 75, 90, 100%
Tube damage o.005v, .005–.020v, W(1/16)v metal loss
Turbining
Price $20,000
Cleaning time 120 h
Energy efficiency 95%
Tube damage W(1/16)v metal loss
Table 1 summarizes the profiles of the existing furnace tube cleaning

product–services and the three levels tested for each of the four features of
the new service. The upper and lower levels of the relevant ranges shown for
shotblasting cleaning time, energy efficiency achieved, and tube damage
were based on comparisons to existing performance levels of turbining and
steam air decoking and what was feasible in practice. For instance, the
minimum metal loss form of tube damage (.005v) that could be guaranteed
with the use of shotblasting was set as the lower limit of the relevant range
for the new service. The existing levels of tube damage experienced often
with the use of the other furnace tube cleaning services were selected as the
other tube damage levels for testing. Close to a 100% energy cleaning
efficiency could be guaranteed with the new cleaning service: the lowest
cleaning efficiency offered with the new service was equal to the highest level
of performance achieved by steam air decoking.
Thus, management wanted useful information relevant to the following
questions:
1. Would a price decrease in the new service be likely to cause an increase in

market share?
2. Would changes in cleaning time across the range of time relevant for the
shotblasting service affect market share?
3. Would guaranteeing close to 100% energy efficiency after cleaning
increase market share substantially?
T R S
(A) $13,000 (A) $18,000 (A) $22,500
(B) 4 hours (B) 4 hours (B) 4 hours
(C) 90% (C) 75% (C) 100%
(D) .005* to .020* (D) < 005* (D) 1/16*
U V W
(A) $13,000 (A) $18,000 (A) $22,500
Key:
A: price paid
B: Cleaning time
C: Energy efficiency
(C) 75% (C) 100% (C) 90%
by cleaning
D: Tube damage
(D) .1/16* (D) .005* to .020* (D) < 005*
X Y Z
(A) $13,000 (A) $18,000 (A) $22.500
(C) 100% (C) 90% (C) 75%
(D) < .005* (D) 1/16* (D) .005* to .020*
Fig. 5. Nine Shotblasting Furnace Cleaning Treatments.
Customers participating in this study were each asked to provide the

share of business they would award to each of three product–service
designs in solving nine buying problems. Each buying problem included
one of nine designs for shotblasting as appearing in Fig. 5. Each of
these nine designs offer different combinations of different levels of price,
cleaning time required, energy efficiency achieved by the cleaning, and tube
damage.
Each of the nine designs for shotblasting was pitted against the designs of
the two competing technologies. Fig. 6 shows an example problem in this
research study.
Table 2 shows the forecasts of shares of business for alternative
shotblasting designs and the two competing product–services using
competing technologies. A total of 81 possible shotblasting designs are
possible from 3 levels of four product attributes: 3 3 3 3 ¼ 81 designs.
The data for each customer in the study and for all customers in the study
Assume that you are faced with the potential need to decoke a 2 pass. 6" OD, Direct
Fired Furnace. From the information presented below. distribute 100 points among the
three processes based on the likelihood that you would use that process to decoke the
above furnace
Steam Air Decoking
• Price .. $6.000
• Cleaning Time .. 36 hrs
• Energy Efficiency .. 75%
• Tube Damage .. 0.020" Carburization Loss

and Thermal Fatigue
Shotblasting
• Price .. $18.000
• Energy Efficiency .. 75%
• Tube Damage .. < .005" Metal Loss
Turbining
• Price .. $20.000

95%
• Energy Efficiency ..
> 1/16" Metal Loss
• Tube Damage ..
Total Points: 100

Fig. 6. Example Problem from Conjoint Study.
permit individual and total sample forecasts of purchase. Multiple

regression analysis was the analytical tool for making these forecasts. See
Woodside and Pearce (1989) for additional details of this study.
Note in Table 2 that dramatic drops in market share for shotblasting
occur when energy efficiency achieved decreases from 90% to 75% while
Table 2. Example Findings: Forecast of Share of Business from Total

Customers.
Service Pricea Time in Tube Energy Market Share (%)
Design Hour Damage Efficiency
SADb Shotblasting Turbining
1 High 4 .005 100 54 43 3

2 High 4 .005 90 56 41 3
3 High 4 .005 75 76 20 4
4 High 4 .0125 100 56 41 3
5 High 4 .0125 90 60 37 3
6 High 4 .0125 75 80 16 4
7 High 4 .0625 100 62 35 3
8 High 4 .0625 90 66 31 3
9 High 4 .0625 75 88 8 4
10 High 7 .005 100 55 42 3
11 High 7 .005 90 57 40 3
12 High 7 .005 75 78 20 4
13 High 7 .0125 100 57 40 3
14 High 7 .0125 90 60 37 3
15 High 7 .0125 75 80 16 4
16 High 7 .0625 100 63 34 3
17 High 7 .0625 90 67 30 3
18 High 7 .0625 75 89 9 4
19 High 14 .005 100 57 40 3
20 High 14 .005 90 59 38 3
21 High 14 .005 75 78 18 4
22 High 14 .0125 100 59 38 3
23 High 14 .0125 90 63 34 3
24 High 14 .0125 75 82 14 4
25 High 14 .0625 100 65 32 3
26 High 14 .0625 90 69 28 3
27 High 14 .0625 75 91 5 4
28 Medium 4 .005 100 49 49 2
29 Medium 4 .005 90 53 44 3
30 Medium 4 .005 75 72 24 4
31 Medium 4 .0125 100 50 47 3
32 Medium 4 .0125 90 56 41 3
33 Medium 4 .0125 75 76 20 4
34 Medium 4 .0625 100 57 40 3
35 Medium 4 .0625 90 60 37 3
36 Medium 4 .0625 75 84 12 4
37 Medium 7 .005 100 50 47 3
38 Medium 7 .005 90 53 44 3
39 Medium 7 .005 75 73 23 4
40 Medium 7 .0125 100 52 45 3
41 Medium 7 .0125 90 58 39 3
Table 2. (Continued )
Service Pricea Time in Tube Energy Market Share (%)
Design Hour Damage Efficiency
SADb Shotblasting Turbining
42 Medium 7 .0125 75 77 19 4
43 Medium 7 .0625 100 58 39 3
44 Medium 7 .0625 90 61 36 3
45 Medium 7 .0625 75 85 11 4
46 Medium 14 .005 100 52 45 3
47 Medium 14 .005 90 55 42 3
48 Medium 14 .005 75 74 22 4
49 Medium 14 .0125 100 55 42 3
50 Medium 14 .0125 90 58 39 3
51 Medium 14 .0125 75 78 18 4
52 Medium 14 .0625 100 60 37 3
53 Medium 14 .0625 90 65 32 3
54 Medium 14 .0625 75 87 9 4
55 Low 4 .005 100 44 53 3
56 Low 4 .005 90 47 50 3
57 Low 4 .005 75 68 28 4
58 Low 4 .0125 100 45 52 3
59 Low 4 .0125 90 49 48 3
60 Low 4 .0125 75 74 22 4
61 Low 4 .0625 100 49 48 3
62 Low 4 .0625 90 54 43 3
63 Low 4 .0625 75 79 17 4
64 Low 4 .005 100 45 52 3
65 Low 7 .005 90 48 49 3
66 Low 7 .005 75 68 28 4
67 Low 7 .0125 100 46 51 3
68 Low 7 .0125 90 50 47 3
69 Low 7 .0125 75 71 25 4
70 Low 7 .0625 100 50 47 3
71 Low 7 .0625 90 55 42 3
72 Low 7 .0625 75 80 16 4
73 Low 14 .005 100 47 50 3
74 Low 14 .005 90 50 47 3
75 Low 14 .005 75 69 27 4
76 Low 14 .0125 100 49 48 3
77 Low 14 .0125 90 52 45 3
78 Low 14 .0125 75 73 23 4
79 Low 14 .0625 100 54 43 3
80 Low 14 .0625 90 57 40 3
81 Low 14 .0625 75 82 14 4
a
High=$22,500; medium=$18,000; low=$13,000.
b
SAD ¼ steam air decoking.
dramatic increases in market share occur for steam air decoking. The
market shares for shotblasting with 75 energy efficiency levels fall
below 10% when this energy efficiency level is combined with a .0625 tube
damage level.
The results of this study vary substantially among different groups of
customers segmented by current share of business and by industry type
(chemical versus petroleum customers). Consequently, adjustments to
marketing strategies based on the results of the study varied substantially.
The key finding in Table 2 noted by the marketing manager for shotblasting
was the strong influence of tube damage on market share when tube damage
reached a high level (1/16v) but not when it increased from less than .005v to
a range of .005–.020v. He provided two implications from these results:
(1) severe tube damage had to be prevented from occurring with
shotblasting applications and (2) a guarantee of a low amount of tube
damage would not have to be set prohibitively low to possibly influence
market share positively for shotblasting.
MODELING ANTECEDENTS AND

CONSEQUENCES OF CUSTOMERS’
ASSESSMENTS OF VALUE
Fig. 7 summarizes the much of the discussion in the first half of this paper.
This exhibit shows the two forces of total benefits and total costs that affect
customer assessments of the value of a product–service design. Increases in
total benefits cause increases in customer value assessments. Increases in
total costs cause decreases in customer value assessments.
The consequences of increases in customer value assessments include
increases in customer acceptance of a product–service design, purchases,
share of business awards, and continuing purchases. These consequences
lead to increases in the customer’s comfort level and preference toward
maintaining the status quo (Christensen, 2003; Huff et al., 2001; Woodside,
1996). Increasing preference for the status quo reduces the customer’s stance
toward and acceptance of new product–service designs built on proven
superior new technological platforms. Executive leadership/stance favoring
change serves as a countervailing force to reduce the customer’s comfort
level and increase customer acceptance of proven superior technologies;
Huff et al. (2001) offer brilliant research illustrating the continuing battle
between the forces favoring inertia versus change.
+
Customer’s
Comfort Level
with Status Quo
Consequences
− Total Benefits
+ Assessment + Customer
Customer
by Customer Value Acceptance of
+ Product-Service
Proven Assessment
Superior of
Discontinuous − − Product-Service Customer’s
Innovation Total Costs Design Purchase
Assessment
by Customer Share of Business
Awarded by
Customer
− +
Executive Customer
Leadership/Stance Retention
favoring Change
Fig. 7. Antecedents and Consequences of Customer Value Assessments of

Product–Service Designs.
ADVANCES IN RESEARCH IN VALUE THEORY,

MEASUREMENT, AND PRACTICE
The remaining papers in this volume appear in one of four parts. The papers
in Part A focus on advancing conceptualizations of value. The papers in
Part B focus on metrics and measurement research into value. The papers in
Part C focus on strategic aspects of value – how to create value. The papers
in Part D focus on operational aspects, value propositions, and pricing.
Intangible Value in Buyer–Seller Relationships
In the second paper, Roger Baxter identifies dimensions of value provision

through relationships in business markets with specific emphasis on the
intangible aspects of value, which are important to long-term competitive
advantage. The provision of value to the seller is the prime focus in this
paper. The paper discusses the meaning of both the tangible and intangible
relationship value and the interplay between them and notes the importance
of assessing the intangible part of the value, particularly the part that derives
from the human aspects of the relationship.
Final Customers’ Value in Business Networks
In the third paper, Stephan C. Henneberg and Stefanos Mouzas explore the
value of the final customer in business networks. The preferences of the final
customer define the concept of the network customer. The central argument
of this paper is that companies within networks of value-creating relation-
ships can act as integrators, which, by interlocking limited value
perspectives, can approximate an absolute value horizon that includes
network customer considerations. Such interlocking activity constitutes a
managerial challenge.
Functions, Trust, and Value in Business Relationships
In the fourth paper, Thomas Ritter and Achim Walter analyze functions of
business relationships and their impact on value perception. Applying a
customer perspective, direct relationship functions are concerned about
payment, quality, and volume. Indirect functions include innovation, access,
and scouting. The study includes trust and the number of alternative
suppliers. The empirical results illustrate the important role of direct and
indirect functions for value creation.
Customer Value Metrics
The fifth paper focuses on customer value analysis and measurement,

framing customer value management as one of the main antecedents of the
company value creation process. The authors, Bruno Busacca, Michele
Costabile, and Fabio Ancarani, build on three main pillars. First, the
paper highlights the critical role of customer value in B-to-B markets,
focusing on the links between the company’s ability to manage
customer value creation processes and the positive financial and economic
outcomes generated by loyalty effects. Second, the paper develops key
analytical stages for an understanding of customer value. The focus is on
the customer value-chain concept, including consideration of the
customer information and acquisition process and its decision rules. Third,
the paper illustrates the measurement process, offering an organizational

framework for selecting the most suitable method for measuring perceived
customer value.
Total Cost of Ownership and Customer Value in Business Markets
The sixth paper explores the use of the total cost of ownership (TCO)
approach from the business marketing perspective. Gabriela Herrera
Piscopo, Wesley Johnston, and Dan N. Bellenger describe how TCO
provides a method to estimate all costs associated with the acquisition, use,
and disposal of a good or service over the lifetime of the purchase.
Organizational buyers can employ TCO analysis to evaluate alternative
offerings from suppliers, to assess ongoing supplier performance, and to
drive process improvement. Sellers can use TCO models to measure,
document, and communicate the value that their offering represents to a
customer in the way of lower costs relative to the next best alternative. TCO
analysis can be a powerful selling tool to demonstrate concrete customer
value creation for alternatives that deliver comparable benefits.
Linking Customer Value to Customer Share in Business Relationships
The seventh paper provides confirmatory evidence supporting the strong

association between customer value assessment and share of business.
Wolfgang Ulaga and Andreas Eggert report findings of a cross-sectional
study among purchasing managers in US manufacturing industries that
indicate a positive link between customer value and customer share in
business relationships. Relationship benefits have a stronger impact on
customer share than do relationship costs, such that sourcing and operation
benefits appear to represent the most promising levers for effective customer
share management. The results finally suggest that researchers should
operationalize customer share in relative terms when investigating key
supplier relationships across different industries.
Configurations and Control of Resource Interfaces in Industrial Networks
In the eighth paper, Enrico Baraldi and Torkel Strömsten identify that
the role of management control receives insufficient attention in the
literature on value creation. Their paper investigates the role of control

in value creation in industrial networks. The aim is to examine the
management and control of interfaces between key resources within and
between firms, in the networks surrounding firms, when they attempt to
create value. All the firms that take part in a value creation process have
both formal and informal control systems: these firms have budgets,
specific routines, reward systems, and sanctioned ‘‘ways to behave.’’
The paper relates the IMP (Industrial Marketing and Purchasing)
Group’s research on interaction, relationships, and networks with control
literature and presents a framework for controlling resource interfaces in
a network setting. Two in-depth cases illustrate the role of control in
value creation.
Creating Superior Value through Network Offerings
In the ninth paper, Bernard Cova and Robert Salle draw on the experiences
of project marketing and solution selling to improve the understanding of
how to create superior value for customers. Project marketing and solution
selling have both developed approaches to deal with complex marketing
situations for a number of years now. The upstream mobilization of
customer network actors and the downstream enlargement of the content
and scope of the offering are the key features of these approaches.
Competence-Based Value Framing for B-to-B Customers
The 10th paper shows how business suppliers set up processes allowing the
translation of their competencies into value for the customers. The authors,
Francesca Golfetto, Fabrizio Zerbini, and Michael Gibbert, seek to
complement the dominant view in which competencies are seen mainly as
valuable for the firm owning the competencies, but not for that firm’s
customers. In so doing, the paper contributes to two bodies of research: the
notion of core competencies in strategic management and the notion of
value for customer in business marketing. These two bodies of research
interact infrequently thus far, leaving the how question largely unanswered.
This question is relevant because competencies are immaterial, tacit, and
non-tradable assets.
VALUE DELIVERY AND VALUE-BASED PRICING IN

INDUSTRIAL MARKETS
The 11th paper proposes an own model of customer value conceptualization

in business markets; first, based on several rounds of testing, this
theoretically grounded model in managerial practice indications exists to
conclude that this model may offer benefits over current models. Second, the
paper provides a comprehensive survey of pricing approaches in industrial
markets. The author, Andreas Hinterhuber, integrates this literature
overview with own empirical findings. Concurrently, the paper summarizes
extant research on the link between pricing approach and profitability in
industrial markets. Third, the paper proposes a framework for value
delivery and value-based pricing strategies in industrial markets. Proposing
such a framework is both useful as well as necessary.
Value Creation Options for Contract Manufacturers
The twelfth paper studies how suppliers in the highly commoditized

metalworking industry try to realize new types of customer value. The
authors, Paul Matthyssens, Koen Vandenbempt, and Sara Weyns, identify
‘‘ideal’’ value positions pursued by Belgian contract manufacturers and
service providers in order to survive in an industry characterized by fierce
price competition from low-labor cost countries. Further, the paper shows
how companies can migrate to these ‘‘ideal’’ value offerings. Key success
factors and potential traps for each ideal type are identified. Market strategy
transition necessitates an internal ‘‘alignment’’ strategy and an external
‘‘coevolution’’ with chain partners.
CONCLUSION
Certainly, this volume does not offer the definitive body of work in describing
and understanding value in business markets. The volume provides a number
of useful insights and in-depth case reports on how executives in business
markets define and use value concepts in planning and implementing
strategies. While working separately in preparing their papers for this
volume, the authors offer a surprisingly cohesive collective perspective of the
antecedents, processes, and outcome of value in B-to-B contexts. The editors
hope that the reader concurs with this overall assessment.
REFERENCES
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Gale, B. T. (1994). Managing customer value. New York: Free Press.
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smart. New York: Oxford University Press.
Huff, A. S., Huff, J. O., & Barr, P. (2001). When firms change direction. New York: Oxford
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Kim, W. C., & Mauborgne, R. (2005). Blue ocean strategy: How to create uncontested market
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Graphics Press.
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Unpublished industry report. Tulane University, New Orleans.
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Woodside, A. G. (2003). Middle-range theory construction of the dynamics of organizational
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buyers’ decision processes in business-to-business relationships. Journal of Business &
Industrial Marketing, 15(5), 354–369.
INTANGIBLE VALUE IN
BUYER–SELLER RELATIONSHIPS
Roger Baxter
ABSTRACT
The provision of value, as a marketing issue, is receiving increasing
attention from managers and scholars. This attention, in combination with
strong calls for better quantification and stronger measures in marketing,
has lead to increased interest in the assessment, quantified where possible,
of the provision of value through buyer–seller relationships. This paper
identifies dimensions of value provision through relationships in business
markets with specific emphasis on the intangible aspects of value, which
are important to long-term competitive advantage. The provision of
value to the seller is the prime focus in this paper. The paper discusses
the meaning of both tangible and intangible relationship value and
the interplay between them and notes the importance of assessing the
intangible part of the value, particularly the part which derives from the
human aspects of the relationship. Despite their importance, the human
aspects of relationships and their contribution to value is a sparse topic
among researchers. The paper compares and evaluates potentially useful
relationship and value conceptualizations. The paper discusses studies of
relationship value and then outlines the results of a recent line of empirical
research into the provision of value by a buyer to a seller that utilizes a
framework synthesized from the intellectual capital literature. This recent
research conceptualizes the potential for a seller’s relationship with a

ISSN: 1069-0964/doi:10.1016/S1069-0964(08)14002-9
27
28 ROGER BAXTER
buyer to provide intangible value to the seller in terms of, first, the
resources available in the buyer and second, the capabilities of the buyer’s
boundary personnel to aid in facilitating the flow of those resources to the
seller. The paper also includes the softer human aspects in the dimensions
of value. These latter aspects are important to a full assessment of value.
The paper concludes with a discussion of aspects of intangible relationship
value that need further elucidation and will thus provide opportunities for
future research.
1. INTRODUCTION
The marketing literature expresses concern about the weakness of the
marketing paradigm and the consequent lack of involvement of marketing
professionals in the firm’s strategy formulation process (e.g., Cravens, 1998;
Doyle, 2000; Gummesson, 1998; Piercy, 1998). At least a partial explanation
of this weakness lies in the inability of sales and marketing managers to
value the outcomes of their actions. Tools to assess value outcomes are
therefore essential for sales and marketing managers, including tools to
assess outcomes of relationship management strategies. The relationships
a firm has with its customers are among the key providers of value to the
firm and are prime concerns of sales and marketing personnel. In fact, they
‘‘contribute to its organizational capital’’ (Hunt, 1997) and comprise an
important part of a firm’s shareholder value (Payne, Holt, & Frow, 2000).
The building and maintenance of networks and relationships for competi-
tive advantage and hence for performance is therefore a key task for firms
(Doyle, 1995) and in particular for their sales and marketing managers.
These assets need valuation in such a way that they are seen as a critical
contribution to the firm and their value needs clear definition.
Managers need to be able to clearly demonstrate the value they
create (Doyle, 2000) in order to argue for a sufficient share of the firm’s
resources to develop these market-based assets (Srivastava, Shervani, &
Fahey, 1998) for competitive advantage (Barney, 1991). They also need to
be able to design relationship strategies for performance (Varadarajan &
Jayachandran, 1999), and to be able to manage their portfolio of customer
relationships effectively (Srivastava, Fahey, & Christensen, 2001). To take
these actions, they need, in turn, to be able to understand the dimensions
of relationship value so that they can assess the worth of individual
relationships. Identification of the dimensions of relationship value and their
relative importance and of scales to measure these dimensions is thus a
Intangible Value in Buyer–Seller Relationships 29
useful research goal which is supported by calls for the quantification of

market-based assets and their value (Srivastava et al., 1998) and for the
provision of meaningful measures in marketing (Day & Montgomery, 1999).
In the business-to-business context, ‘‘customer profitability analysis’’
(Bellis-Jones, 1989; Gattorna & Walters, 1996; Howell & Soucy, 1990; Smith,
1993) is a well-established method which assigns revenues, expenses, assets
and liabilities to customers and algebraically sums their value to reach a
profitability figure for each customer. Increased levels of sophistication can be
applied to the basic customer profitability technique by applying,
for example, activity-based costing principles (O’Guin, 1991; Turney, 1996)
to better identify the costs that should be assigned to the customer and
discounted cash flow calculations (Brealey & Myers, 1988) to bring future
cash flows back to a present value. However, even with increased levels of
sophistication, the primary focus of customer profitability analysis is the
management of profitability by way of extrapolation of the past, with
particular focus on the management of costs, rather than on the management
of the value that is potentially available in the future from the intangible
aspect of a relationship. Without detailed knowledge of the dimensions of
the intangible value in the relationship, the customer profitability analysis
technique is largely restricted to assessing those relationship aspects that are
easily quantifiable in dollar terms by the modification and extension of
historical cost- and revenue-based accounting information.
This lack of knowledge leaves a gap in the available toolbox for managers
in assessing relationship value. As Morgan and Hunt (1999) note, much of
the value provided by a relationship may comprise intangible aspects, which
at present cannot be readily assessed other than by a manager’s experience
and intuition. In order to develop techniques specifically for intangible
value assessment, understanding the dimensions of this intangible value
is necessary. Development of scales to measure the dimensions of this
intangible relationship value and development of an understanding of its
structure is thus a useful research goal. Elucidating these dimensions and
making sense of the structure of intangible relationship value is the specific
goal of the study that this paper describes.
1.1. Research Question
Relationships provide value to the relationship partners. The Industrial

Marketing and Purchasing (IMP) literature (Hakansson & Snehota, 1982,
1995) makes this point clearly, as do the literatures on the resource-based
30 ROGER BAXTER
view of the firm (Barney, 1991) and the application of the resource-based
view in the marketing literature (Morgan & Hunt, 1999).
Because relationships provide value to the partners, the assessment of
that value is important so they can be managed effectively. As in other
disciplines, techniques are available for the value assessment of resources
in marketing-related fields. For example, techniques for the dollar value
assessment of brands (Keller, 1998) and communications campaigns (Ehling,
1992) are available. In these cases the techniques assess the intangible as well
as the tangible aspects of the resource in order to comprehensively assess the
value. Assessment of the intangible value aspects requires knowledge of the
attributes or dimensions of the intangible value of the resource. Identification
of intangible value dimensions for relationships is therefore essential to
developing a comprehensive assessment technique for relationship value.
A limited, but growing, body of research specific to the value of relation-
ships or relationship partners exists. For example, techniques for assessment
of ‘‘customer lifetime value’’ (Gupta, Lehmann, & Stuart, 2004; Kumar,
Ramani, & Bohling, 2004; Venkatesan & Kumar, 2004) are developing
rapidly. This set of techniques is principally focused on consumer relation-
ships, so given the ‘‘arms length’’ nature of consumer relationships, the
techniques generally consider relationships in an aggregated sense, rather than
relationship-by-relationship. These techniques also strictly do not have the
relationship as the unit of analysis. They therefore do not provide a basis for
the development of a set of dimensions of intangible relationship value.
In the business-to-business relationship literature, however, which is
the focus of this paper, some recent studies research the nature of
intangible value in some depth. For example, Walter, Ritter, and Gemünden
(2001), Walter and Ritter (2003), and Ryssel, Ritter, and Gemünden (2004)
research value from the perspective of the seller in a business-to-business
buyer–seller relationship. Ulaga (2003) and Ulaga and Eggert (2003, 2006a)
do the same from the buyer’s perspective. However, in all these studies, the
measures appear to be of drivers of value rather than of manifestations of
value and although they do include the intangible aspects of value, the
inclusion is limited in its extent. Also, these studies do not provide in-depth
assessment of the human aspects of relationship value creation. Hence further
research is necessary for identifying dimensions of intangible relationship
value. This necessity leads to the research question for this study:
what are the dimensions and structure, from the seller’s perspective, of the
intangible value which a buyer provides through a business-to-business
buyer–seller relationship?
This paper describes the study that deals with two related issues in order
to answer the research question:
what are the dimensions of the manifestations of intangible relationship
value?
what is the structure of this value and what might the outcome be?
The paper proposes a set of dimensions and a structure that both utilize
a novel synthesis of a framework from the intellectual capital literature
(Roos, Roos, Dragonetti, & Edvinsson, 1997). The paper also proposes
future financial performance of the relationship as an outcome. The study
takes the seller’s perspective, as will be discussed later.
The study contributes to the relationship marketing literature and to the
broader business literature by providing a sound theoretical basis for
development of a set of dimensions of the intangible value that is provided
through a business-to-business buyer–seller relationship, grounded in the
resource-based view of the firm (Barney, 1991; Morgan & Hunt, 1999) and
grounded also in the synthesis of a framework from the intellectual capital
literature. The study also contributes by providing some indication of
the relative importance of each of the value dimensions, by helping to
elucidate the structure of intangible relationship value, and importantly,
by accounting for the human dimensions (Varey, 2002) of relationship
value provision much better than do existing conceptualizations. Once the
dimensions and structure of this value provision are understood, the
development of techniques to assess value manifestations will become a real
potential. The availability of such assessment techniques will be a valuable
addition to the marketing manager’s toolbox for strategy formulation and
hence for resource management.
The study provides, in turn, support for the conceptualization, seen in the
relationship literature, of a relationship as a value provider (e.g., Hakansson &
Snehota, 1982; Morgan & Hunt, 1999). By demonstrating that managers see
relationship financial performance as an outcome of relationship value, the
study links the results to the broader performance and strategy literature
(Srivastava et al., 2001). The study also provides support for the
conceptualization of the flow of information and value through a relationship
as seen in the intellectual capital literature (Roos & Roos, 1997; Roos et al.,
1997) and in the broader management literature (Dierickx & Cool, 1989). The
study thereby makes a contribution to the body of knowledge concerning the
management of the performance of the firm as a whole.
The study has some additional theoretical implications. For example,
some controversy exists in the literature as to whether a relationship is an
32 ROGER BAXTER
entity with value in its own right or is simply a conduit for value transfer
between the relationship partners (e.g., Ambler & Styles, 1998). The study is
based on a conduit conceptualization and establishes empirical support for
that conceptualization, but later discussion in the paper notes that the entity
versus conduit argument is more complex than can be covered by this study.
This issue thus provides an avenue for further research.
This research makes a contribution to the intellectual capital literature
because this study and the work of Bontis (1998) and Bontis, Chua, and
Richardson (2000) appear to represent the few attempts currently to
operationalize the intellectual capital concepts and test them empirically.
The application of intellectual capital constructs to assess the value of
intangible value appears to have the potential to be extended into contexts
other than relationships, so when further support for the validity is
available, the operationalization of the constructs assists the development of
research in this field.
The constructs used as the basis for this research are intangible in nature,
and intangibles are a representation of future performance and worth
(Contractor, 2001). The study therefore illustrates the linkage between
current intangible value in the form of information flows and future tangible
value in the form of future financial performance.
1.2. Context of the Study
Although this research contributes to the wider literature, data for the study
come from a specific context. The scope is as follows. The primary
contribution is to the business-to-business relationship marketing literature,
and the study is conducted in that context because, as has been noted in
earlier sections of this chapter, researchers see a need for tools to assess
intangible relationship value in that context.
The research problem asks what the ‘‘structure’’ of intangible value is. In
this paper structure means the dimensions of intangible value and the paths
between these dimensions and relevant higher-order mediating constructs.
A consequence of the need to model the dimensions is the need to
measure them, so a set of scales for the dimensions is developed. The study
hypothesizes future financial performance as an outcome of intangible
value, so the paper defines this construct and develops a set of indicators.
The linkage of value to future financial performance is tested and this testing
provides an indication of nomological validity of the model.
The study is of business-to-business relationships because these are

important relationships in the broad business context and because the
judgment criteria for, and hence operationalization of, value dimensions will
be somewhat different for these relationships than for business-to-consumer
relationships. As noted earlier, the developing literature for business-to-
business relationship value assessment (Ulaga & Eggert, 2003; Walter et al.,
2001) is distinct from the customer lifetime value tradition which focuses on
consumer relationships. The literature on business-to-business relationship
value assessment offers two distinct streams of research because again the
criteria and operationalizations are different for the two perspectives. One
stream takes the seller’s perspective (Walter et al., 2001) and the other takes
the buyer’s perspective (Ulaga & Eggert, 2003). The study reported by this
paper is of value from only the seller’s perspective, as the value perceived
to be in a relationship is likely to be quite different for the two partners.
The paper later highlights this difference in perspectives.
The literature includes a range of relationships types. At one end of
this range is the more formalized and integrated joint venture format,
which in the transaction cost economics perspective is seen as close to a
hierarchy. At the other end of the range is buyer–seller relationships
which are closer to the market end of the spectrum described in the
transaction cost economics literature (Williamson, 1975). This study focuses
on buyer–seller relationships, which are particularly important for the
marketing discipline and are separately discussed in the marketing literature
(Wilson, 1995). The unit of analysis for the study is relationships and
relationship processes, so the survey asks respondents to select a customer
with which they have a relationship as the subject of the questions in
the questionnaire. The sample frame is manufacturing industry. Although
the conceptual framework for the study is general and very likely will
apply in service industries, the operationalization for different industry
contexts may be different and a mix of firms supplying services and tangible
goods may confound the results. Hence the study focuses only on
manufacturers.
The intellectual capital literature already establishes the model used as
the basis for the dimensions and structure of intangible relationship value
in the study, so the primary analysis techniques used are quantitative,
although qualitative analysis of a set of interviews with managers
provides initial validation of the proposed value constructs and the
indicators used as their measures. For the main empirical testing of the
model, the study surveys randomly selected managers in sales, marketing,
and related positions in manufacturing firms. The principal quantitative
34 ROGER BAXTER
analysis technique employed is structural equation modeling. The analysis

supports the model and dimension proposals.
1.3. Key Concepts
To aid understanding of the paper, Table 1 defines some of the key concepts
used in the paper. The following paragraphs briefly discuss some of these
concepts.
In an assessment of definitions, Harker (1999) concludes that the
‘‘coverage of the underlying conceptualizations of relationship marketing
and its acceptability throughout the RM ‘community’ ’’ are best stated in
Gronroos’ (1994) definition. This definition clearly states a profit outcome
for relationship marketing, which is a critical point for the conceptualization
of this study.
The aim of this study is to go beyond the simple definition of value as
benefits less sacrifices and to identify dimensions of intangible value to the
seller in a business-to-business buyer–seller relationship. In this paper,
dimensions are interpreted as attributes of a construct. Hair, Anderson,
Tatham, and Black (1998) refer to a dimension as an ‘‘[a]ttribute of a data
element’’ (p. 669), and give the ‘‘age or gender of a customer’’ as an example.
Similarly, in physics, a dimension is a property of an object, such as length
or mass. Drivers of intangible value are, in contrast, seen as causal
antecedents of value. For example, Lapierre’s (2000) study of drivers of
customer value includes such constructs as the responsiveness, flexibility,
and reliability of the seller, which will help create value. The distinction
between dimensions and drivers of relationship value is fundamental to the
study’s conceptualization.
The focus of the paper is intangible relationship value, which is viewed
as the intellectual capital that is provided by the relationship. In the
intellectual capital literature (e.g., Roos et al., 1997), on which this research
draws extensively, intellectual capital is defined as all that capital that is
not physical or monetary capital. Contractor’s (2001) categorization of
intangible value into three groups helps to further clarify the concept. The
first of these groups is intellectual property, which is formally registered
in the form of patents or brand names. The second group comprises
intellectual assets, which are both the registered intellectual property and
‘‘codified but unregistered corporate knowledge’’ such as ‘‘drawings,
software, data bases, blueprints, formulae, manuals, and trade secrets.’’
Table 1. Key Concepts.

Concept Definition
Relationship ‘‘Relationship marketing is to identify and establish, maintain and

marketing enhance and when necessary also to terminate relationships with
customers and other stakeholders, at a profit, so that the objectives of
all parties are met, and that this is done by mutual exchange and
fulfilment of promises’’ (Gronroos, 1994, p. 9).
Value Defined generally, for example by Woodruff (1997), as the excess of the
benefits received from the resource over the cost of (or sacrifice for) the
resource. However, this definition does not state the attributes of value
or how these can be assessed.
Dimensions Dimensions are defined as attributes of a construct, specifically of
relationship value in this study.
Drivers Drivers of intangible value are defined as its causal antecedents.
Intangible Intangible relationship value is viewed in the study as the intellectual
relationship value capital that is provided by the relationship.
Intellectual capital Defined in the intellectual capital literature (e.g., Roos et al., 1997) as all
that capital that is not physical or monetary capital.
Competence That property in a firm, or in this study, of a relationship, that generates
value ‘‘through knowledge, skills talents and know-how of employees’’
(Roos et al., 1997).
Attitude A matter of personality traits and ‘‘covers the value generated by the
behaviour of the employees on the workplace’’ (Roos et al., 1997).
Intellectual agility The ability of people to use competences and to apply them and increase
them through learning (Roos et al., 1997) as described by Prahalad
and Hamel (1990).
Relationships Seen in this study as a category that includes any useful other
relationships to which the seller gains access to by way of the
relationship with its buyer.
Organization Includes databases, process manuals, culture and management styles,
internal networks, and also intellectual property such as patents,
trademarks, brands and processes that have legal protection.
Renewal and Comprises those items ‘‘that have been built or created and that will have
development an impact on future value, but have not manifested that impact yet’’
(Roos et al., 1997).
Future financial The performance of the relationship on a 3-year horizon, in financial
performance terms, as perceived by the seller’s managers.
The third category is intellectual capital, which includes both of the first two
categories as well as ‘‘Uncodified Human and Organizational Capital,’’
such as ‘‘expertise that resides in the thinking of employees and
organizational routines.’’ The intellectual capital literature (e.g., Roos
et al., 1997) further divides intellectual capital into subcategories which
36 ROGER BAXTER
synthesize into this study’s conceptualization as dimensions of intangible

relationship value.
Human attributes comprise three of the subcategories described in the
intellectual capital literature. These attributes are the competence, attitude,
and intellectual agility of a firm’s personnel as described in Table 1 and
in this study they are the attributes of the buyer’s boundary personnel who
work in the relationship with the seller. The other three subcategories
commonly in use in the intellectual capital literature describe structural
organizational attributes, named relationships, organization, and renewal
and development, as described in Table 1. This research conceptualizes these
attributes as resources of the buyer to which the seller has access by way of
the relationship between them.
The study’s model of relationship value includes a future financial
performance construct that Table 1 defines as an outcome of that value.
By including the future financial performance outcome, the model
recognizes the profit outcome of relationships in the Gronroos (1994)
definition of relationship marketing in Table 1.
1.4. Structure of the Paper
The structure of the remainder of the paper is as follows. As a background

to the development of a model for the study, the paper discusses the
relationship literature and the relevant value literature. The paper then
discusses the potential for the resource-based view of the firm and the
intellectual capital literature to provide the principal bases for a frame-
work for the dimensions and structure of intangible relationship
value. Based on this discussion, the paper proposes value dimensions and
scales for their measurement, as well as a structure of intangible relation-
ship value in the form of a model synthesized from Roos et al. (1997),
and an outcome variable named future financial performance of the
relationship.
The paper then builds on this discussion of the framework by describing
the development of a set of measures to empirically test the proposed model
and the data collection and the data analysis. The data analysis supports the
proposed model. The paper then discusses the conclusions from the data
analysis, followed by the theoretical and managerial implications of these
conclusions, the limitations of the study and the opportunities for future
research.
2. RELATIONSHIP THEORIES AND ISSUES
A sound basis in theory is required to achieve the aim of this study, which is
the identification of a set of dimensions and a structure for the manifestation
of relationship value. From among the theoretical frameworks commonly
used to describe relationships, the study principally uses the resource-based
view of the firm. But many theoretical frameworks can describe and analyze
relationships, so as a comprehensive theoretical basis for later discussion of
value assessment, this section of the paper outlines a number of these.
Relationship marketing theory appears to be in an early stage of develop-
ment. In a bibliometric study of the relationship marketing field, where
citations were analyzed, Cooper, Gardner, and Pullins (1997) conclude that
clusters exist in the literature, but that ‘‘Relationship marketing is in
transition’’ and that ‘‘sources for theory building are not on solid ground.’’
Lehtinen (1996) makes a similar point, as do Moller and Halinen (2000)
who argue that ‘‘we do not yet have any developed theory of relationship
marketing.’’ Their contention is that no one single relationship marketing
theory exists; nor is a single one likely. The paper therefore broadly reviews
relationship theories to develop a sound conceptual background for this
study. The following sections deal first with the theories that are of
particular interest to this research, such as transaction cost economics, the
IMP approaches, and the resource-based view of the firm. Discussion of
other theories follows in somewhat less depth.
2.1. Transaction Cost Economics
The concepts of transaction cost economics are relevant to this study

because the literature has commonly used them as a basis for the study of
interfirm relationships. Coase (1937) argues that a firm forms, under the
management of an entrepreneur, in order to reduce the costs of acquiring
resources in a market. Coase sees these costs, now known commonly as
‘‘transaction costs,’’ as the ‘‘costs of negotiating and concluding a separate
contract for each exchange transaction which takes place on a market.’’
Coase sees the firm on one hand and the price mechanism on the other
hand, as two separate means of resource allocation. This view was a major
departure from classical economic theory, which postulated price as the
principal mechanism for resource allocation. In the case of the firm, resource
allocation was, according to Coase’s theory, accomplished by way of
38 ROGER BAXTER
entrepreneurial decisions. Williamson (1975) took Coase’s ideas and

developed them into a more comprehensive theory of the firm.
The development of transaction cost economics is of significant interest
for the analysis of business relationships from a marketing perspective.
Some of transaction cost economics fundamental concepts, such as asset
specificity, the classification of modes of organization for transactions into
‘‘market, hierarchical, and intermediate’’ governance structures, and the
recognition of ‘‘human-capital investments that are transaction-specific’’
(Williamson, 1979, p. 234 and 240) have assisted in the development of
relationship concepts in marketing. For example, in conceptualizing a model
of buyer–seller relationships, Dwyer, Schurr, and Oh (1987) use the work
of Macneil (1980) and others in developing theory. Macneil’s work on
relational exchange builds on the concepts of transaction cost economics
and has helped to provide a theoretical basis for the need, perceived in
the marketing literature, to have models for long-term relationships
between buyers and sellers. Scholars have viewed interfirm relationships,
with governance structures intermediate between a market and a hierarchy,
as giving some of the advantages of a hierarchy, in terms of reduced
transaction costs. The concept of asset specificity, as developed in transac-
tion cost economics, helps explain the bonds that form between partners
in an interfirm relationship; as the partners develop more assets that are
specific in their usefulness to a given relationship, they become more
strongly tied to that relationship because they need to protect those assets.
Dwyer et al. (1987) provide, in addition to a framework for the relation-
ship development process, a useful distinction in the marketing discipline
between discrete transactions and relational exchange which is derived
from the work of Macneil (1980). Of particular interest is their note with
respect to ‘‘measurement and specificity,’’ that relational exchange situa-
tions give ‘‘significant attention’’ to ‘‘measuring, specifying, and quantifying
all aspects of performance, including psychic and future benefits.’’ It is the
limited extent of the research into the assessment of the intangible ‘‘psychic
and future benefits’’ which contribute to relationship value that motivates
this study.
Although transaction cost economics is useful as the basis for the
explanation of some aspects of business relationships, some weaknesses of
the theory are as follows. The theory is not easily able to account for the
attributes other than pure self-interest that are essential in the formation
of business relationships in the marketing literature. In the marketing
literature, other attributes that are important in the formation and
maintenance of business relationships and their value are those such as
trust, commitment, and cooperation (Wilson, 1995). Also, transaction cost

economics regards business relationships as fundamentally adversarial and
regards the avoidance of the effects of opportunism by relationship partners
as of major importance in relationship development and governance. In
contrast to this adversarial view, much writing in the marketing literature
(e.g., Gronroos, 1996; Hunt, 1997; Zajac & Olsen, 1993) has the develop-
ment of benefits, and hence value, for relationship partners as its focus.
Another weakness of transaction cost economics is that the theory
considers relationships from a structural rather than a process point of view.
Zajac and Olsen (1993, p. 142) point out the need for a model of the process
of relationship formation and provide a model for the stages of inter-
organizational processes. Wilson (1995) and Wilson and Jantrania (1994)
also discuss in depth the need for a process model of relationship
development.
Zajac and Olsen (1993) also point out that, contrary to the view of
transaction cost economics, cost reduction is by no means the sole motivator
for relationship formation. In fact, a further weakness of transaction cost
economics is that the measurement of actual transaction costs is apparently
very difficult and ‘‘there is very little extant research in which transaction
costs have been successfully measured’’ (Buckley & Chapman, 1997, p. 133).
So although transaction cost economics is most useful in providing insights
for the conceptual explanation and analysis of interfirm relationships on
issues such as asset specificity and opportunism, the theory falls short of
providing a complete theoretical background for relationships. Transaction
cost economics therefore gives limited insight into avenues for the empirical
investigation of the assessment of value in business relationships. Transaction
cost economics seems to be useful as a tool in explaining why firms might
initially get together in order to reduce transaction costs and in explaining the
early interaction between the partners. But once such factors as commitment
and trust come into play in an ongoing relationship, the transaction cost
economics premises appear not to be so valid in describing the ongoing
structure and performance of relationships. Transaction cost economics
seems therefore not to be the best theory for explaining relationship value-
creating processes, which are the subject of this study.
2.2. IMP Interaction Approach
The interaction approach to business-to-business buyer–seller relationships

developed by the IMP Group (Ford, Hakansson, & Johanson, 1986;
40 ROGER BAXTER
Hakansson, 1982) challenges the following ‘‘traditional’’ views, which in the

past were the predominant ones in the industrial marketing literature.
A concentration on the ‘‘narrow analysis of a single discrete purchase’’
(Hakansson, 1982) in the industrial buyer behavior literature.
A belief that the job of industrial marketing management was the
manipulation of the marketing mix variables.
A view that industrial markets consisted of large numbers of buyers and
sellers with low barriers to switching and with low barriers to entry and
exit.
An approach in which both industrial marketing and industrial
purchasing were analyzed in isolation from one another.
Instead, the IMP Group believes that industrial markets can best be
regarded as sets of relationships between buyers and sellers, who perform
similar tasks and know one another well, and that these sets of relationships
exhibit a high degree of stability. The IMP researchers believe that the
interactions between buyers and sellers are the important relationship
aspects for study in order to understand these markets (Hakansson, 1982).
The IMP interaction model identifies ‘‘four groups of variables that
describe and influence the interaction between buying and selling
components’’ (Hakansson & Snehota, 1982). These groups of variables are:
the parties involved; the elements and process of interaction; the
environment in which the interaction takes place; and the atmosphere that
affects the interaction and that the interaction affects. The establishment
of these variables was a powerful step in the development of methods of
analysis of buyer–seller relationships and, further, in the development of
network approaches to buyer–seller relationships. A limitation of this work
is in the relative sparseness of quantitative empirical support for the
conceptualizations. Also, the focus of the IMP constructs seems to be on the
conditions in the relationship, so they seem more suited to descriptions of
drivers of relationship value that to descriptions of manifestations of value.
Despite their strength, the IMP interaction constructs therefore appear not
to provide an ideal theoretical base for this paper’s study.
2.3. Network Approach
The network approach to the analysis of interfirm relationships (Axelsson &

Easton, 1992; Easton & Araujo, 1986; Ford, 1990; Hakansson & Snehota,
1995) is also largely the result of work done by the IMP Group and
associates. The network approach derives from the IMP interaction

approach and hence from the theoretical background noted above, but
draws on a range of other theories, including resource dependence concepts
and the resource-based view of the firm (Hakansson & Snehota, 1995,
Chapter 4).
The initial work on the network approach concentrates on description
of interfirm relationships and the development of a set of variables with
which to characterize those relationships. The development of this set of
variables is accomplished principally by the use of case study analysis (see
Hakansson & Snehota, 1995), followed by quantitative studies (e.g.,
Blankenburg Holm, Eriksson, & Johanson, 1999; Metcalf, Frear, &
Krishnan, 1992; Spencer, Wilkinson, & Young, 1996). The interest of the
network approach to the study this paper describes is in its clear develop-
ment of the concept of interfirm relationships as resources, the management
of which is a prime concern for managers and its relationship. The
performance and the internal efficiency of a business is viewed as dependent
on its ability to develop resources through relationships rather than its
ability to exploit resources in isolation from other companies, and resource
development is seen as taking place between companies rather than just
within companies. This has some similarities to the competence theory view
described below, which includes among a firm’s resources those external
‘‘addressable’’ resources that the firm can access from its partners.
That a company should help its network counterparts to develop is also
important, because the company’s success is dependent on the counterparts’
success, which is contrary to the more traditional adversarial view. This
helps to prepare the ground for the view of buyer–seller relationships as
resources.
The network approach profiles a relationship between two companies in
terms of activity links, resource ties, and actor bonds. Activity links are
those ‘‘technical, administrative, commercial and other activities that can be
connected in different ways to those of another company as a relationship
develops’’ (Hakansson & Snehota, 1995, p. 26). Resource ties form between
two companies in a relationship as they jointly utilize their individual
resources, such as technological, material, knowledge and intangible
resources, and the resource ties in themselves become a resource for the
company. In the process of interaction between two companies, actor bonds
form between them and play an important part in the interaction as they
operate together with activity links and resource ties. The interlinking of
these three items of ‘‘substance’’ in a relationship, namely activity links,
resource ties and actor bonds is an essential feature of the network
42 ROGER BAXTER
approach. For example, resource ties must be utilized by way of activity

links, which illustrates this interlinking.
The paper now discusses the concept of resource ties in more depth, as
this concept provides a useful background to the concept of relationship
value. As noted above, resource ties are ties that link the resources of the
two members of the dyad and help build further resources through the
relationship. The exchange of resource through the relationship can be
utilized by each member of the dyad in further resource building by linking
their internal resources with the resources of other members of the network.
This linking will allow the development of a set of unique differentiating
positions in terms of the resources that result from the linking and the
uniqueness will potentially provide a competitive advantage for the
relationship partner and for the network.
Because its explanatory framework includes the concept of building
unique sets of resources as the result of resource exchanges between firms,
the IMP network approach fits well theoretically with the resource-based
view of the firm, which the next section of the paper discusses. The approach
also sits well with the market orientation and organizational learning views
(e.g., Jaworski & Kohli, 1993; Slater, 1997; Slater & Narver, 1995) that
resources are heterogeneous rather than homogeneous. This approach in
turn fits with the view that combinations of resources are important to the
competitive health of organizations. The experiential learning that takes
place through relationships and builds value by doing so is an example of
this combination of resources. The view of relationships as heterogeneous
is also useful in clarifying why, as noted in the literature (e.g., Ford,
McDowell, & Tomkins, 1996); absolute quantification of the value of a
relationship is very difficult. No one antecedent value for a relationship
prevails; the value of a relationship as a resource is dependent on what other
resources, including other relationships, the resource combines with
and hence can be quite different for each of the two parties in the dyad.
Firms combine these resources in many different ways and the skill in
combining resources in innovative ways is one of the competitive strategic
skills of a firm.
The above discussion of the network approach is useful to this study
because the concepts discussed support the importance of work on value
assessment in buyer–seller relationships and provide a broad background
to the research. The discussion also suggests, however, that though the
network approach is very useful in supporting the view of the relationship
as valuable because of its provision of resources, the approach is still in
the conceptual stage of development and operationalization as a set of
dimensions of intangible relationship value is not easy to visualize. The

approach therefore gives only limited assistance in modeling and in
operationalizing constructs for empirical research.
2.4. Resource-Based View of the Firm
The resource-based view of the firm is regarded in the literature as a useful

generating theory for the study of the assessment of value in relationships.
The development of both tangible and intangible resources that will give
advantage in competitive markets is seen in the resource-based view as a
major reason for the formation of a firm (Barney, 1991; Conner, 1991).
Relationships, along with such factors as brands, intellectual capital, and
market orientation, are among the intangible resources which firms develop
in order to achieve competitive advantage. Because relationships include
much knowledge that is tacit and therefore difficult to emulate, they are
valuable in providing points of differentiation from competitors (Morgan &
Hunt, 1999) and, in classical economic terms, to contributing to ‘‘quasi
rent’’ or ‘‘excess profit’’ which is realized as increased financial performance.
At a broad level, the resource-based view thus aids conceptualization of this
study by providing a theoretical rationale for regarding relationships as
having value and for regarding the assessment of their value as important,
on the basis that they are intangible assets of an organization. At a level that
is more specific to this research, the resource-based view, and its application
to marketing in general and to relationships in particular, is very useful as a
path to the conceptualization of intangible relationship value. The paper
further develops this conceptualization later. But before discussing the
resource-based view as applied specifically to relationships, the paragraphs
below first discuss the view in general.
The origins of the resource-based view are principally in the strategic
management and economics discipline areas (Amit & Schoemaker, 1993;
Conner, 1991; Penrose, 1959; Wernerfelt, 1984). The resource-based view
defines resources as ‘‘the tangible and intangible entities available that
enable a firm to produce a market offering that has value for some market
segment(s)’’ (Hunt, 1997, p. 433). Thus, a fundamental precept of the
theory is that the competitive position of a firm and a firm’s financial
performance depend on its ability to develop key resources that are
important to producing, distributing, and marketing its products. As
Conner and Prahalad (1995) note, ‘‘a theory of the firm generally addresses
two issues: why firms exist and what determines their scale and scope.’’
44 ROGER BAXTER
The resource-based view of the firm sees a strong link between sustained
competitive advantage for the firm and the resources that are available to it.
Resource-based theory traditionally focuses on the internal characteristics
of the firm, rather than on its environment, but more recent discussion has
extended the theory to include resources external to the firm.
Barney (1991) defines firm resources as including ‘‘all assets, capabilities,
organizational processes, firm attributes, information, knowledge, etc.
controlled by a firm that enable the firm to conceive of and implement
strategies that improve its efficiency and effectiveness.’’ Barney believes that
when a firm puts in place a strategy which is different from its competitors
the firm gains competitive advantage. This competitive advantage is
sustainable when the benefits of this strategy cannot be duplicated by its
competitors. In order to provide sustainable competitive advantage to
a firm, a resource must be valuable, be rare, be not perfectly imitable and
not have ‘‘strategically equivalent substitutes.’’ Barney (2002) and other
writers include relationships among the resources that may bring sustainable
competitive advantage.
There are some questions in the literature about the resource-based view.
In an extensive review of progress in the development of resource-based
theory since the work of Wernerfelt (1984), Barney and Arikan (2001)
note some of these issues that need to be resolved in its further development
and testing. They see the need to develop theory to generate strategic
alternatives, to explain the rent appropriation process, and to successfully
implement resource-based strategies.
On one hand, Barney and Arikan, as proponents of resource-based
theory, present these as issues that will be resolved by further theoretical
and empirical development. On the other hand, authors who favor other
theoretical approaches see issues in the resource-based theory as serious
problems. For example, Bromiley and Fleming (2002) note that while
resource-based theory ‘‘has contributed to our understanding of firm
heterogeneity, it is plagued by contradictory assumptions, unclear con-
structs, and poorly articulated causal processes’’ and they propose
evolutionary theory (Nelson & Winter, 1982) as a more sound starting
point for strategic management thinking. Also, despite the listing of a
substantial number of empirical studies that relate to resource-based theory
by Barney and Arikan (2001), Hoskisson, Wan, Yiu, and Hitt, (1999) note
that ‘‘empirical testing of the resource-based theory faces great challenges.’’
As the result of difficulties in measuring rate, inimitable and firm-specific
resources, which are usually intangible, ‘‘researchers have used proxies
as measures of intangible constructs.’’ This measurement difficulty with
resource-based constructs is an issue for the empirical research of this study,

which is conceptually reliant on the resource-based view, among others, and
is quantitative in its approach.
This issue of a lack of empirical testing and the consequent difficulties of
operationalization is the reason for the synthesis of an intellectual capital
conceptual framework as the basis for a set of dimensions of intangible
relationship value in the study. The intellectual capital framework closely
relates to the resource-based view conceptually, because its roots are in
Penrosian economics (Penrose, 1959). But the framework has a history of
operationalization in both the practitioner and academic literature. The
position of this study is thus that the resource-based view has a lot to offer in
characterizing the process of resource transfer between organizations
for competitive advantage and heterogeneity (Hoopes, Madsen, & Walker,
2003), as explained by Morgan and Hunt (1999). But for modeling, and for
operationalization of the relevant constructs, the study needs to look
beyond the resource-based view. This position is further discussed in the
following paragraphs, and then in more detail later in the paper.
For some time now several areas of marketing have used the literature
of the resource-based view and the competitive advantage literature as a
theoretical background both explicitly and implicitly. Some examples are
as follows. The development of a general theory of competitive advantage
(Day, 1994; Hunt & Morgan, 1995, 1996) and the theoretical and empirical
developments in the analysis of the importance and effectiveness of the
adoption of a market orientation by an organization (Jaworski & Kohli,
1993; Slater & Narver, 1995) use concepts from the resource-based
view. The ‘‘customer value’’ concepts (Parasuraman, 1997; Slater, 1997;
Woodruff, 1997) and the development of the theory of networks, of
alliances and of relationships in general (e.g., Hunt, 1997) also use these
concepts. The marketing and management literature expresses the belief that
firms must differentiate themselves, so Hunt and Morgan (1995) combine
the concepts of the resource-based view with the marketing concepts of
competitive advantage and differential advantage and with the theory of
competitive rationality (Dickson, 1992) to develop a ‘‘resource-advantage
theory of competition.’’ They argue that the resource-based view gives
a more sound rationale than other theories for the development of the
differential advantage that is at the core of conventional marketing theory
and practice, with its concepts such as segmentation, differentiation, and
market orientation.
Following on from the points made in the previous paragraph, the
resource-based view can be used to explain the building of competitive
46 ROGER BAXTER
advantage in terms of the assets of a firm, and even more so in terms of the
capabilities of a firm (Day, 1994). Thus Day offers a theoretical explanation
of capabilities in terms of the resource-based view and applies the view to
marketing activities and distinguishes (p. 36) between assets and capabilities.
Assets are ‘‘the resource endowments the business has accumulated
(e.g., investments in the scale, scope, and efficiencies of facilities and
systems, brand equity, and the consequences of the location of activities for
factor costs and government support).’’ Capabilities are ‘‘the glue that
brings these assets together and enables them to be deployed advanta-
geously.’’ Because organizations embed capabilities so deeply, firms cannot
trade them and competitors cannot imitate them (Dierickx & Cool, 1989).
The importance of capabilities in providing long-term sustainable compe-
titive advantage when utilized in combination with the assets of the
organization derives from the lack of tradability and the inimitability and
thus from the fact that they cannot be easily duplicated, if they can be
duplicated at all.
Organizational learning to incorporate new knowledge is an essential
part of gaining competitive advantage (Slater & Narver, 1995, p. 66) and an
essential part of this organizational learning is externally oriented toward
learning about customers’ requirements by way of a customer orientation
and the development of the relevant capabilities (Day, 1994; Slater &
Narver, 1995). This knowledge about customers’ requirements, and how to
satisfy those requirements, is a key resource and hence its development
creates value in business relationships, such as the buyer–seller relation-
ships that are the subject of this study. In particular, as a justification
of the research described in this study, relationships that allow the seller
to gain knowledge of its immediate downstream customers or through
these immediate customers, the markets further downstream, are valuable
relationships to the seller.
The literature of the resource-based view notes relationships as valuable
resources of a firm (Barney, 1991, 2002). Through relational exchanges in
partnership with other firms, a firm can gain access to resources and by way
of a set of core competencies (Prahalad & Hamel, 1990) combine these with
existing resources to achieve competitive advantage, thus creating value.
Hunt and Morgan (1995) have classified the types of resources that a firm
can access in this manner through relationships. These resource types are
the following: financial, legal, physical, human, organizational, relational,
and informational resources. Morgan and Hunt (1999) take these classes
of resources and describe them in detail. As will be discussed in more
depth later, the Morgan and Hunt resource categorizations and domain
descriptors are useful in providing a conceptual path to the identification

and operationalization of dimensions of intangible relationship value.
2.5. Social Exchange Theory
Some of the more useful constructs used in describing and analyzing

relationships, such as commitment, trust and dependence, derive from the
social exchange literature. A social exchange approach to business relation-
ships views cooperation as a benefit that leads to positive outcomes based on
self-interest in social situations, as described by Blau (1964) and Macneil
(1980). The discussion of these constructs by Blau and Macneil extends to
their importance in political and economic institutions. The literature on
relational contracts, described by Baker, Gibbons, and Murphy (2002) as
‘‘informal agreements sustained by the value of future relationships,’’
further extends these concepts to business relationships (e.g., Dore, 1983).
The marketing literature on relationships has frequently reported research
on the commitment and trust constructs, for example. The constructs are
useful for relationship characterization, and Morgan and Hunt (1994) tested
them empirically as key mediating variables between sets of antecedent
and outcome variables. Although the constructs are frequently related to
relationship value in their nomological net (e.g., Ulaga & Eggert, 2006a),
their application appears to be more useful in describing the atmosphere,
outcomes, or antecedents of relationship value than as value dimensions.
The social exchange theory concepts of comparison of a relationship with
an ideal relationship, identified as CL, and with an alternative relationship,
identified as CLalt (Kelley & Thibaut, 1978; Thibaut & Kelley, 1959), were
developed as a framework for the analysis of social relationships. They have
been used in the development of business relationship theory (Anderson &
Narus, 1990), for the evaluation of outcomes and for value assessment
(Werani, 1996; Wilson, 1995; Wilson & Jantrania, 1994) on the basis that
one of the ways of assessing the value of a relationship is by comparison
with other relationships, but again, they appear to be outcomes rather than
dimensions of value.
2.6. Competence Theory
Although not widely used as a basis for discussion of relationships in the

marketing literature so far, competence theory offers an interesting
48 ROGER BAXTER
perspective. Similarly to resource dependency theory, competence theory

closely relates to the work of Prahalad and Hamel (1990) on core
competencies and derives from classical economic theory. Competence
theory attempts to bring together many schools of thought on strategic
management theory, as explained by Sanchez and Heene (1997). Compe-
tence theory especially tries to bring together two broad streams which
commenced in the 1950s and 1960s: the more externally focused economic
perspectives which are derivatives of industrial organization economics such
as value chain analysis and the more internally focused general management
theory, with a behavioral and organizational perspective, developed
originally by Harvard Business School. Competence theory also includes
concepts from more recent strategic schools, such as the resource-based view
(Wernerfelt, 1984) and, especially, the core competence ideas (Prahalad &
Hamel, 1990).
The theory is of particular interest to this study because of the help
provided in clarifying the way in which resources transfer between
organizations. The theory points out that the tangible and intangible
resources that a firm utilizes may reside both within the firm (as firm-
specific resources) and outside the firm (as firm-addressable resources).
Competence theory recognizes that firms compete and cooperate to gain
resources and capabilities, and so introduces ‘‘an essential supply-
side dimension to industry dynamics’’ (Sanchez & Heene, 1997) that will
better recognize ‘‘important interdependencies and complementarities’’
that will not be seen with a product-market demand-side view. The theory
also views the firm as a ‘‘goal-seeking open system’’ and thus recognizes the
importance of managing the firm’s asset stocks and flows (Dierickx &
Cool, 1989), particularly for the intangible assets and capabilities
that contribute to future achievement of the firm’s goals. Capabilities are
defined by Sanchez, Heene, and Thomas (1996) as ‘‘repeatable patterns of
action in the use of assets to create, produce and/or offer products to the
market’’ and competences as ‘‘an ability to sustain the coordinated
deployment of assets in a way that helps a firm achieve its goals.’’ The
flow of those higher-order intangible assets between firms is what concerns
the study described in this paper, hence the interest of this theory to the
study.
Empirical work utilizing competence theory is limited. However, Lambe,
Spekman, and Hunt (2002) use these concepts with a range of citations from
the competence literature to provide a theoretical background for their
modeling of the competence of firms in forming alliances.
2.7. The Political Economy Approach
The political economy approach (Arndt, 1979, 1983) to marketing theory

was introduced in the 1970s and 1980s in response to the need for a broader
theory than microeconomics, that would cope with the increasing emphasis
on exchange, and hence of relationship building and maintenance, as the
central function of marketing. The political economy approach positions
marketing as the management of exchange behavior and contributes to the
building of relationship development models such as that of Dwyer et al.
(1987). Although the political economy has had a considerable effect on
the development of relationship theory and thus indirectly on empirical
research, it does not provide any obvious set of constructs that might easily
be used as dimensions of intangible relationship value and its dimensions are
not easy to operationalize.
2.8. Resource Dependency Theory
Resource dependency theory has been used primarily in the channels

literature (e.g., Heide, 1994; Stern & Reve, 1980). The theory is largely based
on the idea that one of the main reasons for a firm to form relationships with
other firms is to gain access to the resources that the firm does not possess
and that the use of power is needed to gain those resources. Hence an
important factor in determining governance of a relationship is the relative
levels of power and dependence between the partners (Pfeffer & Salancik,
1978). But the resource dependency viewpoint of the relationship is an
adversarial one and does not see dependence as positive. This stream of
literature is useful to this research by supporting the concept of the
relationship as a nexus for resource flow between organizations, but does
not provide a set of constructs as a basis for value dimensions.
2.9. Agency Theory
Agency theory (Eisenhardt, 1989) can be useful in explaining relationships.

Its base is in the need of the partners to reduce the cost of the risk in the
relationship that arises from the fact that the partners will have different
goals and that they bring different information to the relationship. The
partners therefore trade off these differences in a way that is similar to the
50 ROGER BAXTER
way in which a principal and agent interact. The concepts used to build the
theory, such as goal conflict, uncertainty, information asymmetry, bounded
rationality and cooperative behavior, are similar to those used to build other
relationship theories, so agency theory does not appear to add a lot to this
research.
2.10. Application of Relationship Theories
This section of the paper discusses the use of the theories reviewed above for
their effective application to the goal of the paper, which is to develop a
model and measures of intangible relationship value. Although the literature
uses many theories for the description and analysis of relationships, and
despite the lack of a unifying theory as noted above, many overlaps and
linkages occur between these theories. The review above notes some of
these. For example, similarities are present in the work of the IMP Group,
the ‘‘Nordic School’’ of marketing and those who apply resource-based
theory to marketing. But some major differences also arise in the theories.
One difference, noted by both Donaldson and O’Toole (2002) and by Varey
(2002), is between those that are regarded as economic-based and those that
can be regarded as behaviorally based or socially based. Economic benefits
are the focus of transaction cost economics, agency theory and the channel
literature. Behavioral benefits are the focus of the social exchange literature.
In view of the overlaps between theories, and despite the dichotomy
between economic-based and behaviorally based theories, much of the
recent work on relationships, particularly that concerned with performance
and value, has combined a range of theories, both economic- and
behaviorally based. Examples are the work of Donaldson and O’Toole
(2002), Werani (2001), Mandjak and Durrieu (2000), and Ulaga and Eggert
(2003). In fact, in the present state of relationship marketing theory,
when no one conceptualization is clearly superior or all-encompassing,
Donaldson and O’Toole (2002) suggest adopting a ‘‘meta’’ approach and
thus a ‘‘blend’’ of these theories is best.
This study identifies constructs as potential dimensions of intangible
relationship value. The meta-view of the relationship literature that is noted
above would at first sight suggest assessing the many variables that emerge
from that literature, as components of the relevant nomological net, in terms
of their potential usefulness for the construction of a model of those
dimensions. Wilson (1995, p. 337, Table 1) identifies a number of these
constructs. Examples are commitment, trust, cooperation, mutual goals,
adaptation, and non-retrievable investments. Interesting and conceptually

important as these constructs are, the question that arises is what they might
contribute toward the aim of this study. Unfortunately, none of them by
itself gives a simple indication of how to approach the identification of the
dimensions of the intangible aspects of relationship value. In fact, these
constructs seem not directly applicable as components or dimensions
of relationship value. For example, although Lapierre (2000) uses a set of
‘‘value-based drivers,’’ including trust, in an empirical study to develop a
‘‘scale of customer-perceived value,’’ the constructs such as trust, commit-
ment, and satisfaction are apparently antecedents, outcomes or facilitators
of value, rather than as its dimensions. For this reason, Ulaga and Eggert
(2003) express concern that Lapierre includes constructs such as trust
and solidarity in her conceptualization of relationship value, and note that
‘‘they are typically treated as distinct constructs.’’
The point that these types of constructs are distinct from value dimensions,
and fit in at a different level in the nomological net, is further supported by
the results of other studies, for example one by Walter and Ritter (2003).
They successfully empirically test a model that includes trust, commitment,
and adaptations as antecedents of their ‘‘direct value-creating functions’’ and
‘‘indirect value-creating functions’’ for buyer–seller relationships. The
placement of trust, commitment, and adaptations in their model is at a level
that is quite distinct from their value dimensions. Similarly, a study by
Blankenburg Holm et al. (1999) clearly sees commitment and dependence as
antecedents of value creation. Hogan (1998) investigated relationship value in
terms of the constructs discussed above, such as trust and adaptations, but his
model again includes them as antecedents and facilitators of relationship value
rather than indicators of a set of dimensions of the kind that are the subject of
this study. Ulaga and Eggert (2006a) empirically support a model that has
commitment, trust, and satisfaction as mediators between relationship value
and two outcomes, which are the intention to expand the relationship business
or the propensity to leave the relationship. Relationship value in the Ulaga
and Eggert model has its own set of dimensions and commitment, trust, and
satisfaction are at a level in the nomological net that is quite separate.
So, given the argument above that many of the constructs used in the
relationship literature cannot be used directly as dimensions of intangible
relationship value, the need is to identify theories that can provide such
dimensions. The discussion now turns to that issue. In order to fulfill the
requirements for adoption as the basis for the development of a relationship
value model and dimension, a theoretical approach must provide domain
coverage of the relevant value issues and be viable for operationalization.
52 ROGER BAXTER
With respect to the domain coverage issue, the resource-based view does
appear to have promise as a conceptual basis for relationship value dimen-
sions, based on the discussion of the work of Morgan and Hunt (1999) above
and the discussion again later in the paper. The resource-based view has a
focus on value creation rather than cost reduction, which fits with the aim of
this study. At the same time, the resource-based view can span the dichotomy,
noted above, between the more adversarial and economically focused theories
such as transaction cost economics and the more behaviorally focused
theories such as appear in the social exchange literature.
The resource-based view deals with ‘‘economic’’ resources such as
financial, legal, and physical resources, which comprise a large part of the
resources that flow between the parties to a buyer–seller relationship. But
the resource-based view also deals in depth with, for example, human,
relational, and informational resources (Morgan & Hunt, 1999). Varey
(2002) notes that in relationship marketing, ‘‘we must consider relational
process and outcome indicators’’ and also notes the need, in moving to a
more relationship-based view of marketing, to consider that relationship-
based marketing ‘‘thrives on insight, constant change, creativity, and
humanistic values.’’ These behavioral aspects and other intangible aspects
are an important part of the resource-sharing and value-creating facility of
the relationship and as the paper details later, the resource-based view gives
good domain coverage of these aspects of relationship value.
Considering the issue of operationalization noted above, the problem
generally presented by the theories reviewed earlier in this chapter is that
their empirical testing and the understanding of their operationalization are
still very limited. However, although the resource-based view does require
conceptual development in order to be useful because of difficulty with
theoretically sound operationalization (Hansen, Perry, & Reese, 2004), this
study proposes a conceptualization that can achieve this operationalization.
The study uses a framework synthesized from the intellectual capital
literature for this purpose, on the basis that the latter closely relates
theoretically to the resource-based view.
Also in favor of the resource-based view approach to relationship
marketing is that its operationalization provides a set of dimensions of value
manifestations, rather than a set of drivers. This is in contrast to other
published studies of business-to-business relationship value, which appear to
have tested the following types of constructs: antecedents or facilitators
of value provision; or drivers of value provision through relationships; or
both (e.g., Walter & Ritter, 2003). But they do not appear to have tested
dimensions of value manifestation, in the form that this paper defines
dimensions. The aim of this study is to identify dimensions of the manifesta-

tion of the intangible part of relationship value, as a set of dimensions are
needed to pave the way to development of value assessment tools. In order
to assess what value has been created, managers need to assess manifesta-
tions. The assessment of drivers is an equally important research task and
management task, but that task requires different measures, such as those
used by Walter and Ritter and by Ulaga and Eggert (2003). The application
of the resource-based view to relationships by Morgan and Hunt (1999),
and its operationalization by way of a synthesis from the intellectual capital
literature in this study, is in terms of the nature and dimensions of the
resources that are provided through the relationship, rather than in terms
of what drives the development of that value. The resource-based view
therefore appears to offer a suitable theoretical basis for the study in this
respect. Before discussing this study’s conceptualization of intangible
relationship value and its dimensions, the paper will next discuss value, its
importance to marketing, and its provision through relationships.
3. MEANING AND MANAGEMENT

OF RELATIONSHIP VALUE
For some years now, practitioners and academics in marketing, accounting,

finance, and other discipline areas have commented on the need for the
development of methods of assessment of value of the so-called ‘‘marketing
assets’’ of organizations (e.g., Anderson, 1995; Guilding & Pike, 1990;
Wilson, 1995; Wilson & Jantrania, 1994). Marketers need urgently to
develop techniques to assess and report on the value that their activities
create. Day and Montgomery (1999) state ‘‘Challenge 1’’ in their list of
challenges for academic marketers as the need to ‘‘Provide meaningful
measures, inferences and calibrations’’ and Varadarajan and Jayachandran
(1999) note that ‘‘a broader focus on performance would enable marketers
to more fully understand the performance consequences of strategy.’’
Assessing the value of market-based assets is important to marketing
professionals because shareholder value creation is the common measure for
the activities of an organization and hence is important at the interface
between marketing and other functions (Doyle, 2000). Marketers need to be
able to express the value of the assets they create, in order to participate in
this common language of value and to be able to justify their use of the
organization’s resources. The interface between marketing and other
54 ROGER BAXTER
functions, particularly finance and accounting, has therefore received atten-

tion in the literature (e.g., Barwise, Marsh, & Wensley, 1989; Srivastava et al.,
1998). Management accountants are concerned with the assessment of the
value of market-based assets (Guilding & Pike, 1990). Even if the balance sheet
does not express such assets, effective management of market-based assets is
critical because of the large expenditure by organizations on their creation.
Top management increasingly requires that ‘‘marketing view its ultimate
purpose as contributing to the enhancement of shareholder returns’’
(Srivastava et al., 1998). The view of Srivastava et al. is that the inability
of marketers to ‘‘identify, measure, and communicate to other disciplines
and top management the financial value created by marketing activities’’ is a
reason why the contribution of marketing to the strategy formulation
process has been limited. Doyle (2000) echoes this view. With this in mind,
the marketing discipline has attempted to determine the linkage between
such metrics as customer satisfaction and product/service quality on one
hand and financial outcomes on the other hand (e.g., Keiningham, Rust, &
Weems, 1994; Rust, Zahorik, & Keiningham, 1995). These linkages have not
been at all clear and this lack of clarity is jeopardizing the introduction and
use of systems for satisfaction and quality improvement. This inability to
introduce systems is because their worth is not clear; or because their design
cannot be optimized in the absence of valid measures of outcomes; or
because they cannot be designed to the specifics of the organization in which
they are installed. To get the best results from limited resources requires
knowledge of the linkages between inputs and outcomes.
Given this background, researchers and managers are working to find
techniques for the assessment and management of the value and
performance of buyer–seller relationships. Relationships are strategically
important to an organization and in order to manage them effectively,
managers must be able to assess their value and performance. Research that
focuses strictly on relationship performance is limited. Studies by Hausman
(2001) and by Donaldson and O’Toole (2002) on relationship performance
dimensions are two of the few available, but the literature on the topic of
relationship value is starting to grow. The paper will now review what is
known about the provision of value by relationships.
3.1. The Concept of Relationship Value
Woodruff ’s (1997) analysis of customer value definitions in the marketing

literature indicates that the value of a resource to an entity can be defined
very generally as the excess of benefits received from the resource by the
entity over the cost of, or sacrifice for, the resource to the entity. This is fine
as a basic definition, but the definition describes neither how the dimensions
of value can be assessed nor what the issues are that require to be considered
in assessing the intangible value that this study addresses. The following
paragraphs will therefore discuss issues that need to be considered in
operationalizing intangible relationship value. These include the following
points: the level of tangibility versus intangibility of relationship resources;
issues of the time dependence of value realization; issues of the manifesta-
tion of value versus its drivers; and the way in which relationship value is
appropriated by the relationship parties.
The discussion first considers intangibility of value. Considered broadly,
market-based assets (Guilding & Pike, 1990; Srivastava et al., 1998, 2001)
fall into the category of intangible assets when considered from an
accounting point of view. However, the ‘‘tangible–intangible’’ classification
needs clarification. There are different levels of intangibility that describe
a relationship. At a more tangible level, the dollar value a relationship
provides helps describe that relationship; or at a less tangible level, the
assistance a relationship provides in giving information about downstream
markets is part of the description. Taking the conduit view of a relationship,
as this study does, the tangible aspects of the relationship’s value provision
include the flows of goods and money back and forth across it. The
intangible aspects include tacit and explicit knowledge (Nonaka, 1991) that
flows over time between the relationship partners.
Well-established techniques for the value to the seller of a customer or
segment such as ‘‘customer profitability analysis,’’ can assess the more
tangible part of the value of a relationship, in terms of more readily
identifiable and quantifiable cash flow streams, as noted earlier. The
identifiable cash flow streams are, for example, inflows such as revenue and
outflows such as product costs, salespeople’s’ direct costs, bonuses and
merchandizing costs, and direct warehousing and distribution costs.
The intangible part of the value cannot similarly be assessed in terms of
readily identifiable and quantifiable cash flow streams. But comprehensive
assessment of the value of relationships requires that the intangible and
human aspects (Varey, 2002) as well as the tangible aspects be assessed and
quantified as far as possible. This is particularly so given the increasing
emphasis on the intangible aspects of marketing activities (Vargo & Lusch,
2004). The value dimensions identified must therefore include in their
domains as much of the more intangible value as possible, which is the aim
of this research.
56 ROGER BAXTER
The issue of the time at which the value of an asset is realized in the form
of a cash flow, which is noted above, is closely related to the issue of
intangibility. On one hand, the capital flows from physical resources such as
buildings and machinery are fairly immediate and generally classified as
tangible. They can be relatively easily forecast into the future using the
discounted cash flow technique, which recognizes and accounts for the ‘‘time
value of money’’ in the discount rate. However, much of the future value
that may be realized from a market-based asset such as a buyer–seller
relationship or a brand is potential and strategic in nature and this is
especially true for the human aspects of value. Because the firm largely
realizes the cash flows from these substantially intangible resources in the
future (Srivastava et al., 1998; Srivastava, Shervani, & Fahey, 1999) they are
much more difficult to quantify. The ‘‘most intangible’’ resources such as
tacit know-how and personal relationships are realized entirely in the future
and are the most difficult to quantify. An attempt to quantify the intangible
part of the value of a resource, as in the case of this research, must account
for this issue.
As the focus of this study is on the assessment of the value in business
relationships from a management perspective and the strategic use of this
information for optimization of these assets, the concern is therefore with
value on a ‘‘value-in-use’’ or ‘‘going concern’’ basis (Barth & Landsman,
1995; Srivastava et al., 1998; Wilson & Jantrania, 1994), rather than on the
appraisal value at a time of sale or acquisition. Value in use, which is
of critical concern to the marketing discipline (Vargo & Lusch, 2004), is a
measure of the relative value of a resource in comparison with other
resources that are possible substitutes.
The distinction between sources or drivers of value and its manifestations
also needs to be clearly made for this study, as they are quite different issues.
This distinction is made by Srivastava et al. (2001) for market-based assets
in general and by Keller (1998) for brands as a more specific example. In the
Srivastava et al. discussion, relationships are seen as ‘‘relational market-
based assets’’ that have value, because they are integral to the creation of
customer value through such creation processes as product innovation
management, potentially resulting in financial performance outcomes for
the firm. Relationships thereby contribute to the firm’s shareholder value
and have major strategic significance. In the specific case of brand equity,
Keller discusses the measurement of its sources, such as awareness by
way of recall and recognition whereas he discusses as a distinct issue the
measurement of outcomes of brand equity in terms of the absolute dollar
value of a brand or the comparative values of brands. Most of the published

work on relationship value to date is at the level of the antecedents or
drivers of value, with limited linkage to manifestations. The aim of this
study is to illustrate this linkage, which is seen by Srivastava et al. (2001) as
an important issue for research. The study assesses provision of intangible
value in terms of the potential for outcomes and links this to a final
outcome, performance. This requires the development of suitable scales
at the ‘‘consequence or manifestation of value’’ levels. The focus of the
research that this paper reports on is the assessment of the value provision
by a relationship, so the focus is on the manifestation of value in the
outcomes of the value-creating process rather than the creation, source, or
drivers of value.
As noted above, an issue that appears in the literature is that of the
‘‘appropriation’’ of relationship value by the relationship partners, or the
sharing between them of that value. The question of how to ‘‘share between
the partners the value created in the relationship’’ is ‘‘a major issue’’
(Wilson, 1995, p. 342), particularly if one adopts an adversarial view
of relationships. This suggests that consideration of both sides of a relation-
ship is essential to researching its value. But a good argument is that
a relationship does not provide a discrete and finite pool of value for
participants. This argument is particularly true for intangible resources
and for the conduit conceptualization of a relationship, which is the
conceptualization this study adopts.
In fact, quite a different set of resources flow to each partner from the
other party through the relationship and each partner will have quite
a different set of existing internal resources with which to combine the
resources flowing from the other party. Each partner has quite a different
set of management processes for ‘‘acquiring and deploying resources’’
(Sanchez & Heene, 1997) and for achieving value by combining the inflows
of resources with its existing internal resources. As an illustration of this,
Werani (2001) found empirically that relationship value had quite a
distinctly different structure for the buyers than for the sellers. The value of
a relationship to its parties will also vary with time as the circumstances of
the relationship and the participants vary. There is a logical inconsistency
in ascribing a single value to a relationship and thus to discussing splitting
this value up between participants, unless the discussion is restricted to the
tangible value of the shares of the margins that are available to each
participant. Therefore, this study restricts its research of relationship value
to include only the perspective of the seller.
58 ROGER BAXTER
3.2. Value Provision by Relationships
The basis for, and meaning of, value provision through relationships
requires discussion to aid understanding of the model and measures
proposed later. Two conceptualizations of value provision by relationships
are viable. The first conceptualization is of a relationship as an entity in itself
that possesses value, which the partner firms can access. Madhavan, Koka,
and Prescott (1998) present the view that interfirm relationships ‘‘can be
considered to be resources in their own right.’’ In contrast, another view is
of a relationship as a nexus or conduit that allows resources to flow to
the partners rather than as a separate entity. Only a few researchers seem
to overtly recognize the distinction between these views. However the
distinction is discussed in the following paragraphs for clarity of the
development of reflective paths in the intangible relationship value model
tested in this study.
Classically, the resource-based view of the firm includes buyer–seller
relationships (Amit & Schoemaker, 1993, p. 36) among firm resources. This
classical resource-based view appears to regard relationships as entities with
value. In the transaction cost economics conceptualization of a relationship
as a hybrid governance form, with some of the characteristics of a firm
(Borys & Jemison, 1989), hybrids lie between markets, which are at one
end of a spectrum of governance forms, and hierarchies or firms, which
are at the other end. They have properties of both markets and firms.
This conceptualization appears again to regard a relationship as an entity
with some of the properties of a firm and hence as a resource or entity that
possesses value (Anderson, 1995; Wilson, 1995). The literature thus
establishes the concept of interfirm relationships as entities with value.
But Wilson (1995) builds further on the work of Borys and Jemison
(1989), and of Dwyer et al. (1987), to describe a process model for relation-
ship development with five stages, including one of value creation. This
paper by Wilson seems to take more of a conduit view of a relationship.
Wilson’s first three stages of relationship development, which are search and
selection, defining purpose, and boundary definition, have a strong focus on
developing the structure of the relationship. The fifth stage is where the
stability of the relationship is cemented in place by way of structural bonds,
cooperation and commitment that start to form in the fourth value creation
stage. Value creation in the fourth stage, which is the stage of interest to this
study, is ‘‘founded on the hybrid structure that has evolved from the earlier
stages’’ (Wilson, 1995). The establishment of mutual goals, the input of non-
retrievable investments and of relationship-specific adaptations to processes
and products, together with strengthening of structural bonds, cooperation

and commitment, provide a structure through which value can flow. The
flow of value to the parties, in the case of this research to the seller, is thus
dependent on, and results from, the existence of the relationship, which is
thus seen more as an enabler than an entity in its own right.
Thus, the two interpretations of relationships are evident in the literature.
So, although Moller and Wilson (1995) express a view of relationships as
resources and the firm as a nexus through which those resources are
managed, Wilson (1995) expresses a view of a relationship that includes both
that view and, more indirectly, suggests the view that the relationship itself is
a nexus for the exchange of resources. This latter view of the relationship as
a nexus is also in fact expressed frequently but rather implicitly in the IMP
literature in the form of the strongly process-oriented view of relationships
between firms that is noted above. Similarly, Morgan and Hunt’s (1999)
paper discusses in detail how the resource-based view can lead to an under-
standing of the resources that are accessible through relationships. In doing
so, the paper implicitly takes the conduit view of a relationship.
Ambler and Styles (1998, 2000) recognize this relationship conceptualiza-
tion issue overtly and take a clear position on it: they argue strongly that
relationships should be seen ‘‘merely as conduits: necessary but not
sufficient for improved performance,’’ and suggest that for future research
in ‘‘performance-oriented relationship marketing,’’ relationships should
be treated as ‘‘conduits for, rather than drivers of, performance.’’ Their
suggestion is that communication is critical and that ‘‘value creation comes
from what flows through the relationship rather than from the quality of the
relationship itself.’’ For the relationship, they ‘‘highlight two key conduit
roles: the transfer of explicit and implicit information; and the generation
and reinforcement of emotional commitment (passion) towards a business
or idea’’ (Ambler & Styles, 2000).
Ambler and Styles (1998, 2000), citing Penrose (1959), Boisot (1995), and
Nonaka and Takeuchi (1995), then go on to develop a rationale for the
way in which relationships act as conduits by providing ‘‘the pipe-work
along which these implicit (and explicit) communications can flow.’’
The relationship also is perceived as a carrier for the emotional commitment
that provides the motivation to use the information that flows through it.
This motivation is seen as being as important as the information flow,
and expresses the human element of relationship value that is of interest to
this study.
The view of the relationship as an enabler for the transmission of value
between organizations, in the case of this research from the buyer to the
60 ROGER BAXTER
seller, as an outcome of the relationship processes, is also widely stated in

the management literature, including that which deals with networks,
alliances, and buyer–seller relationships. Using a resource-based view
approach, Gulati, Nohria, and Zaheer (2000) point out that a firm’s
network of relationships is ‘‘an important source for the creation of
inimitable value-generating resources.’’ They contend that ‘‘a firm’s
networks allow it to access key resources from its environment.’’ They
therefore see the relationship as the enabler for the acquisition of resources.
Das and Teng (2000) support this view in the case of alliances when
they say that ‘‘the resource-based view considers strategic alliances and
mergers/acquisitions as strategies used to access other firms’ resources, for
the purpose of garnering otherwise unavailable competitive advantages
and values to the firm.’’ In considering networks of relationships, Lee,
Lee, and Pennings (2001) integrate the resource-based view and social
capital theory in a study of technological start-ups in Korea, which shows
a positive interaction between performance of firms’ internal capabilities
and their linkages to resources through their networks. They point out that
‘‘Networks are vital . . . to garner resources for the formation of the new
organization.’’
The competence literature provides support; Sanchez et al. (1996)
and Sanchez and Heene (1997) distinguish between the assets of a firm as
‘‘firm-specific assets’’ which ‘‘a firm owns or tightly controls’’ and ‘‘firm-
addressable assets,’’ which ‘‘a firm can arrange to access and use from time
to time.’’ This again suggests that, in a relationship, the ability to address
assets external to the firm results from that relationship. Likewise, Dyer
and Singh (1998), in taking a ‘‘relational view’’ of competitive advantage,
cogently argue the view that the competitive advantage that accrues through
a relationship comes from the processes in that relationship. Further
support for the conduit view comes from a study of alliances by Lambe et al.
(2002), who hypothesize, and find empirical support for, the existence of
a construct ‘‘joint alliance competence’’ which is seen as a competence at
‘‘finding, developing, and managing alliances.’’ The model they test is
theoretically based on resource-advantage theory (Hunt, 1997), and includes
concepts from the resource-based view and competence theory. They view
resources that contribute to the success of the alliance as being the result of
the competences of the partners and in turn as being the result of the value
created in the alliance relationship by the alliance partners.
As the paragraphs above indicate, strong support is present in the
literature for a nexus or conduit view of the provision of value by a
relationship. The conduit view of the relationship focuses attention on the
processes that take place in the relationship, rather than the transactional
outcomes. This is the view that appears to best fit the relationship
marketing perspective. As Varey (2002, p. 73) has pointed out, a relational
approach logically perceives ‘‘the unit of analysis to be relational processes.’’
This study, in seeking to add to knowledge of the structure of intangible
buyer–seller relationship value and hence to improve the theoretical base for
the development of techniques to assess that value, takes the nexus or
conduit view of these relationships and proposes a model accordingly. The
application of the resource-based view to relationships (Morgan & Hunt,
1999) and its operationalization using a framework from the intellectual
literature by this study, adopts the provision process as the unit of analysis.
The study thus models the value of relationships in terms of how well
they facilitate the flow of resources from buyers to sellers and what the
resources are that flow, with the dimensions of relationship value seen as its
reflections. This modeling will be detailed in the model conceptualization
section.
4. CONCEPTUALIZING THE INTANGIBLE

VALUE FRAMEWORK
The conceptualization of a set of constructs that will adequately serve as

dimensions of intangible relationship value requires the identification of a
framework that will comprehensively describe its domain. As noted above,
most of the constructs that researchers frequently used in the past are either
antecedents or drivers of value or they describe the atmosphere of the
relationship, rather than what the partner receives through the relationship.
However, based on their resource-advantage theory, and in turn on the
resource-based view of the firm, Morgan and Hunt (1999) categorize the
resources that can be ‘‘shared and exchanged’’ by the partners through
relationships. Morgan and Hunt divide tangible resources that firms can
access through relationships into two categories, which they name financial
and physical resources. They describe financial resources as ‘‘cash reserves
or as cash available through stock issues, loans, bonds, and other financial
instruments’’ and physical resources as ‘‘the tangible assets, other than
labor and cash, that are used by the firm to produce and market goods
and services.’’
Morgan and Hunt (1999) name and describe four resources that are
the more intangible ones: the human, organizational, relational, and
62 ROGER BAXTER
informational resources. These are the resources of specific interest to this

study as potential dimensions of intangible relationship value. Morgan and
Hunt describe human resources as encompassing ‘‘the skills, knowledge, and
vision of the firm’s employees.’’ Organizational resources are ‘‘the assets the
firm possesses that arise from the organization itself, chief among these are
the corporate culture and climate, the organization’s structure, valued brand
names, and the administrative history of the firm.’’ Relational resources
consist of ‘‘the relationships: (1) between various constituencies within the
organization; and (2) between the organization and its various external
partners.’’ They note that ‘‘the collective knowledge of the organization
and the processes developed for inducing organizational learning’’ are
informational resources. These resources are distinct from the individually
held knowledge that comprises a part of the human resources of the
organization. The paper by Morgan and Hunt thus provides a framework
for a set of intangible value categories as dimensions of intangible value that
is potentially suitable for the purposes of this study. Their categorization
is particularly useful in distinguishing the human aspects of relationship
resources from other intangible resources. These human aspects are
important components in a relational approach to marketing (Varey,
2002), but they have not been studied in depth. The Morgan and Hunt
categorization is also useful because its aim is to be relevant to the
marketing discipline, and because the categorization has a sound theoretical
base in the resource-based view.
The next step in developing a framework for intangible relationship value
is to find a suitable basis for operationalization of the Morgan and Hunt
(1999) categories. Although the Morgan and Hunt paper includes hints
concerning how to achieve this operationalization, the paper provides
insufficient information for detailed domain descriptions. The lead for
suitable descriptions comes from the origins of the resource-based view of
the firm in the work of Penrose (1959). Much of the basis for the intellectual
capital literature in the management discipline is found in her work. The
commonly used categories of capital or resources used in the two literature
streams are therefore similar, as can be seen by comparing the Morgan
and Hunt categories of relationship resource with those of the intellectual
capital literature as seen in Fig. 1. The source for this figure is Roos et al.
(1997). Fig. 1 shows a clear division in into tangible resources, named
‘‘Financial capital’’ and intangible resources, named ‘‘Intellectual capital.’’
In the intellectual capital literature descriptions, financial capital comprises
physical and financial resources and intangible resources are named as
intellectual capital and described in some detail.
Total value
Financial Intellectual
capital capital
Structural
Human capital
capital
Intellectual Renewal and

Competence Attitude Relationships Organisation
agility development
Fig. 1. The Value Distinction Tree. Source: Roos et al. (1997).
Table 2. Categories of Intangible Relationship Resources.

Resource-Based View Categories Intellectual Capital Categories
(Morgan & Hunt, 1999) (Roos et al., 1997)
Human capital
Competence
Human resources Attitude
Intellectual agility
Structural capital
Organizational
Informational Organization
Legal
Relational Relationships
Renewal and development
Source: Baxter and Matear (2004).
In particular, Table 2 and the following discussion describe the categories

of intellectual capital that Roos et al. (1997) closely map onto the Morgan
and Hunt intangible categories. Because both the academic (e.g., Bontis,
1998) and practitioner (e.g., Edvinsson & Malone, 1997) literature provide
good information on the operationalization of the intellectual capital
categories, this study follows the lead of Peppard and Rylander (2001) and
utilizes the intellectual capital literature as the basis for domain descriptions.
64 ROGER BAXTER
Table 2 shows the comparison of the categories of resource provided by the

resource-based view approach of Morgan and Hunt (1999) beside
the categories in the intellectual capital literature, in the form provided by
Roos et al. (1997), who distinguish very clearly between the human aspects of
intangible resources and the nonhuman aspects. The vertical level at which
the categories appear in the table indicates where the similarities lie.
Some differences appear in the categorizations, but they clearly map onto one
another. For example, Roos et al. specify the human aspects at a more
detailed level than do Morgan and Hunt and Morgan and Hunt separate out
three aspects of the category that Roos et al. refer to as ‘‘organization.’’
Morgan and Hunt’s legal resources are ‘‘those assets the firm uniquely
possesses because of government statute or a legally binding agreement
between the firm and another party.’’ This could include, for example,
contracts and licenses. Though legal resources are relatively tangible and may
have property rights attached to them, they also have considerable elements
of intangibility. For this study’s conceptualization, they are included in the
intangible resource category, which is where Roos et al. place them. Morgan
and Hunt do not give a distinct category to the resources Roos et al. name as
‘‘renewal and development,’’ but in support of their inclusion the Kaplan and
Norton (1992) balanced scorecard has a similar category named the
‘‘innovation and learning perspective.’’ The work of Penrose (1959) appears
to be the origin of the balanced scorecard approach, as it is for the resource-
based view of the firm and for the intellectual capital literature.
The literature includes reports on intellectual capital and its nature (e.g.,
Bontis, 1998; Booth, 1998; Brooking, 1997; Edvinsson & Sullivan, 1996;
Roos et al., 1997; Stewart, 1997; Sullivan, 1998; Sveiby, 1997). The way in
which they categorize intellectual capital facets shows some variation, but the
underlying patterns are very similar. Roos et al. distinguish very clearly
between human and nonhuman aspects, they describe the human aspects
well, and they provide detailed domain descriptions for their intellectual
capital ‘‘distinctions,’’ so their model, shown in Fig. 1, is the preferred basis
for the set of dimensions of intangible relationship value for this research.
The study assesses rival value models based on the work of other authors, but
space does not allow for full discussion of these models and their analysis.
The translation of the Roos et al. (1997) intellectual capital distinctions
into the relationship value context is on the left of Fig. 2. On the lowest line
of Fig. 1 and the leftmost column of Fig. 2 are six categories of intellectual
capital, which this research proposes as dimensions of the intangible
value that a relationship can provide to one partner from the other.
In synthesizing the intellectual capital concepts into relationships, these
Competence
Human
Attitude Intangible
Value
Intellectual
Agility
Intangible Future
Relationship Financial
Value Performance
Relationships
Structural
Organization Intangible
Value
Renewal
and
Development
Fig. 2. Theoretical Model of Relationship Value. Source: Baxter and Matear (2004).
concepts need translation from their more usual application to firms to

enable their application to relationships. This study therefore conceptualizes
the intellectual capital distinctions as dimensions of the value that the seller
can receive from the buyer. The following paragraphs provide more detail of
the conceptualization of Fig. 2.
Fig. 2 shows a set of six first-order constructs which are the ones proposed
as the first-order dimensions of intangible relationship value. The study
proposes these dimensions as reflections of two second-order dimensions,
corresponding to the equivalents in Fig. 1, named human intangible value
and structural intangible value, which are in turn reflections of the overall
intangible relationship value. As a test of nomological validity of the
intangible relationship value construct, future financial performance is
proposed as its outcome, as will be explained later. The three proposed first-
order human dimensions, which are interpreted as attributes of the buyer’s
boundary personnel, are described first, commencing with competence,
which is based on the work of Hamel and Prahalad (1994). In this study,
66 ROGER BAXTER
the individual competence of the buyer’s boundary personnel such as its

salespeople and its research and development personnel who work with the
seller, provide value, in the words of Roos et al. (1997), ‘‘through
knowledge, skills talents and know-how of employees.’’
In this study’s context, the attitude expressed by the second human
dimension is the attitude of the seller’s boundary personnel. Roos et al.
(1997) describe attitude as covering ‘‘the value generated by the behavior
of the employees on the workplace’’ and as an expression of personality
traits comprising boundary personnel motivation, behavior, and conduct,
determined largely by the buyer’s choice of employees. The third human
dimension, intellectual agility, comes again from the work of Hamel and
Prahalad (1994) and describes the boundary personnel capabilities in using
their competencies and in applying them to new situations where they need
to adapt existing products or processes or need to innovate by establishing
new ones. In summary, the three human value dimensions represent the
abilities of the buyer’s personnel in facilitating the provision of value
through the relationship.
The name of the first of the three first-order dimensions of structural
intangible value in Fig. 2 is ‘‘relationships.’’ In the context of the study, this
dimension of value refers to the seller’s network of relationships with its
suppliers, customers, and other stakeholders, which the seller might find
useful by accessing them through the buyer. For example, if the buyer has a
network of groups of users of its products or services, these could be a very
useful source of information about downstream market conditions and
market needs. The name of the second dimension of structural intangible
value is ‘‘organization.’’ The domain of this dimension is broadly stated as
‘‘all the physical and nonphysical manifestations of intellectual capital
related to the internal structure or the day-to-day operations’’ (Roos et al.,
1997), and in this research these are the manifestations of those
resources that exist in the buyer. Important aspects of this dimension are
infrastructure, processes, and culture and these aspects are manifested both
in intellectual property forms that have legal protection such as trademarks,
patents, brands, and processes and also in other forms such as internal
networks, databases, culture and management styles, and process manuals.
The third structural dimension is ‘‘renewal and development,’’ which is
comprised of those aspects of intellectual capital ‘‘that have been built or
created and that will have an impact on future value, but have not manifested
that impact yet’’ (Roos et al., 1997). The future impact of these aspects can
be through an improvement in financial capital or an improvement in
intellectual capital. Examples are new product development, new machines,
new training programs, and research and development. For this study, these
are resources in the planning stages, from which the seller gains benefit by
accessing them or their benefits from the buyer.
4.1. Model Structure
The value dimensions in the Fig. 2 model have reflective paths between
them. This expresses the conceptualization of the relationship as a conduit,
which provides the path through which the buyer can get access to the
seller’s resources. Thus, a good relationship is one which can provide good
resources from the buyer of the form represented as ‘‘structural intangible
value’’ in the model. A good relationship is also one through which the
buyer provides human resources, in the form of their boundary personnel,
who are good facilitators of the flow of resources to the seller. The construct
‘‘human intangible value’’ represents this aspect of the buyer’s resources
in the model. The level of usefulness of the resources that provide the
intangible relationship value results from the quality of the relationship.
The ‘‘causal’’ direction is therefore reflective, from intangible relationship
value to the set of proposed dimensions.
In assessing the path directions, the criteria of Law, Wong, and Mobley
(1998) are applied, as an addition to the conceptual arguments provided
earlier in the paper titled ‘‘Value Provision by Relationships.’’ The criteria of
the taxonomy proposed by Law et al. depend on whether or not the sub-
dimensions of a multidimensional construct exist at the same level as the
dimension itself. For example, considering the structural intangible value
second-order dimension, its three first-order dimensions are all aspects of the
structural value, but they are quite different from one another for the reasons
that follow, so they fit the Law et al. criteria for reflective paths. The domain
of the dimension named as ‘‘relationships’’ comprises relationships that are
external to the buying firm. The other two dimensions are both internal to
the buying firm, but are also distinct from one another. The ‘‘organization’’
domain comprises developed resources, whereas the ‘‘renewal and develop-
ment’’ domain comprises resources that are still in development. Considera-
tion of the other paths between value constructs in the model similarly shows
that they fit the Law et al. criteria for reflective paths.
In this study a ‘‘future financial performance’’ outcome has been included
in the model, to assess nomological validity of the proposed intangible
relationship value construct. In presenting their ‘‘Framework for analysis of
market-based resources,’’ Srivastava et al. (2001), note that investments in
68 ROGER BAXTER
marketing-specific resources lead to intellectual and relational market-based

assets which in turn lead to performance and to shareholder value. Hence
the study proposes that intangible relationship value will lead to financial
performance, with the path direction as in Fig. 2. The study assesses this
performance construct in the future, given that as noted above, intangible
resources provide their performance outcomes in the future.
5. TESTING THE MODEL
Because the management literature describes the constructs proposed as

dimensions of intangible relationship value in some depth, the testing of
the model was principally quantitative in nature. On the basis of the
literature used to develop the model, domain descriptions lead to an initial
set of questionnaire items. Qualitative analysis of interviews with managers
provided a first empirical assessment of validity of the constructs and
provided some additional questionnaire items. The study then collected
survey data from managers who are involved in relationship management.
These were principally sales and marketing managers. The main analysis
technique was structural equation modeling, for estimation of both a
measurement and a structural model.
5.1. Instrument Development
The multi-item operationalization of the six proposed value dimensions used

the domain descriptions provided above. The items used in the survey
are in Table 3. The descriptions in Roos et al. (1997) strongly influenced
item selection, but other sources such as Bontis (1998), Bontis et al. (2000),
Edvinsson and Malone (1997), and Sveiby (1997) provided information to
varying degrees. Analysis of the interviews about eight companies with
seven senior managers who were involved in relationship management also
aided operationalization. Rather than eliminating items before the survey,
the study took the position that, because this is the first attempt to
operationalize these constructs in a relationship context, the best course
was to include a broad range of items that covered the domains of the
dimensions well. Hence 42 items were in the survey as measures of the
dimensions. Purification in a confirmatory factor analysis then reduced this
number to a parsimonious set of 22.
Table 3. Value Scales and their Reliabilities.

Scale Dimensions and Items Cronbach Item-Total
Alpha Correlation
Competence 0.75
Please think about your chosen customer’s personnel whom you
encounter in the relationship. Using the scales at the right,
how would you rate their competency on the following aspects
in their work with your firm?
Technical skills including IT skills 0.57
Professional skills 0.65
Practical know-how in the work they do with you 0.53
Personal relationship skills
Knowledge that they apply to the work they do with you
Training which is specifically applicable to the work they do with
you
Attitude 0.87
Now thinking about the attitude of your chosen customer’s
personnel whom you encounter in the relationship, to what
extent do you disagree or agree with the following statements
about them?
They demonstrate a strong commitment to their relationship 0.73
with your firm
They show enthusiasm for their work with you 0.74
They share their ideas with you 0.74
They are ethical in their dealings with you 0.68
They are fun to work with
They are difficult to please
They show vision in their work with you
They create a dynamic environment in their work with you
They are professional in their dealings with you
They are highly motivated to reach goals that are set in their work
with you
They show strong leadership in their work with you
Intellectual agility 0.90
And how would you rate your chosen customer’s personnel in
their work with you in terms of the following statements?
They are innovative in their approach 0.73
They can adapt ideas from one situation to another 0.82
They can adapt products/services to new situations 0.82
They can successfully imitate existing concepts/products 0.73
They are not receptive to new ideas
They can create new products/services
70 ROGER BAXTER
Scale Dimensions and Items Cronbach Item-Total
Alpha Correlation
Relationships 0.84
To what extent does your relationship with your chosen
customer allow you to utilize the relationships your customer
has with the following?
Members of a product or service user group to which your 0.65
customer belongs
Your customer’s alliance or joint venture partners 0.62
Key opinion leaders in your customer’s field 0.71
Business networks or other networks to which your customer 0.74
belongs
Your customer’s network of contacts, including their customers
and suppliers
Members of a buying group to which your customer belongs
Other business units within your customer’s organization
Your customer’s research and development partners
Organization 0.78
customer allow you to gain benefits from the following in their
organization?
Their intellectual property, including patents, trademarks, and 0.61
copyrights
Their brands 0.66
Their information in databases and other documentation 0.59
Their internal networks
Their processes and systems
Renewal and development 0.81
customer assist you in preparing for the future by helping with
the following?
By helping to develop training programs 0.56
By reporting and forecasting the trends in their markets 0.57
By helping to develop new systems, including IT systems 0.65
By helping to develop new networks or strategic partnerships 0.72
By helping with research and development work (e.g., on products
and processes)
By helping with the restructuring that is needed to prepare for the
future
Note: Items italicized were dropped during scale purification.

The items used for the six value dimensions are all reflective indicators. As
the literature expresses concern about the misspecification of indicators in
marketing research, the paper now discusses this reflective operationaliza-
tion, using a set of decision rules that Jarvis, Mackenzie, Podsakoff,
Mick, and Bearden (2003) note. Table 4 provides these rules, together with
the decisions made for this study’s value indicators. As Table 4 shows, the
decisions based on the Jarvis et al. rules suggest that the correct specification
for the indicators is reflective.
The paper now discusses the basis for the decisions in Table 4. As noted
earlier, a relationship is conceptualized in this study as a conduit for value,
so the relationship’s value arises from the ability to make resources in the
buyer (structural intangible value) available, and from the facilitation of
the flow of resources from the buyer to the seller (human intangible value).
The discussion applies the decision rules in Table 4 to the ‘‘organization’’
value dimension, which is one of the dimensions of structural intangible
value, as one example. The individual items for ‘‘organization’’ in the
Table 4. Decision on Formative or Reflective Indicators.

Decision Rule Answer to Suggests
Decision Formative or
Question Reflective?
1. Direction of causality
Are the indicators (items) (a) defining characteristics or (b) Reflective
(b) manifestations of the construct?
Would changes in the indicators/items cause changes in No Reflective
the construct or not?
Would changes in the construct cause changes in the Yes Reflective
indicators?
2. Interchangeability of the indicators/items

Should the indicators have the same or similar content? Yes Reflective
Do the indicators share a common theme? Yes Reflective
Would dropping one of the indicators alter the conceptual No Reflective
domain of the construct?
3. Covariation among the indicators

Should a change in one of the indicators be associated Yes Reflective
with changes in the other indicators?
4. Nomological net of the construct indicators
Are the indicators/items expected to have the same Yes Reflective
antecedents and consequences?
Source: For decision rules: Jarvis et al. (2003).

72 ROGER BAXTER
questionnaire in Table 3 are indicators of the seller’s ability to gain benefits

from the following resources that the buyer has:
their internal networks;
their processes and systems;
their intellectual property, including patents, trademarks, and copyrights;
their brands; and
their information in databases and other documentation.
But the introduction to the question asks the respondent not to rate
simply the amount or number of these resources that the buyer possesses.
The respondent is asked to rate the extent to which the relationship
allows the seller to gain benefit from such resources. In other words, the
ability of the relationship to provide these resources is rated 1 to 7 by the
respondent, not the ‘‘amount’’ of, for instance, ‘‘information in databases
and other documentation.’’ Assessing the question and its indicators in
terms of the Jarvis et al. (2003) decision rules, the following are therefore
the relevant points. The items are examples of the types of attributes or
resources in the buyer’s organization that the seller might gain access to by
way of a relationship that is good at allowing flow of such resources.
Therefore the ability to access such resources is a manifestation of the ability
of the relationship to provide such resources. The availability of all of these
resources through the relationship is not essential and the absence of
availability of one or more of them would not change the domain of the
‘‘organization’’ construct. Because the construct that the indicators measure
is the ability of the relationship to provide this type of resource, a change of
indicators will not change the construct as long as the indicators all are
manifestations of the ability to provide this type of resource. A decrease in
the ability to provide one of these types of resource would reflect a change in
the nature of the relationship, because the measured construct represents the
ability of the specific relationship to transfer benefit of this type from buyer
to seller. This decrease at the same time would indicate a decrease in the
ability to provide other resources of that type, hence the indicators will
covary. In terms of the Jarvis et al. (2003) decision rule 4, the indicators all
have an expected consequence of increased benefit to the seller in terms of its
increased knowledge resulting from access to these organizational attributes
of the buyer, and the antecedent of all indicators is the level of ability of the
relationship to transfer them. These points noted for the organization
dimension lead to decisions concerning the indicators as noted in the middle
column of Table 4 that in turn lead to characterization of the indicators as
reflective in the third column.
As another example consider the decision rules in Table 4 to one of the

dimensions of human intangible value. The three human dimensions of
intangible relationship value are indicators of its ability to facilitate resource
flow through the relationship, in terms of the attributes of the buyer’s people
who work in the relationship. For example, looking at the indicators used in
the questionnaire as listed in Table 3, people who display high levels of the
intellectual agility dimension in the context of the relationship will be people
who do so in their work with the seller.
The questionnaire respondents judge the intellectual agility of the buyer’s
people in terms of the following characteristics, as listed in Table 3.
They are not receptive to new ideas (reverse scored).
They are innovative in their approach.
They can adapt ideas from one situation to another.
They can adapt products/services to new situations.
They can successfully imitate existing concepts/products.
They can create new products/services.
The respondent is asked to rate the extent to which the buyer’s boundary
personnel display these characteristics ‘‘in their work with you,’’ not simply
the extent to which the boundary personnel possess the characteristics.
These characteristics are all manifestations of the intellectual agility of the
people as they participate in the relationship, which is in turn a manifesta-
tion of the nature of the relationship and the effect of the relationship in
providing these people. Specifically applying the Jarvis et al. (2003) decision
rules, as in Table 4, to the indicators of the intellectual agility construct
noted above, they have a common theme and they do not all have to be
present in order to express its domain. Other somewhat different indicators
with the same theme are potentially useful as manifestations of the
propensity of the relationship to provide people with intellectual agility.
The indicators will covary because of the common theme of the provision of
innovation, adaptability, and creativity. The expectation is that a relation-
ship that rates high on providing one of these manifestations will rate
relatively high on the others. A change in the domain of the intellectual
agility construct would, however, require a change in the theme of the
indicators. All the indicators will have similar outcomes in terms of
inventive solutions to problems through the relationship and similar
antecedents in terms of the personal characteristics of the people who
the buyer provides to participate in the relationship and in terms of the
working conditions under which they provide the specific level of capability.
These points again lead to decisions using the rules in Table 4 that lead to
74 ROGER BAXTER
characterization of the indicators as reflective in the third column. In

similar fashion, the Jarvis et al. (2003) rules show that all the other value
dimensions should be reflective.
The unit of analysis for the survey was a specific relationship of the
respondent’s company. Collecting objective measures of performance for
specific relationships was not viable, so the survey asked the respondent’s
perception of four commonly used measures of financial performance,
as noted in Table 5, to operationalize the future financial performance
outcome in the model. The literature does not appear to report comparison
of perceived measures against objective measures in a context that relates
specifically to this study, namely for future rather than past financial
performance, or for the case of relationships rather than at the firm level.
But evidence that perceived measures are in general suitable as surrogates
for objective measures (Dess & Robinson, 1984; Rowe & Morrow, 1999)
supports this study’s operationalization.
The survey presented all items in the questionnaire in 7-point Likert-type
format, with anchor points stated as, for example, ‘‘strongly agree’’ to
‘‘strongly disagree,’’ or ‘‘not at all’’ to ‘‘to a very great extent.’’ Academics
with knowledge of either or both of relationship management and
questionnaire design reviewed the questionnaire before five managers
with relationship management experience also did so. After some minor
alterations, the questionnaire went out in a pilot single-wave mail-out to 200
members of the sample frame for the study. Very little changed after
analyzing the 28 responses to this mail-out. But for the main mail-out, based
Table 5. Future Financial Performance Scale and its Reliabilities.

Scale Items Cronbach Item-Total
Alpha Correlation
Future financial performance 0.81

Thinking now about the next 3 years, how do you expect your
chosen customer’s performance to rate? Please rate on the
scale at the right according to the following criteria, as
compared with your other customers
The size of their business with you relative to your total business 0.50
The profitability of your organization’s business with this 0.73
customer
Return on investment of your organization’s business with this 0.76
customer
The sales revenue they provide to your company
Note: Item italicized was dropped during purification.

on a skew in the responses to the pilot mail-out, respondents selected

their fourth-largest customer as the questionnaire subject. This avoided
having respondents all use a ‘‘good’’ customer as the questionnaire subject,
which would have resulted in insufficient variance in responses. This
technique was successfully used by Anderson and Narus (1990). In
telephone calls, sales managers in the sample frame for this study easily
identified their fourth-largest customer and the nature of that relationship,
which suggested viability of the technique, because the result was a spread
from good to bad relationship types. This suggested that the technique
would work, which occurred, as evidenced by the variance of responses in
the main survey.
5.2. Survey Data Collection
The sample frame comprised people with responsibility for managing

relationships with business-to-business customers in firms listed in the
New Zealand database of a multinational database company, who occupied
positions in which they managed customer relationships. The sample frame
was further restricted to firms with five or more employees and to those
which were listed as manufacturers. Although exceptions exist, in general
very small organizations do not have the level of sophistication desired. The
restriction to manufacturers was to avoid too many large variations in types
of business, which might introduce confounding factors. Because of the
small size of the New Zealand economy, an even narrower classification by
industry type would have resulted in too few companies of the requisite size
with job titles as specified.
The single-wave pilot-test mailing of 200 questionnaires provided a
response of 14%. Indications from the literature are that a follow-up
mailing markedly increases response rates. Although the multiple-follow-up
method of Dillman (1978) achieves the highest response rate, the literature
suggests the method is less cost-effective than a postcard follow-up for an
industrial survey population (Fox, Robinson, & Boardley, 1998). The main
survey mail-out to 1,407 members of the sample frame included a small
incentive and used many of the techniques that Dillman recommends for
good response rates. A follow-up postcard then thanked those who had
already responded and asked those who had not to do so.
The responses received numbered 318, which resulted in 314 good
responses after elimination of those that were incomplete, for a 23% rate.
The major groups of respondents were as follows: sales managers (45%);
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marketing managers (21%); sales and marketing managers (14%); or those

in a CEO/General Manager/Director position (9%). Using the Armstrong
and Overton (1977) procedure, nonresponse bias does not appear to be an
issue, as t-tests showed no significant differences in means of early and late
responses at po0.05 on any of the focal variables tested.
Given the small size of the New Zealand economy, the responses in the
sample represent a good range of company sizes as shown in Table 6.
The responses also provide a wide range of relationship types and durations,
and good variance, with a range of standard deviations of 1–1.6 on the 1 to 7
scales for a set of validation items such as ‘‘We have strong social bonds
with people in the customer organization.’’
5.3. Analysis
Initial exploratory analyses assessed the following, among other points:

moderating effects of potential confounding factors such as firm size and
proportion of product versus service sold; missing values; outliers; and
nonnormality. Results of all these analyses suggested that the data were
suitable for analysis, and that confounding factors were not among those
assessed. The study discarded four questionnaires with more than 10 missing
values and the missing values in other questionnaires were imputed using
the mean value technique. Application of a ‘‘Separate Variance t-Tests’’
procedure in SPSS indicated no association of concern between the pattern
of the missing data and the other variables. As is expected with this type of
data, the distribution was not strictly normal, but as judged on the basis
of simulation work by Curran, West, and Finch (1996), the data did not
require transformations.
Table 6. Respondent’s Firm Size by Employee Numbers.

Number of Employees in Respondent’s Firm (Incl.) % of Responses in Survey
5–9 9
10–19 16
20–49 32
50–99 19
100–199 9
200–499 11
500–999 3
1000 or more 1
After initial exploratory analysis, the study used Amos software to

estimate first- and second-order confirmatory factor analyses for the six
proposed dimensions of intangible relationship value. The indicators for all
six dimensions were included in both analyses, to allow for thorough testing
of unidimensionality, and all indicators were reflective, as discussed above.
The fit statistics for the two confirmatory factor analyses in Table 7 indicate
a good fit. The paths to the 22 purified indicators are all significant at
po0.001, with regression coefficients of the indicators on the first-order
constructs all well in excess of double the standard error, for significance at
po0.01. Also, all correlations between the indicators and the constructs
they represent are greater than 0.5, providing good support for convergent
validity of the indicators. The Cronbach alpha and item-total correlations
from SPSS analysis are in Table 3. All alpha’s are well above the
recommended minimum of 0.7, indicating reliability of the measures.
After summing the purified scales of focal constructs, correlations
between the first- and second-order dimensions and the total intangible
relationship value variable were computed as shown in Table 8. They
provide an initial indication that the data match the pattern that is in the
Table 7. Goodness of Fit Statistics for Measurement Models.

CMIN Df p-Value CMIN/Df SRMR RMSEA TLI GFI
First-order model 286.5 194 0.00 1.48 0.04 0.04 0.97 0.93
Second-order model 297.3 202 0.00 1.47 0.04 0.04 0.97 0.93
Table 8. Pearson Correlations between Value Constructs.

Construct 1 2 3 4 5 6 7 8
1 Competence
2 Attitude 0.50
3 Agility 0.49 0.61
4 Relationships 0.18 0.25 0.17
5 Organization 0.18 0.27 0.21 0.47
6 Renewal and development 0.25 0.30 0.18 0.55 0.61
7 Human intangible value 0.75 0.87 0.86 0.24 0.27 0.29
8 Structural intangible value 0.25 0.33 0.22 0.83 0.79 0.87 0.32
9 Relationship intangible value 0.56 0.68 0.60 0.72 0.70 0.77 0.74 0.87
Notes: Correlations are between the summed scales of the constructs; minimum significance of
correlation is 0.002 (2-tailed): most are at 0.000.
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proposed model shown in Fig. 2 and that the correlation patterns show that
the constructs in the model have convergent and discriminant validity. The
competence, attitude, and intellectual agility constructs correlate very well
with the human intangible value construct at 0.75, 0.87, and 0.86. They
correlate well with one another at 0.50, 0.49, and 0.61, but not so well that
they are not distinct, and they correlate much less well with the relationship,
organization, and renewal and development constructs. The relationship,
organization, and renewal and development constructs similarly correlate
well with one another, very well with the structural intangible value
construct and much less well with the competence, attitude, and intellectual
agility constructs. At a higher level in the model, the human and structural
intangible value constructs correlate only moderately with one another
at 0.32, suggesting discriminant validity, and very well with the relationship
intangible value construct at 0.74 and 0.87, respectively, suggesting
convergent validity.
Estimation of measurement and structural models more rigorously
assessed validity of the value constructs in the analysis. A second-order
measurement model assessed convergent and discriminant validity of the
first-order value constructs and discriminant validity of the second-order
value constructs modeled in Fig. 2.
For the first step in the validity assessment process, Table 9 shows the
information for judgment of convergent validity of the first-order value
dimensions. The first three columns indicate the paths in the measurement
model corresponding to the paths on the left of Fig. 2. The next columns
show the regression coefficient and its standard error for each of these paths.
The critical ratio that follows these is the ratio of the regression coefficient
Table 9. Convergent Validity of First-Order Value Dimensions.

Path Regression Standard Critical p-Value Correlation
Coefficient Error Ratio
Attitude ’ Human 1.00 0.87

Competence ’ Human 0.63 0.08 7.67 0.75
Intellectual agility ’ Human 0.79 0.08 9.41 0.86
Relationships ’ Structural 0.76 0.08 9.42 0.83
Renewal and development ’ 1.00 0.87
Structural
Organization ’ Structural 0.81 0.09 9.46 0.79
Notes: ‘‘Regression Coefficient Estimate’’ of 1.00 indicates that this path was fixed at 1.
Indicates the probability of occurrence of the critical ratio is less than 0.001.
to the standard error. The ‘‘p-value’’ then gives the probability of such a
‘‘critical ratio’’ occurring. The last column provides the correlation between
the constructs as calculated in the SPSS package. The information in Table 9
shows that the regression coefficients for the paths from the second-order
constructs to the first-order constructs are all well in excess of double the
standard error, as recommended by Anderson and Gerbing (1988), they
are all significant at po0.001, and they correlate at greater than 0.5 with the
second-order constructs. These are good indications of convergent validity
of the first-order constructs.
The structural model, described later, provides the information for
judgment of convergent validity of the second-order constructs of the
model. In the structural model, significant paths between these pairs of
constructs shows their convergence: first, the second order human value
construct on the intangible relationship value construct and second, the
structural value construct on the intangible relationship value construct.
Table 11 shows the regression coefficients for these paths, which were both
significant at po0.001. In addition, the correlation is 0.74 between the
summed human intangible value scales and the summed intangible
relationship value scales and is 0.87 between the summed structural
intangible value scales and the summed intangible relationship value scales.
These correlations are both well above the suggested 0.50 minimum, further
strengthening support for convergence.
Bootstrapping in Amos assessed discriminant validity. Two hundred
replications calculated the correlations between the constructs as in Table 10.
The last two columns of Table 10 show the mean plus and minus two
standard errors for each pair of constructs, at both the lower and upper
levels of the value model. None of these value ranges overlaps the value of 1,
supporting discriminant validity of the constructs in the model (Anderson &
Gerbing, 1988) at both first- and second-order levels. The paragraphs
above show that both convergent and discriminant validity throughout the
proposed intangible relationship value model illustrated in Fig. 2 are well
supported and in turn provide support for the proposed model.
The study used a confirmatory factor analysis, which had good fit
statistics, to purify the scale for the future financial performance construct in
Fig. 2. The purified scale, after dropping one indicator to leave three, had
a Cronbach alpha of 0.81 and sound item-total correlations, as shown in
Table 5. Estimation of the Fig. 2 structural model in Amos resulted in good
fit statistics, as follows: CMIN, 398; degrees of freedom, 266; CMIN/Df, 1.50;
SRMR, 0.05; RMSEA, 0.04; TLI, 0.96; and GFI, 0.91. Paths in the
structural model were estimated as in Table 11 and are all significant at
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Table 10. Discriminant Validity of Value Dimensions.

Bootstrapped Correlation between Mean of Standard Mean Mean
Bootstrapped Error (SE) of Plus Minus
Correlation Correlation 2 SE 2 SE
Human value and structural value 0.40 0.07 0.53 0.26

Attitude and competence 0.63 0.06 0.75 0.51
Competence and intellectual agility 0.56 0.06 0.69 0.43
Competence and relationships 0.18 0.07 0.32 0.04
Competence and organization 0.20 0.06 0.32 0.07
Competence and renewal and 0.28 0.06 0.41 0.15
development
Attitude and intellectual agility 0.68 0.04 0.77 0.60
Attitude and relationships 0.30 0.07 0.43 0.14
Attitude and organization 0.33 0.07 0.46 0.20
Attitude and renewal and development 0.36 0.06 0.48 0.24
Intellectual agility and relationships 0.20 0.07 0.34 0.05
Intellectual agility and organization 0.25 0.07 0.38 0.11
Intellectual agility and renewal and 0.19 0.07 0.32 0.06
development
Relationships and organization 0.57 0.06 0.69 0.45
Relationships and renewal and 0.67 0.05 0.76 0.58
development
Organization and renewal and 0.75 0.05 0.85 0.64
development
Table 11. Path Coefficients in Structural Model.

Path Standardized Regression Coefficient
Human intangible value to

Competence 0.70
Attitude 0.92
Intellectual agility 0.75
Structural intangible value to
Relationships 0.72
Organization 0.79
Renewal and development 0.95
Intangible relationship value to

Human intangible value 0.57
Structural intangible value 0.70
Intangible relationship value to
Future financial performance 0.54
po0.001, again supporting the validity of the intangible value dimensions

and value model and supporting the nomological validity of the intangible
relationship value construct with the significant path from intangible
relationship value to future financial performance. The squared multiple
correlation for the future financial performance construct is 0.29, which
indicates that the intangible relationship value construct explains 29% of its
variance.
6. DISCUSSION
The study described in this paper is undertaken because the focus of

research into relationship value to date is on the creators of value, rather
than its dimensions, and the focus on intangible aspects has not been strong,
especially not on the human aspects. In order to extend the body of
knowledge in these two respects, the study synthesizes a framework from the
resource-based view of the firm and the intellectual capital literature into
relationship research and empirically tests a model based on that synthesis.
The empirical support for the conceptualization provides a basis for further
research. The paper now discusses the outcomes of the study under the
following headings: the dimensions of intangible relationship value that are
tested and their distinction from those of other studies; the structure of
the value model, including its performance outcome; broader theoretical
implications; managerial implications; and limitations and future research.
6.1. Value Dimensions
Based on the synthesis from the intellectual capital literature, the study
proposes six dimensions of intangible relationship value. Three of these
dimensions, namely the competence, attitude, and intellectual agility of the
buyer’s boundary personnel, are reflections of a second-order dimension,
human intangible relationship value. The three other dimensions, namely
the relationships, organization, and renewal and development resources of
the buyer, are reflections of another second-order dimension, structural
intangible relationship value. The study in turn models the human and
structural intangible relationship value dimensions as reflections of a third-
order dimension, intangible relationship value. The analysis of the survey
data collected in the study supports the conceptualization and indicates that
the dimensions have good psychometric properties. The respondents, who
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were managers with responsibility for relationships, saw the relationships

with the customer on which they reported in terms of the proposed
constructs. The dimensions as proposed therefore appear to be useful
expressions of intangible relationship value as tested in the survey context,
and the scales used to measure them are viable.
The nearest studies of relationship value to that of this paper are the
studies by Walter et al. (2001) and Walter and Ritter (2003). Their work
proposes and tests a set of ‘‘value-creating functions,’’ as seen from the
perspective of the seller. But the constructs they work with fit the description
of drivers of value rather than its dimensions because they describe the
creation of value rather than its manifestation. The authors refer to them as
value-creating functions and their model has paths with formative directions
from their value-creating functions to their value construct, so they are quite
different from the dimensions that this study has used.
Also, Walter et al. (2001) divide the value-creating functions of a relation-
ship into two groups in their studies. The first of these groups comprises the
‘‘direct’’ value-creating functions, which appear to be the more tangible
aspects of the benefits that the seller gets from the buyer. The indirect value-
creating functions of Walter et al. are the more intangible ones and so are the
ones that correspond most closely to the constructs of this paper’s study.
They are constructs labeled as the ‘‘innovation,’’ ‘‘market,’’ ‘‘scout,’’ and
‘‘access’’ functions. The measures used in the Walter et al. study cover similar
domains to two of the first-order dimensions reflecting the structural
intangible value second-order dimension in this paper’s study, but they do
not appear to cover the other of the first-order reflections, namely the
‘‘organization’’ dimension. Also, the domains of the dimensions labeled in the
current study as human aspects of intangible relationship value are not
covered by the Walter et al. constructs, so in fact a major part of the domain
of the intangible value construct tested in this study is not covered by the
Walter et al. constructs. As noted by Varey (2002), these human aspects are
important components of relationship value. Some significant differences
therefore appear between this study and the Walter et al. studies.
Ulaga and Chacour (2001), Ulaga (2003), and Ulaga and Eggert (2003,
2006a) also investigate relationship value, but from the perspective of the
buyer rather than the seller. As is true for the studies of Walter et al. (2001),
the Ulaga et al. value components appear to be drivers rather than
dimensions of value. Ulaga (2003) adopts a grounded approach, analyzing
interviews with managers to identify the following relationship value
factors: product quality; service support; delivery performance; supplier
know-how; time-to-market; personal interaction; price; process costs.
Ulaga’s factors are labeled as dimensions, but in terms of the definitions

used for this study, they fit the description of drivers. Ulaga and Eggert
(2003) later estimate a formative measurement model in a structural
equation modeling package to test their scales using partial least squares
and then (Ulaga & Eggert, 2006a) add commitment, trust, and satisfaction
to test a broader nomological network. Their scales describe what creates
value, rather than its manifestation and the use of formative models fits
logically with the modeling of value creation rather than value manifesta-
tion. Their coverage of the value domain is in some ways similar to that of
this study in terms of coverage of the transfer of knowledge between the
parties and the human aspects of the relationship actors. However, the
Ulaga and Eggert study’s coverage is more limited for the transfer of
knowledge and much more limited for the human aspects. Hence, significant
differences again appear between this study and the Ulaga et al. studies.
Lapierre (2000) also reports on a study of drivers of value, from the
customer’s perspective. Lapierre’s constructs and their domain descriptions
appear, as in the cases noted above, to fit with a conceptualization as drivers
of customer value rather than its dimensions according to the definitions
used in this paper. They cover a range of the intangible relationship value
domain, similar in some ways to those covered in this study, but the
perspective is different in that the constructs are a mix of practical manage-
ment outcomes or value drivers, such as ‘‘alternative solutions’’ and
‘‘product quality’’ and more sociological antecedents such as ‘‘trust’’ and
‘‘solidarity.’’ Coverage of the human aspects of the relationship actors in the
Lapierre study is limited, so again distinct differences appear between the
Lapierre study and the study reported on in this paper.
To summarize, the studies by Walter and Ritter (2003) and Walter (2001),
which are closest in their approach to relationship value because they take the
seller’s perspective, have a more limited coverage of intangible relationship
value and their constructs are conceptualized as drivers of relationship value
rather than as manifestations. Other similar studies in the literature, such as
Lapierre’s (2000) and Ulaga and Eggert’s (2003) studies, are from the buyer’s
perspective, rather than the seller’s perspective, and do not consider the
human aspects of relationship value in great detail. The approach of this
study to value dimensions is therefore different from related research reported
in the literature. Comparison with other relationship value studies thus shows
that the study this paper reports on contributes to the relationship marketing
literature because of the clear conceptual differences, especially because the
dimensions identified focus on the intangible aspects of relationship value
and, in particular, on the human aspects.
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6.2. Structure of the Value Model
As noted above in the data analysis discussion, estimation of the structural

model provided sound support. The first-order value dimensions derive,
through the resource-based view of the firm (Barney, 1991); from Penrosian
economics (Penrose, 1959) and they provide an empirical illustration of the
application of both those theoretical streams. The empirical support for the
first-order value dimensions and for the dimensionality of the higher-order
value constructs in turn lends support to the synthesis of a framework
from the intellectual capital literature. This study therefore presents an elegant
and coherent theoretical grounding for manifestations of relationship value.
The discriminant validity of the human and structural aspects of a
relationship demonstrated in the analysis supports their conceptualization
as two different forms of resource. Structural resources are those that
potentially flow through the relationship whereas human resource in this
context is what facilitates that flow. This distinction between the two
resource types is a useful insight for management and for future research
into relationships. Of the two reflections of intangible relationship value,
respondents saw structural intangible value, with the path coefficient of
0.701, as a more important indicator of value provision than human
intangible value, with the path coefficient of 0.571. This may well be a
reflection of the fact noted by Roos et al. (1997) that, for example, the
financial services firm Skandia regards human capital as ‘‘anything that
thinks’’ and can leave the firm relatively easily, whereas structural capital is
‘‘what remains in the company when the people go home.’’ This expresses
the view that the relationship’s human facilitators can easily leave their
employer, the buyer, whereas the buyer more permanently holds the
resources comprising the structural value dimensions in its organization. So
in the relationship context of this study, human capital does not ‘‘belong’’ to
the buyer in the sense that structural capital does and hence is not so reliably
available to the seller through the relationship.
Consideration of other path coefficients in Table 11 provides some useful
insights. Although all the path coefficients from human intangible value to
its three first-order reflections are strong, the strongest is to attitude. This
means that respondents saw attitude as the most important attribute, so
they regard the way in which their customers approach their work as being
the strongest indicator of the ability of the customer’s boundary personnel
to provide value through the relationship. Similarly, although the path
coefficients from structural intangible value are all strong, the strongest is to
renewal and development. Managers thus saw the ability of their customer
to contribute in terms of new ways to do things as the most important of the

customer’s resources that they can receive through the relationship.
The inclusion of the future financial performance construct as an outcome
in the model in Fig. 2 provides useful information. The inclusion gives
support to the nomological validity of the intangible relationship value
construct because of the alignment with the notion, seen in the Gronroos
(1994) definition of relationship marketing that relationship resources
provide financial outcomes as profit, and also because intangible value as
perceived currently is expected to be realized as financial performance in the
future. The standardized regression coefficient of 0.54 as Table 11 shows
indicates that respondents saw a strong relationship between the intangible
relationship value construct and the future financial performance construct.
The variance of the future financial performance is explained partially by the
intangible relationship value, as the R2 of 0.29 indicates. The paper later
discusses the factors that might make up the other 71% variance in future
financial performance.
Also, the conceptualization of performance in this study has connotations
for the point noted by Donaldson and O’Toole (2002) that the available
studies of performance outcomes of relationships have a narrow interpreta-
tion of performance, which has tended to be restricted mainly to financial or
transaction cost perspectives. In asking about the relationship performance
in ‘‘the next 3 years,’’ the items are asking respondents in this study to assess
relationship resources in the light of their future worth. The study therefore
taps into a broad range of performance antecedents and links them to their
final outcome of financial performance.
Both reflective and formative conceptualizations of relationship value
appear in the literature. The use of these alternative conceptualizations for
value research links to the issue of whether the research concerns drivers of
value or dimensions of value. This issue is clear in some studies, but in others,
the issue is not so clear. This study adopts a view of relationships as conduits
for value rather than entities with value and therefore tests and supports
a model with reflective paths in the structural model rather than formative
paths. The study takes the view that the flow of value results from the
relationship and that the value constructs are dimensions and not drivers.
6.3. Theoretical Implications
The study that this paper describes has raised and shed some light on several
issues. This section discusses these issues, which are: the issue of whether
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relationships are conduits for resources or are resources in their own right;
the management of resources in and through relationships; the contribution
to the intellectual capital literature; the creation of relationship value versus
its manifestation; and time and tangibility issues.
With respect to the first of these issues, two views of relationships are
possible. One view is of the relationship as just a conduit for resources,
whereas the other is of the relationship as an entity in its own right, with
the ability to create and maintain value of its own. This study adopts the
conduit view to clarify its conceptualization and tested that conceptualiza-
tion, but an argument for taking the entity view is viable, as noted earlier in
the paper. This entity versus conduit issue is a broader concern than just
that of buyer–seller relationships. Perhaps a range of value perspectives can
apply to governance forms so that in more structured relationships, such as
alliances and joint ventures, the entity model is more appropriate, whereas
in the less structured relationships, such as buyer–seller relationships,
the conduit model is more appropriate. But even within the confines of
buyer–seller relationships, interesting research can be done, taking the entity
view, on how much value a relationship creates ‘‘inside’’ itself versus how
much the relationship simply transmits value in the way that the conduit
view assumes. And if substantial value creation takes place within the
relationship, how can we identify the processes by which creation occurs?
Madhavan et al. (1998) note that relationships between firms ‘‘represent
significant flows of knowledge and other resources that are crucial to
industry leadership.’’ This study contributes to the literature by conceptua-
lizing and testing a structure that models the way in which knowledge of
buyers is gained through a ‘‘good’’ relationship with a seller. This contribu-
tion to the literature is important because the management of knowledge
is critical to firm success and ‘‘knowledge is the fundamental source of
competitive advantage’’ (Vargo & Lusch, 2004). The study illustrates the
way that firms develop competitive advantage by capability-building and
resource-combining activities between them (Sanchez & Heene, 1997), such
as by use of information in the databases and the other documentation of
a partner. This has significance well beyond buyer–seller relationships.
The conceptualization of intangible relationship value developed and
tested in this study, and the dimensions of value the conceptualization
incorporates, derives from Morgan and Hunt’s (1999) categorization of the
resources a firm can gain through a relationship, which was in turn based on
the resource-based view of the firm. The testing of, and support for, a model
that is based on Morgan and Hunt’s categorizations therefore support
a resource-based view of the exchange that occurs through a relationship.
The study provides an empirical illustration of the conversion of resources

from one form to another that Dierickx and Cool (1989) and writers on
intellectual capital (e.g., Roos et al., 1997) describe, by assessing managers’
perceptions of the conversion from current intangible relationship resources
to tangible financial performance, and the study demonstrates the
importance of their effective management. The conversion from intangible
resources to tangible financial performance is observable as time-based
because the outcome variable is financial performance in the future, which
is specified in the questionnaire as the next 3 years. This study therefore adds
to the body of knowledge about the time dependence of flows of firm
resources. The study is also one of the few reported that operationalizes and
empirically tests the frameworks for intangible resources that are available
in the intellectual capital literature.
The study demonstrates empirically the linkage of relationship value to
relationship financial performance as expressed in the Srivastava et al.
(1999) model and thus supports the linkage of relationship value to firm
performance. The study also distinguishes between the manifestation of
value, with which concerns this study, and value creation, which concerns
most other relationship value studies. Guilding and Pike (1990) make this
distinction very clearly in an early model of the process for conversion of
marketing expenses into firm assets. They discuss the point that, although
marketing expenses lead to the development of a firm asset, the traditional
accounting system does not recognize this asset. The study is therefore
relevant to the interface between the finance and accounting functions
because of the interest of both disciplines in assessing the value of
intangibles. As noted earlier in the paper, the marketing discipline is
concerned by the fact that its expenses are not recognized as creating assets
for the firm.
6.4. Managerial Implications
This study shows a very clear link between the flow of intangible resources
through a relationship and the performance of the relationship, so the study
gives a clear signal that these resources need to be managed carefully for
optimum firm performance. The study provides a set of dimensions that,
with further validation, can contribute toward building relationship
assessment tools as the basis for judging how to effectively manage a
relationship portfolio, because those dimensions are the ones that will
indicate the future relationship performance. Though the detail of the
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intangible value measures and their weightings may be specific to industry

type and hence may need industry-specific validation, this study gives
marketing managers potential tools that can enable them to assess, for
example, which small customers have the potential to become big customers
and thus provides a basis for supporting the application of the necessary
resources to develop those small customers. The question of how to justify
the allocation of resources to small customers who have large potential is an
issue for sales and marketing managers in the management of a customer
portfolio. In future, with further development of measures, dollar value
estimates of business-to-business relationships are possible by application
of relationship value dimensions in a similar way to the ‘‘brand strength’’
(Keller, 1998) factors used assessing brand value. But the dimensions can act
as the basis for a checklist or framework for relationship management even
at their current level of development, with a focus on intangible aspects, for
which no clear framework has previously been available.
For example, the study shows that two distinct relationship aspects need
management by a seller in order to optimize the intangible value of a
relationship. These are the people-related aspects and the structural aspects.
The human value dimensions are indicators of the effectiveness of the
process by which the intangible value is provided to the seller and can be
managed by discussing with the buyer which of its boundary personnel the
seller prefers to work with and how the seller prefers those personnel to act.
The human dimensions also provide further detail to direct the work of the
participants in the relationship, because they show which aspects are the
highly weighted ones and are the strongest indicators of performance.
Similarly, a relationship can be assessed in terms of its viability at the level
of the resources that are available from the buyer, using the measures of the
three structural dimensions.
7. LIMITATIONS AND FUTURE RESEARCH
This section discusses the limitations of, and avenues for future research
arising from this study. First, research needs to further establish the validity
of the scales used in the study and to assess their more generalized use.
Churchill (1979) and Flynn and Pearcy (2001) note that at least two studies
are required to develop a scale, so at least one close replication is required.
Preferably, different researchers require several replications (Nunnally &
Bernstein, 1994), initially with closely similar replications. Generalization
beyond a sample frame of New Zealand manufacturers requires testing in
other countries and other contexts. For example, in service industries

human dimensions may be relatively more important than is the case for
manufacturers. Lapierre (2000) points out that value to the buyer is
probably context-specific, and this is just as likely to be true for the value to
sellers, which is the subject of this study. To add weight to the argument that
value tends to be context-specific, Bolton and Drew (1991) note, from
the results of their empirical work, that perception of value can be specific
even to a particular segment of a market. And in other countries, cultural
factors may play a part in determining which dimensions are the most
important ones.
Firm size also may well have a bearing on how much use the seller makes
use of the buyer’s resources and on the way in which the user values or uses
the resources. The use of objective financial performance information rather
than managers’ perceptions may be useful for further validation. If time
and resources are available, study of relationship value longitudinally
rather than in cross-section will be useful, especially to better establish how
value flows. Also, investigation of networks in addition to dyads will be
interesting, as will investigation of both dyads and networks from the
perspective of sellers, rather than buyers, using this study’s framework. In
principle the framework should apply to these other contexts, but perhaps
the dimensions and their weightings may differ somewhat.
The issue of the distinction between dimensions as reflections of value and
drivers as causes of value needs some attention in future research. Ulaga
(2003), Ulaga and Chacour (2001), and Ulaga and Eggert (2003) use a
formative model and use both dimensions and drivers to name their
constructs. The construct domains and indicators suggest they are drivers
of value in terms of the definition used in this paper. Walter et al. (2001) also
estimate a formative structural model for the effect of their ‘‘direct’’ and
‘‘indirect’’ functions on supplier-perceived relationship value. This is logical
given that the specification of their ‘‘direct’’ and ‘‘indirect’’ functions is as
drivers of value, not dimensions. But Lapierre (2000) apparently specifies
reflective directions in factor models for what are value drivers, so some
confusion exists over the issue of formative versus reflective directions.
Lapierre does not explain the reflective directions she uses. Werani (2001)
also does not make the causal directions clear in his paper. The literature
therefore needs some clarification of what causal directions mean in
relationship value studies and of how value studies specify the directions.
An opportunity is available in the future to simultaneously research the
view of a relationship from both sides of the same dyad using the
dimensions and measures used in this study. The two partners will usually
90 ROGER BAXTER
have quite different perceptions of the value of the relationship so the links
between the two parties can be explored. Study of the possible differences in
the way value is provided by buyer–seller relationships, as distinct from the
more closely bound forms of relationship such as joint ventures, will
also provide theoretical insight of considerable value. Do relationships
that have more formal and/or closely bound structures than buyer–seller
relationships, such as alliances and joint ventures, manifest value
differently? This could shed more light on the issue of the conduit-versus-
entity conceptualization of relationships. The issue of how buyer–seller
relationships create value internally, rather than simply transmitting as
investigated in this study, is an interesting one that is closely related to the
entity-versus-conduit issue. These issues also relate to the interesting
questions that arise about how assets flow within and between organizations
(Dierickx & Cool, 1989), which probably require longitudinal study.
Investigation of these points will provide important information for
researchers and managers.
The paper earlier raises the question of whether and when reflective or
formative models are appropriate. This issue of model specification seems to
relate closely to the alternative conceptualizations of the value constructs
as either drivers of value creation or as dimensions of value manifestation.
Ulaga and Eggert (2006b) make a strong argument for specification as a
formative model, but their argument is for a set of drivers of relationship
value, rather than for a set of dimensions of manifestations of value. In their
case, the formative specification is therefore valid, but is not valid for
manifestations. This issue of specification needs clearer establishment in the
literature by further conceptual development and empirical testing.
The performance aspect of the study also raises some interesting issues.
How can this framework help understanding of the way in which the
performance of a relationship or a portfolio of relationships, in terms of
their intangible assets, link to the overall performance of the functions of a
firm such as sales, marketing and operations, and in turn to the performance
of the firm as a whole? If, in this study, the intangible relationship value
explains 29% of the variance of the relationship’s future financial
performance, what are the factors that determine the other 71%? These
factors will include those such as past financial performance, and clearer
establishment of how the factors work together will be interesting.
Another interesting issue concerning the path from intangible relationship
value to future financial performance, which shows this conversion
between the current value and its future realization, is what factors might
affect the effectiveness of this conversion. Testing the effect of relationship
atmosphere including variables such as trust and commitment on the

conversion of current value to future performance will be informative.
The framework this study uses derives from the intellectual capital
literature and the resource-based view of the firm and thus traces back to a
broad base in economic (Penrose, 1959) and management (e.g., Barney,
1991) concepts of resource development. The framework therefore
potentially applies in other discipline areas for intangible asset assessment.
Researchers apply the framework in the management discipline to studies of
performance at the firm level, and this study applies the framework to
relationships from a marketing perspective. This suggests that the broader
application in other discipline areas is potentially fruitful for future research.
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FINAL CUSTOMERS’ VALUE IN
BUSINESS NETWORKS
Stephan C. Henneberg and Stefanos Mouzas
ABSTRACT
This paper explores the value of the final customer in business networks.
The preferences of the final customer define the concept of the network
customer. The central argument of this paper is that companies within
networks of value-creating relationships can act as integrators, which by
interlocking limited value perspectives, can approximate an absolute value
horizon that includes network customer considerations. Such interlocking
activity constitutes a managerial challenge. As such, the interconnecting
activity extends companies’ value horizons and can be characterized as a
relationship capability, which is managerial knowledge capital that is not
residing within isolated organizational actors but within the interrelations
between them. Accordingly, such knowledge becomes a significant
resource that can be used by both the organizations to improve their
network position. By deconstructing the notion of value, this paper
demonstrates the need for greater conceptual clarity and operationaliza-
tion of value in the wider field of marketing, and specifically for business-
to-business marketing.

ISSN: 1069-0964/doi:10.1016/S1069-0964(08)14003-0
99
100 STEPHAN C. HENNEBERG AND STEFANOS MOUZAS
THE CHALLENGE OF MANAGING IN

BUSINESS NETWORKS
What is the challenge that companies face in business networks? Creating
and delivering value for customers is generally seen as a key ingredient for
successful business management (Anderson & Narus, 2004; Hamel &
Prahald, 1996). This notion of value is based on an exchange theory
(Aldersen, 1957; Bagozzi, 1975; Homans, 1961). Exchange among actors
happens when the concerned parties perceive that value can be created and
delivered in accordance with their specific needs and wants exemplified in
their goal functions. Within the exchange-based view, the creation and
delivery, as well as the appropriation of value, represents the main
managerial challenge; and has been linked directly to the essence of
marketing (Bagozzi, 1975; Flint, 2004) and yet to strategy itself (Hamel &
Prahald, 1996; Normann & Ramirez, 1993; Slater, 1997). As a concept,
value is considered as an antecedent of customer satisfaction, and thus has
direct impact on economic outcomes and performance variables of the firm
(Eggert & Ulaga, 2002).
This paper uses ‘‘exchange’’ to portray a company’s interaction with other
companies, including any upstream or downstream interactions (Ford &
Håkansson, 2006a); the argument also uses the term ‘‘networks’’ as a
metaphor for constellations of exchange relationships in the marketplace
(Anderson, Håkansson, & Johanson, 1994; Gnyawali & Madhavan, 2001;
Helfert, Ritter, & Walter, 2002). The concepts of exchange and networks
emphasize (a) the value challenge at the company-level and (b) the inherent
connectivity between companies in the marketplace. Lastly, final customers
as ‘‘network customers’’ indicate that they are the focal point of the network
in terms of final value delivery and ultimately value creation (Normann &
Ramirez, 1993).
Value is a contingent concept. Value represents the worth customers
perceive in monetary terms of a set of economic, functional/technical, and
psychological benefits from exchange for a price paid as well as other
sacrifices. Hence, value builds from contingencies which make the challenge
of managing the value of an offering a far from straightforward activity. The
reason for this complexity relates to the contextual embeddedness of value.
Value is not absolute or a given, rather value is constructed by individuals as
part of exchanges and relationships (Hogan, 2001). The relevant actors as
well as the holistic circumstances of an exchange constitute, therefore, a
pivotal aspect of all value considerations and are a crucial management
challenge.
Final Customers’ Value in Business Networks 101
For this reason, Holmen and Pedersen (2003) introduce the notion of
‘‘network horizon’’ or ‘‘customer horizon’’ (Storer, Holmen, & Pedersen,
2003) as an entity that can be analyzed and influenced by different actors.
This notion relates to the relevant companies and customers and their
exchange interactions that focal actors are aware of and that are taken into
consideration. Analogously, in this paper the concept of ‘‘value horizon’’
refers to the actors and their relevant value perceptions adopted by
companies to manage their offerings. However, a qualification of the
existing customer horizon concept (Storer et al., 2003) is presented by, first,
adding the aspect of value, and second, by applying this concept to
upstream and downstream interactions. While the implied theoretical value
horizon incorporates constituent relationships within a business-to-business
context, this perspective does not normally incorporate final customers in its
definition of the relevant network. Not incorporating final customers
encompasses the foremost managerial challenge. Consequently, value
considerations of the final customer serve as the starting point to extend
traditional value models and provide better understanding of value
management in complex network constellations (Holmen & Pedersen,
2003; Henneberg, Mouzas, & Naudé, 2006). Value management comprises
the creation, as well as the appropriation, of value in networks of exchange
relationships (Mizik & Jacobson, 2003).
The challenge companies’ face is, therefore, that they cannot understand
all relevant actors involved in their networks of exchange relationships
(Prenkert & Hallen, 2006). A mere dyadic exchange horizon solely focuses
on interactions between selling and buying entities and their value
perceptions, irrespective where these are positioned in a value-creating
system (Parolini, 1999). A network perspective, on the other hand, explains
in a holistic way the overall interaction patterns as well as direct and indirect
relationships between companies. This perspective implies a focus on both
upstream and downstream exchanges and interactions (Ford & Håkansson,
2006a), even including final customers and their specific preferences.
Nevertheless, this construct is without a clearly defined network horizon
(Holmen & Pedersen, 2003). Which value exchanges are specifically relevant
for their managerial decisions and which are tangential remains unclear
conceptually to companies.
Are holistic networks and value horizons managerially naive and
unachievable? This paper is an exposé of which value exchanges are most
relevant for a company within a network and how a company can gain the
necessary knowledge regarding which value exchanges matter. How far a
company’s value horizon can reach in a network of exchange relationships,
what the implications of an extended value horizon are, and how companies
become integrators of different value horizons will be discussed below. The
challenge of managing in networks of exchange relationships depends
crucially on an understanding of the characteristics of value considerations
that final customers apply. The paper reintroduces the ‘‘network customer’’
to value considerations of all the companies irrespective of where they are in
the value-creating system. While an extended value horizon enriches the
management in networks, no company can grasp a truly holistic under-
standing of a value-creating system (i.e., an absolute value horizon).
Although a holistic network value concept can be introduced that
incorporates previously neglected notions of value exchanges, such a
complete value horizon is unachievable and practically naive.
Holistic value management, based on insights into the conceptual fabric
of the created value of an offering, in a specific context for final customers, is
necessary to optimize value within the overall network. Such holistic value
management does not manifest itself in the actions of one company in the
network, but rather lies within the interactions and the overlay of differing
value horizons (Möller & Svahn, 2003; Parolini, 1999). These extended
value horizons (which are nevertheless partial) cocreate a more holistic value
perspective if the relevant actors engage in exchanges around the value
facets that are visible within their value perspective. Therefore, specific
managerial requirements within a value-creating network exist that are
preconditions for value management, and which are built around an
understanding of the needs and preferences of the network customer, that is
the final customer. This perspective includes aspects of the relational
governance within the network that is the dissemination of a value
understanding throughout the organizations in the value-creating system.
By introducing an innovative and holistic value management concept
based on an extended value horizon, this argument adds to a recently noted
resurgence of interest within academia in the concept of value and its
strategic management (Eggert & Ulaga, 2002; Ulaga, 2001) as well as in the
managerial practitioner sphere (Bovet & Martha, 2000). Moreover, new
concepts of value and its measurement, for example in a relational context,
are increasingly being explored (Payne & Holt, 1999; Ulaga, 2003; Ulaga &
Chacour, 2001; Ulaga & Eggert, 2005, 2006a; van der Haar, Kemp, & Omta,
2001; Wilson & Jantrania, 1994).
The structure of this article is as follows. The first section describes
conceptually the challenge of managing in business networks. The next
section provides an overview of value and exchange concepts as employed in
marketing theory by concentrating on a juxtaposition of models of dyadic
and network value exchange. Following on, the introduction of a holistic but
theoretical perspective provides the context for value management through
focusing on incorporating final customers into value considerations of
business networks. The paper discusses the impossibility of such a construct
in value management and introduces the challenge of a partial value horizon.
The paper ends with a discussion of managerial and theoretical implications
of an overlay of partial value horizons and how these are achieved.
EXCHANGE AND VALUE
A focus on exchange is arguably one of the main ontological characteristics

of marketing theory (Bagozzi, 1975, 1978; Houston & Gassenheimer, 1987;
Hunt, 1976, 1983). While not without alternatives (Hymen, 2004), exchange
remains a crucial concept; and underpins much of current marketing
thinking (Levy, 2002; Miller & Lewis, 1991; Pels, 1999; Shaw & Jones, 2005;
Sheth, Gardner, & Garrett, 1988; Wilkie & Moore, 2003). Generally
speaking, providing an offer that has specific characteristics in the eyes of
the customer facilitates exchange (Wright, 2004). These characteristics
manifest themselves in the (tangible or nontangible) attributes of the offer.
They are linked directly or indirectly to satisfying a need. By addressing and
fulfilling elements of this need, the attributes constitute a certain utility that
is value to the customer (Bagozzi, 1975; Houston & Gassenheimer, 1987;
Kothandaraman & Wilson, 2001). Thus, ‘‘ . . . customers estimate which
offer will deliver the most value. Customers are value-maximizers; [ . . . ] they
form an expectation of value and act on it’’ (Kotler, 2003, p. 60).
Managing the value of an offering to a customer (and to consider the
value appropriated through engaging in an exchange) represents a major
strategic activity (Hamel & Prahald, 1996). The offer a customer experiences
is usually the result of an amalgamation of efforts and activities of different
companies and players in the market, with each contributing certain aspects
(Flint, 2004; Normann & Ramirez, 1993; Parolini, 1999). Interorganiza-
tional activities, be they market exchange-based or the consequence of
strategic alliances and cooperation, provide the framework for the creation
of offerings to interim and final customers (Biggart & Delbridge, 2004;
Blois, 2002; Perks & Easton, 2000). Thus, an offering is ‘‘really frozen
activities, concrete manifestations of the relationships among actors in a
value creating system’’ (Normann & Ramirez, 1993, p. 68). As a result,
‘‘[v]alue creation and value sharing can be regarded as the raison d’être of
collaborative customer-supplier relationships’’ (Anderson, 1995, p. 349).
This joint value creation constitutes a nontrivial problem; specifically as it

is not immediately obvious, but crucially important to state which
exchanges are determining strategic value for management considerations.
Stabell and Fjeldstad (1998) show that there are distinct types of value
creating systems that follow their own logic (Uzzi, 1996, 1997). To get to
grips with these types, understanding the immediate (dyadic) exchange
partner in a downstream (customer) or upstream (supplier) exchange is the
obvious starting point. The exchange perspective for value considerations
that an actor is using represents their relevant ‘‘value horizon,’’ that is the
morphology of exchange interactions that are considered to be value-
relevant. The question of the value horizon becomes more opaque regarding
how exchange situations and value considerations further downstream in a
value-creating system should be treated (Anderson & Narus, 1998).
Ultimately, the value horizon challenge is about the inclusion of final
customers in value considerations of upstream marketing decisions. There-
fore, understanding how marketing concepts of value treat this challenge is
of pivotal importance. A concise overview of dyadic and network customer
value exchanges facilitates clarification of this challenge posed by the final
customer.
Dyadic Value in Marketing Exchanges
Traditional business and buyer behavior theory generally argues that in

order to make sense of the value of an offering, the subjective value to the
dyadic counterpart, which is the customer, is first and foremost relevant.
For this value consideration, the customer compares the perceived benefits
and costs (sacrifices) of an offering (Lapierre, 2000; Ulaga, 2003; Ulaga &
Chacour, 2001; Zeithaml, 1988). Deep level customer values provide the
reference points for this comparison in a means-end hierarchy, by
influencing the so-called ‘‘customer-desired value’’ (Zeithaml, 1988). Only
if the juxtaposition of benefits and sacrifices has a positive outcome will an
exchange be triggered, that is in cases where the benefits are greater than the
sacrifices (Eggert & Ulaga, 2002; Engel, Blackwell, & Miniard, 1993;
Simpson, Siguaw, & Baker, 2001).
Marketing management tries to convince the customers of the distinctive-
ness of the value of an offering and its unique ability to satisfy specific
individual needs; and thus its superiority in comparison to other alternatives
considered (Evans & Berman, 2001). The perceived offering superiority is the
distinctive purpose of any firm (Drucker, 1973; Slater, 1997). For this
purpose marketing management utilizes as a lever every variable that is part
of value considerations (Ravald & Grönroos, 1996). Therefore, assumptions

regarding the contextual embeddedness, that is the customer/buyer-specific
perceptual influences, are made. Adding or creating value (Drucker, 1954) is
therefore much more than just increasing the (perceived) functional benefits
of an offering (de Chernatony, Harris, & Riley, 2000). Value management
also focuses on decreasing the costs and sacrifices (and price is certainly only
one of many elements) or on influencing the embedding factors (Rust,
Zeithaml, & Lemon, 2000). In consequence, marketing management tries to
manage the mix of benefits and sacrifices, the transactional and the relational
elements, as well as the perceptions of these, in order to increase the perceived
value of the offering to the buyer. Therefore, marketing management tries to
understand the dyadic variables and interactions that are relevant in this
process of ‘‘value production’’ as well as the contextual embeddedness of
‘‘value perception’’ and the characteristics of ‘‘value considerations.’’
However, the mental calculation of the value of an offering is contextually
embedded (Zeithaml, 1988). Invariably, the literature on customer behavior
distinguishes the following layers of embeddedness: first, the customer
assesses perceived benefits in comparison to other offerings within the same
offering class, that is, value is relative to competition (Anderson & Narus,
1998; Ulaga & Chacour, 2001). Second, the customer references benefits
against other offering classes (e.g., substitutes) as well as general expectations
(e.g., regarding minimum requirements) (Parolini, 1999). Subsequently, the
customer compares the perceived benefits to the perceived sacrifices in
obtaining and consuming the product. Such considerations include sales
price, time efforts, mental effort of decisions making, prestige-loss with peer-
groups (Kothandaraman & Wilson, 2001; Woodruff & Gardial, 1996). These
considerations include opportunity costs, that is, the value that would be
obtainable from an alternative allocation of resources (e.g., an offering
satisfying a different need or the value of not buying at all). Thirdly, the
literature highlights the importance of adding relational benefits and sacrifices
to the value equation (Bagozzi, 1995; Grönroos, 1997; Hogan, 2001;
O’Malley & Tynan, 2000; Payne, Holt, & Frow, 2001; Payne & Holt, 1999;
Ravald & Grönroos, 1996; Ulaga, 2003; Ulaga & Eggert, 2005). Such
relationships constitute another element of the contextual embeddedness of
value. Value is not purely static (in the sense of episodic, relating to one
transaction), and therefore not independent of longer-term exchange
considerations. Dynamic relationships can influence each element of the
value concept. Therefore, besides transactional benefits (sacrifices) also
relational ones matter within the dyadic framework (Hogan, 2001; Ravald &
Grönroos, 1996; Tzokas & Saren, 1999; Ulaga, 2003; Ulaga & Eggert,
2006b). Relational value elements can be increased (e.g., relational benefits

like emotional reactions to increased group coherence) or decreased (e.g.,
relational sacrifices such as the efforts to continue the relationship, or
supervision efforts) to manage overall perceived value (Ravald & Grönroos,
1996). Marketing management also focuses on adding value by reducing the
attractiveness of alternative relational resource usages by, for example,
convincing a customer that going to the cinema with their children is such an
emotionally rewarding relational offer with benefits transcending the obvious
value of watching a movie, that such an activity cannot be compared to the
value of other alternatives, for example, buying a computer game.
The three aspects of embeddedness all remain within the construct of a
dyadic value horizon, focusing on immediate customers and their value
perceptions. The value-related elements are blended in the decision-making
process into the subjective construct of value. The perceived value allows
customers and buyers to make or evaluate purchase decisions. After
consumption, a rational, emotional, and/or affective response follows from
this value consideration in the form of customer (dis-) satisfaction (Antonides
& van Raaij, 1998; Churchill & Surprenant, 1982; Foxall, 1992; Foxall &
Goldsmith, 1994; Fournier & Mick, 1999; Garbarino & Johnson, 1999;
Holbrook, 1995; O’Shaughnessy, 1992; Spreng, MacKenzie, & Olshavsky,
1996). However, the (dis-) satisfaction is not necessarily a post-hoc experience,
but works also in anticipation of a consumption activity (Eggert &
Ulaga, 2002; Shiv & Huber, 2000).
No generally accepted definition of value or of its components within the
dyadic framework exists (de Chernatony et al., 2000; Payne & Holt, 1999).
However, going beyond dyads creates an even more complex perspective of
actors (Ford & Håkansson, 2006b; Håkansson & Ford, 2002). A network
perspective to value exchanges incorporates a web of indirect but neverthe-
less constituent relationships (Anderson & Narus, 2004; Kothandaraman &
Wilson, 2001). Networks are complex systems of interorganizational
exchange, characterized by their interdependence (Ford & Håkansson,
2006a; Håkansson & Ford, 2002), and incorporate distinct mechanisms
regarding value creation (Thompson, 1967; Stabell & Fjeldstad, 1998).
This network perspective corresponds with the conceptual frameworks
used in the International Marketing and Purchasing Group (IMP) (Ford &
Håkansson, 2006b), based on an interaction and social exchange paradigm
(Anderson et al., 1994; Easton & Håkansson, 1996; Ford, Gadde,
Håkansson, & Snehota, 2003; Möller & Halinen, 1999; Turnbull, Ford, &
Cunningham, 1996). Therefore, all domains of value in business-to-business
relationships are explicitly incorporated: value through supplier relationships,
value through customer relationships, and value through alliance relation-

ships (Möller & Törrönen, 2003; Ulaga & Chacour, 2001). However, these
considerations relate back to a dyadic perspective, as exemplified in the
juxtaposition of different concepts of value (Table 1). No value concept
relating to third party or indirect exchange relationships currently exists. In
conclusion, one has to concur with Hogan (2001) that the diversity of value
constructs hints at the fact that value is a complex multidimensional concept
with an innate ambiguity (Nauman, 1995). This complexity may explain why
most researchers conceptualize value through a dyadic perspective.
NETWORKS AND THE FINAL CUSTOMER

Business marketing rarely incorporates the final customer explicitly in their
considerations (Ulaga, 2001). As seen above, a dyadic perspective of value
dominates the literature. The traditional conceptualization of value provides
only a partial value horizon linked to a dyadic ‘‘seller-customer relation-
ship.’’ The value concept therefore inherently links direct counterparts in an
exchange. Consequently, the value remains reduced to facets relating to
activities by one part of the dyad. This focus in itself neglects a truly dyadic
perspective that takes into account value aspects that are related to the
relationship itself, that is, value as the manifestation of the relationship
between the actors (Pardo, Henneberg, Mouzas, & Naudé, 2006).
Furthermore, this focus does not in any way introduce indirect value
considerations of downstream exchange partners and ultimately the final
customer into the value consideration. However, wider value considerations
constitute one of the necessary developments for network marketing theory
to engage with the wider marketing and strategy literature (Parolini, 1999;
Stabell & Fjeldstad, 1998; Woodruff & Gardial, 1996).
Contemporary studies indicate that companies attempt to integrate the
final customer into their value considerations, even if they do not have direct
interactions with them. Spurred on by a number of significant advances in
information and telecommunication technology (Bell, Davies, & Howard,
1997; Kumar, 1997; Stern & Weitz, 1997), companies have developed and
implemented programmatic initiatives, such as Efficient Consumer
Response or Quick Response (Buzzell & Ortmeyer, 1995; Fernie, 1994;
Fiorito, May, & Straugh, 1995; Whiteoak, 1994). These initiatives represent
a collection of proven methods and tools that are applied to reduce costs
and response times and increase customer value within an expanded value
horizon within business networks, going beyond dyadic considerations
Table 1. Alternative Definitions of Value.

Author(s) Perspective Description
Anderson and B2B Value as the expression in monetary terms of the

Narus (2004) functionality or performance of market offering in a
given customer application; this performance is offset
against the price
Ulaga (2003) B2B ‘‘Customer value is generally defined as the trade-off
(transactional) between the benefits [ . . . ] and the sacrifices [ . . . ] in a
market exchange’’ (p. 678)
Subjective concept
Trade-off basis
Multifaceted
Construct relative to competition
B2B (relational) Eight dimensions (purchasing managers)
Product quality
Service support
Delivery
Direct product costs (price)
Supplier know-how
Time-to-market
Personal interaction
Process costs
Möller and B2B Supplier value (potential)
Törrönen Supplier efficiency
(2003) Price level (profit)
Efficient process (volume)
Diverse customer portfolio (safeguard)
Supplier effectiveness
Innovation
Supplier networking
Resource access
Scouting
Market signal
Eggert and B2B Customer perceived value: multicomponent cognitive
Ulaga (2002) construct (trade-off between benefits and sacrifices);
based on perceptions (i.e., a subjective concept);
importance of competitive comparison
Flint et al. B2B/B2C Customers’ desired value change: future oriented construct
(2002) of customer value
Hogan (2001) B2B Expected relationship value: ‘‘perceived net worth of the
tangible benefits to be derived over the life of the
relationships’’ (p. 341)
Simpson et al. B2B Total value (perceived; to a reseller): benefits for a channel
(2001) relationship, offset against factors that reduce value of a
channel relationship
Direct value: added value by supplier
van der Haar B2B/B2C ‘‘The customer value concept assesses the value a product
et al. (2001) offers to a customer, taking all its tangible and intangible
features into account’’ (p. 628)
Intended value map: initial company perceptions of

customers wants based on internal strategy and
capabilities
Desired value map: intended value map of future users
(unclear if perception by customer or supplier)
Information gap: gap between intended and desired value
map
Designed value map: value of existing product
Design gap: gap between designed and intended value
map
Expected value map: value expectation of existing
product by customer
Compromise gap: gap between desired value map and
expected value map
Perception gap: gap between designed value map (by
supplier) and expected value map (by consumer)
Received value map: outcome of offer evaluation after
consumption
Satisfaction gap: gap between expected value map and
received value map
de Chernatony B2B/B2C Added value: lack of meaning of concept; in its essence a
et al. (2000) multidimensional construct incorporating (perceived)
functional and emotional benefits, relative to
competition; core requirement of brand; intangible values
and value-delivering processes are most likely to be
sustainable added value
Parolini (1999) B2B/B2C Value in a value-creating system (VCS)
Net value created by the system: difference between gross
value that customer assigns to an offering and the
overall costs sustained by the VCS creating it
Net value received by end customer: difference between
the value the customer attributes to an offering and the
price paid
Net value acquired by value-creating players: difference
between the total price that purchasers have paid to the
players carrying out value-creating activities and the
total cost that the latter have had to bear
Flint, Woodruff, B2B Value: core beliefs and desired end-states/goals of customer
and Gardial organization
(1997) Desired customer value: perception of what customer
organization want in specific situation for a desired goal
Value judgment: assessment of a customer organization of
the created value for them (as defined by trade-offs
between benefits and sacrifices in a specific use situation
Woodruff and B2B/B2C ‘‘Customer value is the customers’ perception of what they
Gardial want to have happen in a specific use situation, with the
(1996) help of a product and service offering, in order to
accomplish a desired purpose or goal’’ (p. 20)
Zeithaml (1988) B2B/B2C Perceived value

Benefit components of value include salient intrinsic
attributes, extrinsic attributes, perceived quality
Sacrifice components of value include monetary price and
nonmonetary prices
Extrinsic attributes serve as value signals
Perceptions of value depend on frame of reference
Value affects relationship between quality and purchase
Porter (1985) B2B/B2C Value as the ‘‘amount buyers are willing to pay for what a
firm provides them’’ (p. 38); subjective construct
(Mouzas & Araujo, 2000). The conceptual foundation for these program-
matic initiatives will be discussed below.
The Challenge of the Absolute Value Horizon
Different value elements of an offering are visible and relevant to the final
customer, who may also be able to attribute them to a specific supplier (e.g.,
a Mercedes car customer might know and value the Recaro seats as part of
the offering). However, in most cases, value elements are not clearly
attributable, and the offer is associated exclusively with the relevant brand
and possibly the supplier (e.g., a retailer). The aggregation of value
constituents in a value-creating chain of many suppliers and buyers in
business-to-business exchanges remains obscured to most final customers.
For the following discussion of the management of value and an absolute
value horizon, the construct of the value chain in its abstract entirety serves
as a shorthand for a more complex network perspective (Evans & Berman,
2001; Porter, 1985; Tzokas & Saren, 1997; Wright, 2004).
While the dyadic view of value presupposes a partial value horizon, an
‘‘absolute value horizon’’ provides an alternative, that is, a strategic value
consideration that takes into account direct and indirect downstream
exchange partners. This includes final customers. In other words, every
actor within a value chain, wherever situated, has to know about final
customer value considerations and about the entirety of transition processes
of value exchanges that link the specific company to the final customer. This
absolute value horizon concept has implications for the strategic value
management of companies, by distinguishing different value aims and
associated activities. These value management facets of an absolute value

horizon are:
Optimization of the overall value for the final customer within the overall
value chain to increase the probability of selling to a final customer, and
so to increase the benefits of all value chain participants
Optimization of the derived value element(s) in the value chain to increase
the freedom to optimize the overall value
Optimization of the value captured by an individual company of the value
chain within the overall given (exchange) value to increase the individual
profitability of a value chain member.
The following section outlines these three theoretical propositions in more
detail before analyzing their managerial applicability.
Optimizing Overall Value

To increase the probability of selling an offer eventually to a final customer,
the value producing chain of organizations must be optimized to achieve
either a given offering output for minimized costs/sacrifices or, with a given
sacrifice structure, must maximize the (perceived) value of the offering
(Kothandaraman & Wilson, 2001; Mizik & Jacobson, 2003). As this activity
results through the interplay of all companies (whether they exchange
directly with the final customer or not) (Håkansson & Ford, 2002), in the
context of a specific value chain, this aim represents a ‘‘public value’’
(analogously to public goods) to the relevant companies: if any company
increases the value of the offering through their activities, this activity
benefits all companies in the value network by an increase in the demand
from final customers’ for this offering (or alternatively through a willingness
by the customer to pay a higher price). This public value characteristic
induces free-rider behavior by companies for this specific value management
aim (Downs, 1957). For this effect to happen it is irrelevant whether the
interplay between companies is characterized by traditional market
transactions, cooperative or collaborative behavior, or collusion.
Optimize the Derived Value

Acts of consumption, in a narrow sense, only happen as part of the ultimate
business-to-customer exchange (i.e., when the value of an offering is realized
by a final customer via consumption). Neither the supplier nor the
manufacturer nor the retailer benefits per se from quicker seat heating
elements in a car, for example; however, the final car customer does. In a
wider sense, value creation also occurs within the business-to-business value
chain, for example when a consumer goods company uses special packaging
material from a supplier that fits better onto the shelves of a retailer, that is,
functional benefits which optimize shelf space utilization for the retailer and
therefore decrease warehousing and handling costs.
This benefit represents ‘‘derived value,’’ that is, derived from managing
the ultimate aim of selling successfully to the final customer. The final
customer is oblivious to this value; neither perceiving nor benefiting directly
from this value. However, the derived value (in this case of the packaging
example the value is to the retailer) helps members of the value chain to
serve the final customer better by increasing their freedom to add value or to
instigate another derived value creation as another intermediate step in the
value creating chain. In the example above, the cost and flexibility benefits
to the retailer potentially increase the value of the offering to the final
customer, for example through the use of price promotions as logistic costs
have decreased, or through the elimination of out-of-stock situations.
However, the ultimate and determining value within a value chain remains
always in the form of the value delivered to the final customer, the only
value that is not derived but absolute (in a customer-subjective way).
Optimizing the derived value elements of a value chain is also a public
value to the members of the value chain: the overall offering value can be
increased by certain activities within the value chain with the results of these
activities benefiting all members of the value chain, for example through
more demand, better process efficiency, higher relationship benefits.
Optimize Value Capture

Value capture is the classic optimization aim of individual companies within
the value chain, often called value appropriation (Mizik & Jacobson, 2003).
Value capture represents the part of the overall income stream of a value
chain that a company can claim (Parolini, 1999; Ulaga, 2001). This income
may or may not be proportionate to its value contribution with regard to
overall or derived value. If demand and price of the final offering is fixed,
the optimization of the value capture constitutes a zero-sum game between
all members of the value chain. However, these variables are in fact not fixed
and therefore this optimization becomes dynamic. This aim can be
characterized as the only clear private value to a company in the value
chain, and one that companies manage directly through ‘‘isolating
mechanisms’’ (Mizik & Jacobson, 2003, p. 63) as in cooperation, barriers
to imitation, codification, negotiation, competitive position, power, etc.
(Ghemawat, 1991; Håkansson & Ford, 2002).
While some aspects of overall value optimization, as well as value capture

optimization, are loosely linked to the traditional view of value in the
marketing and general management literature, the facet of derived value
optimization is absent from the (dyadic) value literature. Furthermore, the
essence of the overall value optimization aim is incommensurable with a
dyadic value horizon. In effect, any given company in a value chain
theoretically has to simultaneously manage the optimization of three
different but interlinked value layers (Mizik & Jacobson, 2003) of which two
demonstrate characteristics of public values for the members of the value
chain and only one (the optimization of value capture) resembles a private
value. Two of the three value-related activities (overall and derived value
optimization) emanate from a subjective perspective, that is, that of the final
customer. Alas, even the third activity, that of value capture, is somewhat
linked to final customer perceptions as the strategic and negotiation position
(irrelevant of the position of a company in the value chain) depend on the
extent to which this company convinces other chain-members of its
importance for the production of the final offer and its ability to understand
the preferences of a final customer.
Therefore, an absolute value horizon is a theoretical prerequisite of a
holistic value management for any company in a value chain, whatever its
position within this chain. The notion of derived value as well as the
introduction of the final customer into value considerations throughout
the value-creating system means that value creation management needs to
be theoretically understood from the end of the chain. Final customer
perceptions of value represent the starting point that is the point from where
the value is realized through use or consumption by the final customer
(Ulaga, 2001; Wikstroem, 1996). The final customer is effectively finishing
off the value network. While a dyadic business-to-business understanding of
network relations grasps the value capture aspect, the activities of overall
value management as well as derived value management remain under-
exposed within such a perspective. This recognition drives the conclusion
that the value considerations in networks need to be linked to the ways and
circumstances in which all involved final customers perceive and realize the
value of an offer. Therefore, the relevant network environment (the value
horizon) needs to be broadened beyond traditional approaches of value
toward including final customer perspectives, or a ‘‘value-exchange-system
model’’ (Woodruff & Gardial, 1996). This perspective implies linking the
notion of (subjective) value embeddedness with that of the value network.
Within a business-to-business value-creating network, that is, within the
network of organizational supplier and buyer exchanges, the ultimate offer
is negotiated, constructed or produced by adding elements of ultimately

value-creating components. In order to add value for the final customer, this
value must be prepared somewhere within the value network and the
resulting income streams must be distributed (Kothandaraman & Wilson,
2001; Simpson et al., 2001). To be specific, the value itself is not created in
the business-to-business context, as the value ultimately only comes into
existence in its epiphany realization through the final customer. The final
customer becomes the ‘‘network customer’’ and an important characteristic
of the absolute value horizon.
The Impossibility of the Absolute Value Horizon
The previous discussion provides the theoretical value and network

considerations to deduce the following insight: value management in networks
incorporating final customers’ perspectives refers to nontrivial activities of
several complexities, including the construction of an absolute value horizon.
However, this theoretical conclusion needs qualification. The information
available to manage the three proposed value activities in the context of the
network customer’s sense making of value differs widely within the value
chain. In fact, most value-creating systems are too complex to achieve a
unified absolute value horizon. The research on network pictures shows that
these are subjective, idiosyncratic, task-specific and therefore do not
overlap easily between individuals and companies (Henneberg et al., 2006).
The notion of an absolute value horizon is therefore a somewhat naive
consideration which cannot be achieved by any company in the network. It is
extremely difficult for companies that are in the first tier of a value chain to
understand how final customers define and perceive value; for example, a
packaging producing company does not normally know about final-product
value perceptions without detailed access to point-of-sale and customer
behavior data which is usually beyond its reach. The leveling-off of
information asymmetries as projected for business-to-business markets with
the advent of the internet (Sharma, Krishnan, & Grewal, 2001) appears
unrealistic when understanding final customers and their value considerations.
However, companies with direct interaction links with the final customer
usually have a good understanding of preferences and value considerations.
Furthermore, through interorganizational integration (e.g., EDI, ECR, or
other systems spanning parts of the value-creating system and disseminating
final customer data) a better transparency exists in many networks
(Mouzas & Araujo, 2000). Such information dissemination normally does
not cover all secondary interactions or many upstream exchanges. Final

customer data is often treated as proprietary because such data is linked to a
position of power within the network and therefore increases the bargaining
position of companies in value appropriation negotiations.
While dissemination of customer data beyond the traditionally employed
dyadic perspective (dyadic value horizon) is possible, an absolute value
horizon is achievable throughout the value-creating system. Additionally,
because of the theoretical boundaryless construct of any network, achieving
a consensus on network boundaries that would underlie an absolute
value horizon remains elusive (Holmen & Pedersen, 2003). In strategic value
management terms there exists the possibility of an ‘‘extended value
horizon,’’ that is an integrated view of the value considerations of multiple
actors locked into exchanges as part of a wider value-creating system. This
view constitutes advancement over dyadic value horizons but does not
constitute an absolute value horizon. In effect, an extended value horizon is
an intermediate between traditional dyadic perspectives and theoretical
absolute perspectives on value.
The Extended Value Horizon
The concept of an extended value horizon operationalizes the understanding

of a partial value perspective which can potentially include final customers.
Such an extended value horizon incorporates the exchange morphology of
more than just a dyadic view (Fig. 1A), that is the extended value horizon at
least bridges three actor exchanges and incorporates the relevant value
considerations. The company from whose position the value perspective is
seen is called the focal company. However, an extended value horizon does
not prescribe whether or not the bridging is downstream (Fig. 1B) or
upstream (Fig. 1C) or a mixed perspective (i.e., integrating value
perspectives of supplying as well as buying companies) (Fig. 1D).
Furthermore, an extended value horizon does not necessarily incorporate
the final customer per se. Even an upstream-integrated perspective, that is
one that looks at customer value characteristics beyond the dyadic
customer, may fall short of incorporating the final customer of a network.
Therefore, in Fig. 1D the focal company Supplier B is able to understand
the preferences and therefore the value considerations of Wholesaler D (and
thus going beyond the Manufacturer C, its direct dyadic exchange partner).
However, this understanding constitutes the limits of Supplier B’s value
perspective; the final customer’s value consideration remains obscured.
Supplier A Supplier B Manufacturer C Wholesaler D Retailer E Final Customer
A)
Dyadic Supply Chain Dyadic Customer
Value Perspective Value Perspective
B)
Extended Supply Chain
Value Perspective
C)
Extended Customer
Value Perspective
D)
Extended Customer/ Supply Chain

Value Perspective
Indicates Indicates
Focal Final
Company Customer
Fig. 1. Schematic Value Chain and Different Value Horizons (Based on Henneberg &
Mouzas, 2007).
Fig. 1D shows the extended perspective representing a value horizon

that is achievable by individual companies. However, any further stretch
of the value perspective, approaching an absolute value horizon, is
improbable.
While the notion of an absolute value horizon is a naive and
overcomplicates explanation of managerial value considerations, the
alternative of an extended value horizon is addressing some of the aspects
of holistic value management (i.e., the three value management facets).
Nonetheless, this perspective does not guarantee an understanding of final
customers and, hence, does not deliver the necessary value orientation to
optimize value management in networks. Notwithstanding its utility to
companies, the concept of an extended value horizon does not provide us
with an understanding of how integration of these horizons can occur in
such a way that partial perspectives interlock and final customers become
transparent to all members of the value-creating system.
INTEGRATING VALUE HORIZONS IN NETWORKS
While utilizing an understanding of final customers for value considerations

within the whole network of interorganizational exchanges is of importance
because of the different value management facets, this issue does not merely
constitute a problem of quantity (i.e., how many companies a focal
company can include in their value horizon). Companies are limited to some
kind of extended value horizon, incorporating only partial value views. The
problem is therefore one of quality, that is of managerial coordination
between companies. Specifically, an interlocking of extended value horizons
in a network can create a business constellation in which an absolute value
horizon is approximated without companies having to achieve this absolute
horizon individually. The interlocking mechanism relies on the cooperative
activities of several companies within the network.
Interlocking Value Horizons
In order to achieve interlocking value horizons, a company within a network

must be positioned in such a way that it finds companies to collaborate with
which hold complementary extended value horizons. Fig. 2A provides a
schematic example for a two focal companies (manufacturer C and
wholesaler D) that by interlocking their specific extended value horizons,
achieve a combined overall picture of the system, including value
considerations of final customers. Manufacturer C achieves individually
an extended value perspective to first tier supplier A, while Wholesaler D
understands the value considerations of final customers although no
involvement by D occurs. This interlocking of perspectives enables the
companies within the relationship C–D to manage all three-value facets of
derived value, overall value, and value capture for the network.
However, this capability of interlocking value horizons represents in itself
a networking competence (Ritter, 1999; Ritter, Wilkinson, & Johnston,
2002), that is the competence resides within the specific relationships
between manufacturer C and wholesaler D, not within any specific company
(Zajac & Olsen, 1993). Multiple possibilities for interlocking extended value
horizons may exist within networks. The possibility of competing
interlocking perspectives provides a further indicator of the dynamic and
complex nature of networks. However, achieving an interlocking situation
will allow the focal relationship (in the example above C–D) to manage the
public aspects of value management (derived value and overall value) more
Supplier A Supplier B Manufacturer C Wholesaler D Retailer E Final Customer
A)
Extended Supply Chain Extended Customer
Interlocking Extended Value Perspectives
Interlocking Extended Value Perspectives
B)
Extended Customer/ Supply Chain Extended Customer/Supply Chain

Indicates Indicates
Focal Final
Company Customer
Fig. 2. Schematic Value Chain and Interlocking Value Horizons (Based on

Henneberg & Mouzas, 2007).
efficiently and effectively. The interlocking perspective increases their

company’s respective power position within the network regarding the
value appropriation aspect via the information asymmetry which exists
within the network. Value horizon integrators are therefore in a privileged
position and potentially can be tempted to control the overall network, a
tendency which causes counterproductive overall network performance
(Ford et al., 2003).
Integrators as Focal Companies in a Network
Certain characteristics of integrators as well as the managerial activities are

complementary for achieving such a situation resulting in interlocking value
horizons. However, these characteristics are tentative and need to be tested
against future empirical research in this area. The existence of interlocking
extended value horizons depends on several preconditions.
Achieving Extended Value Horizons

Several companies in a value-creating network must be able to extend their
value horizon by gaining insights into the value considerations of other than
their dyadic exchange partners (either regarding upstream or downstream
exchanges, or a combination of both). Gaining insight into value considera-
tions of extended exchange partners must also include an understanding of
how the preceding exchanges contribute to this value (in the sense of an
application of the three value management facets to the extended value
horizon).
Overlapping Extended Value Horizons

Two or more companies within a value-creating system must have
complementary or overlapping value horizons, in the sense that the value
exchanges incorporated must represent most of the important interaction
structures which in the perception of the actors characterize the network
(Parolini, 1999). The focal companies with the overlapping value horizons
need not be adjacent to each other, that is, that direct exchange happens
between them as part of the value chain. The second example in Fig. 2B
represents a constellation where two companies (Supplier B and Retailer E)
engage in an interlocking relationship that integrates their overlapping
extended value horizons without being directly involved in mutual exchange.
Creating Interlocking Relationship

These relationships are at the heart of a holistic value management and
achieve an integrated and interlocking value horizon that spans the most
important aspects of the value-creating system. This overlapping of
extended value horizons is embedded in the interactions between the two
or more companies, that is, the overlap is created by the interorganizational
relationship. Managerially, this overlap implies building trust–commitment
relationships, based on a web of strong and weak ties between the
companies (Uzzi, 1997). Interdependencies result, and the interlocking
relationships enable an exchange of information about the network pictures
of the companies, that is their specific and idiosyncratic understanding of
the network (Ford et al., 2003) which includes relevant actors, activities,
resource flows, power positions, network boundaries, and core/periphery
constellations (Henneberg et al., 2006). Because the network and value
horizon of these exchanged network pictures are different but complemen-
tary, the focal companies can integrate the different extended value horizons
in line with an amalgamation process that has been described as gaining
network insight (Mouzas, Henneberg, & Naudé, 2008).
Including Network Customers

Interlocking extended value horizons are a valuable result of managerial
(inter-)action. However, the discussion of the three value management facets
above implies that certain strategic decisions depend on an inclusion of the
final customer as the defining network customer. Therefore, at least one
extended value horizon as part of an interlocking value perspective needs to
include an understanding of final customer value considerations in order to
allow for the dissemination of these preference considerations upstream
along the value chain.
CONCLUSIONS
This section provides an overview of the main strands of the argument and
discusses some crucial implications of the network customer for manage-
ment in complex business networks. The preceding discussions concern the
notion of exchange and the pivotal aspect of value in exchanges. The
management of value falls into three distinct dimensions linked to final
customer considerations and an absolute value horizon. This multifaceted
value concept, incorporating a perspective spanning the whole value-
creating system, contrasts with existing (dyadic) marketing theory. Value
management aspects depend on a deep understanding of final customers’
value considerations.
However, such an absolute value horizon is a managerially naive
and a practically unachievable notion. Nevertheless, companies can
achieve extended value horizons. These are important for enhanced value
management considerations while not providing a full systemic perspec-
tive. An enhanced understanding of business-to-business networks derives
from interlocking several extended value horizons. A central argument is
that focal companies within a value-creating system can constitute
integrators, which by interlocking value perspectives, approximate an
absolute value horizon, including network customer considerations. This
interlocking activity builds on a deep relationship building between the
focal companies, and includes the exchange and amalgamation of
network pictures. The interlocking extended value horizons represent a
relationship capability, that is, the managerial knowledge capital that is
not residing within organizational actors but within the interrelations
between them. This knowledge capital becomes a sticky resource that is
used by both organizations to improve their network position (Gosh &
John 1999).
Achieving such an interlocking value perspective consequently allows the

focal companies to manage the optimization of the overall value to the final
customer as well as the optimization of derived value in the value-creating
network. The focal companies are also in privileged power positions
regarding the third aspect of value management, that of value appropria-
tion, because of their holistic understanding of the value elements and their
dynamics in the value-creating system.
Value management based on extended and interlocking value horizons
constitutes a shift away from single level entities that try to optimize ‘‘micro-
goals’’ (Hunt & Lambe, 2000, p. 24), toward multifirm considerations; and
represents an important developmental step of extant management theory
(Araujo, Dubois, & Gadde, 2003; Flint, 2004). Normann and Ramirez
(1993, p. 69) observe: if ‘‘ . . . the key to creating value is to co-produce
offerings that mobilize customers, then the only true source of competitive
advantage is the ability to conceive the entire value-creating system and
make it work.’’
IMPLICATIONS AND FURTHER RESEARCH

The present paper contributes to a better conceptual understanding of the
determinants of value which are arguably still in their infancy (Flint,
Woodruff, & Gardial, 2002). By deconstructing the notion of value, this
study demonstrates the need of more conceptual clarity and more systemic
operationalization of value for the wider field of marketing, and specifically
for business-to-business marketing (Ulaga, 2001). In the context of the
research literature which distinguishes between received and desired value,
the value horizon concept suggests that this distinction actually clouds the
issue (Flint et al., 2002): both received and desired aspects are relevant for
the management of value in networks.
Value creation and appropriation represents a strategic networking
activity, embedded in the social structure of complex systems of business
interactions (Uzzi, 1997). Further research on value management, especially
in the business-to-business area, has to explicitly incorporate the final
customer, as ‘‘ . . . research in marketing has overlooked the activities
employed by the customers in order to achieve value’’ (Tzokas & Saren,
1997, p. 115).
Empirical research needs to address the question how companies with
different assets, capabilities, and positions within a value-creating system try
to gain knowledge about the value considerations of indirect exchange
partners, including the final customer (Håkansson & Ford, 2002). To redress
the imbalance by focusing on dyadic intercompany exchanges, more
empirical studies of the network customer and the impact on value
realization and value management are necessary. Breaking down the
distinction between business-to-business and business-to-consumer markets
in research on value management is therefore inevitable. The network and
systems approach of research in marketing needs to be applied not only to
business markets but to final customers also (Anderson, 1995; Pels, 1999).
The notion of public value elements needs consideration when looking at
value-creating network relationships, specifically the condition that allows
for an optimization of these elements in contrast with typically private value
elements, that is value appropriation management. For example, a link of
the value horizon concept with different forms of value creation in chains,
shops, and networks contributes to a better understanding of strategic
positioning issues (Normann & Ramirez, 1993; Stabell & Fjeldstad, 1998).
Incorporating the final customer into the research agenda on value
management provides new insights regarding such enquiry as the process
and source of creating superior business rents or superior network positions.
Insights into the source and the process of value creation requires the
employment of more developed methodologies in network research such as
the use of experimental techniques that allow to operate on a higher
aggregation level (company clusters or value-creating systems) while
simulating practical and relevant results and outcomes. A greater under-
standing of customers’ considerations and a better understanding of how
organizations and individuals interact with each other to develop and
mobilize the ingredients of value realization, may deepen and extend the
conceptualization of interorganizational networks. Exploring the multiple
ways by which organizations and individuals develop their own value
representations is pivotal.
Considering how organizations manage the process of amalgamating
the inherent diversity of these considerations in networks of exchange
relationships is pivotal. The proposals here open new avenues of enquiry
that move away from narrow approaches and guides future empirical
research in this field.
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FUNCTIONS, TRUST, AND VALUE
IN BUSINESS RELATIONSHIPS
Thomas Ritter and Achim Walter
ABSTRACT
Managers and academics alike focus on value creation in business
relationships. This paper adds to existing literature by analyzing functions
of business relationships and their impact on value perception. Applying a
customer perspective, direct relationship functions are concerned about
payment, quality, and volume. Indirect functions include innovation,
access, and scouting. Furthermore, trust and number of alternative
suppliers are included in the study. The empirical results illustrate the
important role of direct and indirect functions for value creation.
Understanding these functions is instrumental for driving customer value,
both for the supplier and the seller. Direct functions do have a much
stronger impact on value than indirect functions that still do have a
significant impact. Thus, increasing direct function fulfillment is much
more effective in order to gain key supplier status than relying only on
indirect functions. But indirect functions may offer ample differentiation
opportunities. Being a strong driver of relationship value, trust is also
driven by function fulfillment. Thus, relationship value depends on
rational elements (functions) and social elements (trust). Availability
of alternative suppliers increases the importance of relationship function
fulfillment on customer value and customer trust. In highly competitive

ISSN: 1069-0964/doi:10.1016/S1069-0964(08)14004-2
129
130 THOMAS RITTER AND ACHIM WALTER
markets, suppliers need clear understanding and communication of

relationship value in order to succeed.
INTRODUCTION
The value concept receives significant attention in business marketing and

purchasing (Anderson, Jain, & Chintagunta, 1993; Parasuraman, 1997;
Ulaga & Eggert, 2006; Wilson & Jantrania, 1994). The basic notion is that
industrial markets make sense only when applying the concept of value.
Anderson and Narus (2004) see customer value ‘‘as the cornerstone of
business market management because of the predominant role that
functionality or performance plays in business markets.’’
The literature provides two perspectives of relationship value: a supplier
and a customer perspective. From the supplier perspective (e.g., Walter,
Ritter, & Gemünden, 2001), customer value is the contribution of a
customer, a customer group, or all customer relationships to a supplier’s
business results. The customer perspective (e.g., Ulaga & Eggert, 2006;
Walter, Müller, Helfert, & Ritter, 2003) focuses on the value of a supplier
relationship for a customer. Various actors may perceive the value
creation – the most prominent actors are the customer and the supplier.
As such, at least four perspectives on relationship value exist in all business
relationships (see Fig. 1 for an illustration).
This paper applies the buyer perspective both in terms of perception and
value creation. Hypotheses focus on the impact of relationship function
fulfillment on customer-perceived customer value. A study of 303 business
relationships contributes to the theoretical arguments. Managerial conclu-
sions and research implications conclude the paper.
CUSTOMER RELATIONSHIP VALUE
No common definition of customer value exists in the marketing literature.

The description of customer value focuses either on the offering (most
common) or on the relationship (increasingly adopted). Most definitions of
customer value draw on the quality and costs of a focal product exchange
(Zeithaml, 1988).
Most studies assess the perceived trade-off between benefits and
sacrifices (Anderson & Narus, 2004; Flint, Woodruff, & Gardial, 1997;
Ulaga & Eggert, 2006). Anderson and Narus (2004) propose to summarize
Functions, Trust, and Value in Business Relationships 131
Supplier perceives customer value Customer perceives own value
Supplier Relationship Customer
Supplier perceives own value Customer perceives supplier value
Fig. 1. Value Perspectives in a Business Relationship.
customer value in a financial measurement: ‘‘( . . . ) value in business markets

is the worth in monetary terms of the economic, technical, service, and social
benefits a customer firm receives in exchange for the price it pays for a
market offering.’’ However, this approach is often not applicable because of
valuation problems. Consequently, the measurement of the perceived
customer value employs mostly multi-attributive approaches and/or
decompositionary measurements (Anderson et al., 1993). For the purpose
of this study, customer relationship value equals the overall trade-off
between the multiple benefits and sacrifices of a supplier relationship
perceived by the customer.
RELATIONSHIP FUNCTIONS
Several models and theories on relationship functions emerged over the past
two decades (Anderson, Håkansson, & Johanson, 1994; Cunningham &
Homse, 1986; Håkansson & Johanson, 1993; Ulaga & Eggert, 2006; Walter
et al., 2001). Functions of supplier relationships are areas of supplier’s
contribution to customer business in this study. The fulfillment of these
functions is valuable for a customer if the customer is appreciative and
perceptive of these contributions. Functions are potential drivers of
customer relationship value; they are the reasons why a customer should
be interested in exchange with a supplier.
Even though perceived value relates to a relationship, relationship

functions may relate to outside the relationship. Here, this paper departs
from Homans’ (1961, p. 7) notion that ‘‘( . . . ) the reward each gets from the
behavior of the other is relatively direct and immediate.’’ To determine the
value of a supplier relationship in business markets, indirect connections
between the exchange partners and involved other parties must be
considered as well (Blau, 1964). Anderson et al. (1994) consider such
outside effects as ‘‘indirect functions.’’
Therefore, relationship functions are either direct or indirect functions
(Håkansson & Johanson, 1993; Walter et al., 2001). Direct functions of a
supplier relationship have an immediate effect on the economic goals of the
customer firm. Indirect functions have an indirect influence as their value-
increasing effects are connected to other relationships or future action, that is,
the economic effects developed outside or later in the supplier relationship.
Direct Relationship Functions
In cases where the supplied product or service is an important part of the

customer’s offering (like the microprocessor to a computer or the seat
module to a car), customers’ concerns center around quality because the
delivery contributes to (or reduces in negative cases) the quality the customer
produces for his or her customers. Taking a view inside the customer’s
operations, supplies might support operations by being reliable, easy to use,
or easy to maintain – issues that directly impact the processes and the
profitability of the customer. In addition, less critical purchases (often called
C products) are not important enough to spend a lot of effort on quality
problems. Thus, quality is always a customer concern regardless the product
category. The quality function is a holistic one, including product quality,
delivery performance, and service support.
The payment function covers the financial, monetary side of the
relationship. Depending on the purchasing orientation (Anderson & Narus,
2004), customers focus on purchasing price, total cost of ownership, or net
present value (Cannon & Homburg, 2001; Ulaga & Eggert, 2006). This
function also includes different payment methods to mirror a shift from
product exchange to service exchange (Vargo & Lusch, 2004), where
industrial products are not any longer sold upfront but paid according to
usage. Such ‘‘leasing’’ or ‘‘operation management’’ models change the
payment structure from an upfront lump sum toward a revenue stream for
the supplier, which is related to the economic success of the customer.
Regarding the volume function of a relationship, firms move from wide

supplier bases with fragmented purchasing power to smaller supplier bases if
not even single source arrangements. Obviously, volume and payment
functions are related, as suppliers normally offer discounts for higher
volumes. Besides price impacts, allocating larger purchases to selected
suppliers allow customers to influence suppliers, to gain consistency within
the supply (no variations between suppliers), and to reduce communication
costs by focusing on one rather than many suppliers. All three direct
relationship functions influence the economic goals of the customer.
Hypothesis 1. The better a supplier relationship fulfills direct relationship
functions, the higher the perceived customer relationship value.
Indirect Relationship Functions
Suppliers can also fulfill a scout function by passing on relevant technical or

market-related information. This activity is especially of interest because
firms need information about their environment and sense their markets in
order to maneuver successfully (Day, 1994). Suppliers usually have
particular knowledge about their own industry as well as their customers’
industry and competitive situation as they potentially supply other firms in
these markets. If a supplier fulfills the scout function, the customer can
realize a time advantage compared to competitors and eventually decrease
market research costs.
Beyond pure information exchange, suppliers can be valuable partners for
their customers’ product and process innovation. The innovation function
can have many faces: developing innovative ideas, supplying innovative
components and production facilities, or engaging in a collaborative
development project. By using suppliers’ resources, customers can speedup
their development process, engage in larger, riskier and long-term oriented
projects, and also have wider technological input.
In addition, suppliers may fulfill an access function when she or he helps
the customer to establish contacts with new, potential exchange partners or
influential people (e.g., opinion leaders, celebrities). These contacts can be
with other suppliers but also with customers, industry associations, or
governmental institutions. Hereby, the supplier can take an active role by
bringing the customer together with potential partners. However, customers
can also use relationships with prestigious suppliers as reference and, thus,
the supplier plays a more passive role. The value effect of the access function
depends on the value of the new relationships. The new partners can, for
example, show a large procurement volume, offer low prices, become

innovation partners, or themselves have a large network in the industry.
Hypothesis 2. The better a supplier relationship fulfills the indirect

functions, the higher the perceived relationship value for the customer.
CUSTOMER TRUST
The importance of trust in relationships increased over the last 20 years
(Andaleeb, 1992). Consequently, trust is one of the major determinants
of models explaining business relationships (Wilson, 1995). Therefore,
this study explicitly studies the influence of customer trust on relationship
value.
Moorman, Zaltman, and Deshpandé (1992) define trust as ‘‘( . . . ) a
willingness to rely on an exchange partner in whom one has confidence.’’
Generally, trust involves not only the belief in the benevolence in the
partner’s actions, but also the vulnerability against the partner (Morgan &
Hunt, 1994, p. 23). An organization that trusts their partners expects ‘‘( . . . )
that another company will perform actions that will result in positive
outcomes for the firm, as well as not take unexpected actions that would
result in negative outcomes for the firm’’ (Anderson & Narus, 1990, p. 45).
Trust involves the capability to delegate responsibility so that the own area
of responsibility is reduced, hereby creating free capacities for other tasks.
A trusting partner assumes to receive a good offer or a fair deal. Reduced
control and higher flexibility (Dwyer, Schurr, & Oh, 1987; Morgan & Hunt,
1994; Ring & Van de Ven, 1994) leave the customer in a position to perceive
high relationship value, at least to assume such a perception.
Hypothesis 3. The more a customer trusts a supplier, the higher she or he

values the relationship with this supplier.
A customer trusts a supplier when the supplier consistently fulfills relevant
functions for the customer (Ganesan, 1994; Geyskens, Steenkamp, &
Kumar, 1999). Customers interpret the fulfillment of relationship functions
as suppliers’ investments in the relationship, which in turn is a foundation
of trust.
Hypothesis 4. The more a supplier fulfills relationship functions, the more

the customer will trust the supplier.
AVAILABILITY OF ALTERNATIVE SUPPLIERS
Relationships are very complex. External factors of the exchange processes

between the partners directly influence relationships (Håkansson, 1982).
Therefore, the importance of relationship functions for customer trust and
relationship value varies according to market and situational factors.
Although a variety of supply market factors can influence the development
and output of relationships, the availability of alternative suppliers
(replaceability), and in this context the comparison level of alternatives, is
a key variable across different streams of marketing literature (Anderson &
Narus, 1990; Cannon & Perreault, 1999). The availability of alternative
suppliers is the degree to which a customer firm has alternative sources of its
needed resources.
In order to achieve high relationship value, suppliers need to perform
better when alternative suppliers are available. When many suppliers
compete to sell goods to a customer it is easier for the customer to get
reasonable prices, quality, know-how, and market information. At the same
time, differentiated function fulfillment may be the key point of differentia-
tion. Therefore, the linkages between direct and indirect functions and
relationship value are likely to be stronger when the customer has more
alternative suppliers to choose from, because the customer is aware of the
differences in the market and the importance of those for value creation.
Hypothesis 5. The impact of direct and indirect relationship functions on
customer-perceived relationship value is stronger when the customer has
alternative sources of supply.
In a supplier relationship that fulfills relationship functions to a high
degree, the customer has sound reasons for the development of trust. When a
company can choose between several suppliers, past experiences with a
supplier become the focal point for decision. With alternatives available, only
relatively stronger function fulfillment can serve as building blocks for trust.
Hypothesis 6. The impact of relationship functions on the customer trust
is stronger when the customer has alternative sources of supply.
EMPIRICAL STUDY
A total of 745 purchasing professionals were initially called by phone and

motivated to complete the questionnaire. The telephone contacts served as a
basis to ensure that the selected person is knowledgeable to report on the

constructs under investigation. The empirical work yielded a total of 303
usable questionnaires, equal to a 41% response rate. Most of the responses
came from mechanical engineering (19%), vehicle manufacturing (18%),
electronics industry (10%), chemical industry (10%), and metal-processing
industry (7%). The suppliers of these respondents are all manufacturers and
mainly operate in the electronics industry (42%), mechanical engineering
(19%), and chemical industry (9%). The average number of employees on
the part of the customers is 15.913 (median ¼ 500). The supplier companies
employ 744 persons on average (median ¼ 300).
All constructs measurements employ seven-point multiple-item scales.
Measurement development follows procedures that Anderson and Gerbing
(1988) recommend. Building on the conceptual research on relationship
value, four items measure this construct including value of supplier
relationships as perceived trade-off between benefits and sacrifices (Walter
et al., 2001), value depending on role perceptions of the respondents, value
as a measure relative to the offerings of competitors (Anderson & Narus,
2004), and value as a multi-attribute concept (Wilson, 1995).
Customer trust measurement adapts the five-item scales of Kumar,
Scheer, and Steenkamp (1995) and Ganesan (1994). The direct relationship
functions use seven items following the research of Sheth and Sharma
(1997). The indirect relationship functions employ suggestions by Anderson
et al. (1994) and Håkansson and Snehota (1995). The moderator variable
availability of alternative suppliers is measured by a single item: the degree
to which the supplier can be replaced easily. This notion of replaceability of
a focal partner as a measurement of dependence is used in several empirical
studies of marketing channels (e.g., Heide & John, 1988).
The results of a LISREL analyses show that the measurement models
satisfy all reliability and validity requirements of existing marketing
literature (Anderson & Gerbing, 1988). Not only the global fit criteria
of the developed scales but also their details are more than satisfactory
(see Appendix D). Discriminant validity between the five factors is also
given applying the criterion suggested by Fornell and Larcker (1981)
(see Appendix E).
RESULTS
Tables 1 and 2 show the results of the regression analyses. The data supports
all hypotheses. Furthermore, the model explains a substantial portion of the
Table 1. Regression Results Relationship Value.

Independent Variable Model 1 Model 2 Model 3
Main effects
Direct functions (H1) 0.28 0.26
Indirect functions (H2) 0.17 0.16
Customer trust (H3) 0.31 0.29
Interaction effects (H5)
Availability of alternative suppliers X
Direct functions 0.07w
Indirect functions 0.08
Moderating variable
Availability of alternative suppliers 0.41 0.27 0.26
R2 (adjusted R2) 0.17 (0.16) 0.47 (0.47) 0.49 (0.48)
DR2 0.17 0.30 0.02
F 59.88 66.56 46.54
Note: n ¼ 303.
po0.05.
po0.001.
w
po0.10 (one-tailed test).
Table 2. Regression Results Customer Trust.

Independent Variable Model 1 Model 2 Model 3
Main effects (H4)

Direct functions 0.31 0.30
Indirect functions 0.18 0.16
Interaction effects (H6)
Availability of alternative suppliers X
Direct functions 0.14
Indirect functions 0.02
Moderating variable
Availability of alternative suppliers 0.23 0.15 0.14
R2 (adjusted R2) 0.05 (0.05) 0.20 (0.20) 0.22 (0.21)
DR2 0.05 0.16 0.02
F 16.27 25.94 17.04
Note: n ¼ 303.
po0.05.
po0.01.
po0.001.
variance of the dependent variable, relationship value (49%). The three

influencing factors – direct functions, indirect functions, and customer
trust – are significant predictors of relationship value of a supplier
relationship (supporting H1, H2, and H3). Relationship functions explain
a moderate proportion of the variance of customer trust (22%), thus
supporting H4.
The moderating variable availability of alternative suppliers shows
negative effects on relationship value and customer trust. The negative
influence on customer trust supports Cannon and Perreault’s (1999)
argument that customers are more likely to cooperate with their suppliers
if they have none or only a few alternatives and, therefore, are more
dependent on their supplier. If a customer has several available alternatives,
she or he will be less likely to develop trust with a given supplier based on
value creation unless additional circumstances apply.
This outcome holds also for the negative effect of availability of
alternative suppliers on relationship value. The easier a supplier can be
replaced (especially in case of commodities), the less the realized advantages
will be different from competitors’ offerings. This result is not surprising.
However, the analysis of availability of alternative suppliers highlights
interesting additional insights. The results of the hierarchical regression
analysis for relationship value as dependent variable (Table 1) show the
expected positive significant interaction effects of availability of alternative
suppliers and direct functions as well as availability of alternative suppliers
and indirect functions. Moreover, the results in Table 2 show a positive
significant interaction effect of availability of alternative suppliers and direct
functions on customer trust. The expected interaction effect between
availability of alternative suppliers and indirect functions on customer trust
is not significant. Thus, with increasing competition, function fulfillment
gains importance for countering the direct negative effect with a positive
indirect effect.
DISCUSSION AND OUTLOOK
This study shows that relationship functions and customer trust explain a
considerable amount of the customer-perceived relationship value. Direct
relationship functions have a much stronger impact on perceived value than
indirect ones. As such, highlighting its direct value contributions in order to
gain key supplier status is important for a supplier firm. However, this
highlighting should not lead to neglecting indirect relationship functions.
Indirect functions do have a significant impact on relationship value and

thus offer differentiation potential.
The result is important for both, marketing and purchasing managers. On
the supplier side, differentiation and revenue potential exist in indirect value
functions. It is a worthwhile exercise to investigate the potential for
increasing customer value perceptions based on innovation, market access,
and information. Also, sales directors must analyze their current sales
people’s reward systems in order to find the right balance between direct and
indirect functions. Short-term oriented reward systems work for direct
functions because results can be seen in a short period of time. However, a
short-term orientation fails in motivating personnel to exploit indirect
functions of relationships because of a time gap between input and outcome.
Typically, current reward systems favor direct value functions beyond the
reasonable level. Firms need to develop and implement new reward systems
in order to foster indirect functions of relationships.
On the customer side, firms can improve their supplier evaluation practice
by including all functions, not only direct ones. Many supplier evaluation
systems are very much oriented toward direct functions. Such practice opens
for a lack of supplies with regards to innovation, market access, and
information. This is of particular concern in dynamic, innovation-driven,
and networked industries, where indirect functions are inputs to key success
factors.
In addition, customer trust has a major impact on relationship value. This
highlights the importance of good working relationships between suppliers
and customers. To some extent, this result supports the notion that not only
rational arguments (i.e., functions) but also social arguments (i.e., trust)
drive relationship value. Therewith, the study contributes to existing
relationship value models by employing a relationship function perspective
as well as by analyzing the role of trust.
Some managers say that as long as value is created, everything is
good in the relationship. While value creation is the reason to have
a relationship, the above attitude actually brings relationships at risk. Our
results suggest that low levels of trust harm relationship value perception.
As such, troublesome relationship management processes may lower
relationship value to a point where the customer will terminate the
relationship because of a lack of perceived value creation. Also, function
fulfillment is one possible mechanism to drive trust and, thus, functions are
a powerful predictor of the overall relationship strength. Trust needs to be
earned – and relationship functions are one feasible and measurable way of
achieving this.
Furthermore, the results on availability of alternatives further develop an

understanding of relationship functions as drives of relationship value. When
alternatives exist, customer value perception decreases. The interaction effect,
however, signals increased importance of fulfilling relationship functions in
competitive markets. If a firm operates in a highly competitive market
regarding goods and services, it is of paramount importance to fulfill on the
relationship functions in order to minimize the directly negative impact of
alternative supply sources. This poses a practical challenge to managers
because they often ‘‘give up’’ in competitive markets and operate under the
assumption of commodity markets. However, as our results suggest, even
when alternatives exist, function fulfillment is a source of differentiation and
a means to increase relationship value perception indirectly.
This paper analyzes the relationship between relationship functions,
creation of trust, and value in a relationship. But the present study not only
provides answers to important questions concerning value creation through
relationships, but it also raises questions for further research. Research on
the preconditions and antecedents for the fulfillment of different functions is
underdeveloped. Does a relation exist between the development stage of a
relationship and value creation? In addition, the question of value sharing
(Anderson, 1995; Wilson, 1995) is important. When a relationship creates
value for both partners, both partners benefit from this situation and have a
strong incentive to continue the relationship. Are there typical combinations
of relationship function fulfillment in a relationship?
Business relationships exist for creating value – and value creation
relationships are vital for the future survival of the company. Thus, an
understanding of the drivers of relationships value perception is of
paramount importance. Firms need to adopt value assessment tools as well
as implement value-delivering processes inside and between firms in order to
stay competitive.
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APPENDIX A. INDICATORS
Relationship Functions
Suppliers can provide different benefits to their customers, for example,

covering a large demand volume, supplying innovative products, and/or
delivering information on the procurement market. How do you rate the
following potential functions regarding your benefit of this supplier
relationship? (1 ¼ very little, 7 ¼ very strong)
Cost Function
Products that are good value for money.
Low purchasing prices.
Volume Function
Long-term delivery promises for the products delivered.
Complete coverage of your total demand for the products.
Quality Function
Functionality of the products delivered.
Reliability of the products delivered.
Realization of our product requirements.
Access Function
Intermediation of contacts to prospective customers of your company.
Intermediation of contacts to prospective other suppliers of your
company.
Intermediation of contacts to relevant third parties (technology compa-
nies, consultants, marketing service providers, and so on).
Direct reference with possible business partners.
Scout Function
Information on your procurement market.
Information on your competitors.
Information on relevant third parties (technology companies, consultants,
marketing service providers, and so on).
Information on developments in your market.
Innovation Function
Ideas for new products/services of your company.
Development of your products/services.
Development of your manufacturing processes.
New technological know-how for your company.
Relationship Value
Considering all benefits and sacrifices associated with this supplier

relationship, how would you assess its value? (1 ¼ very low, 7 ¼ very
high)
The value of the relationship with this supplier is in comparison with
alternative supplier relations very high. (1 ¼ strongly disagree,
7 ¼ strongly agree)
All in this entire supplier relationship has a high value for our firm.
(1 ¼ strongly disagree, 7 ¼ strongly agree)
How do you rate the value of all performance contributions that your
company gains from this supplier (e.g., volume, market information,
technologies)? (1 ¼ very low, 7 ¼ very high)
Customer Trust (1 ¼ Strongly Disagree, 7 ¼ Strongly Agree)
When making important decisions, the supplier is concerned about our

welfare.
When we have an important requirement, we can depend on the supplier’s
support.
We are convinced that this customer performs its tasks professionally.
The supplier is not always honest to us (reverse scored).
We can count on the supplier’s promises made to our firm.
APPENDIX B
Table B1. Results of the Measurement Model Direct Functions.
Construct Indicator Standardized Item to Cronbach’s Explained Construct Variance
Factor Total- Alpha Variance Reliability Extracted
Loading Correlation (EFA)
(CFA)
Payment function PF 1 0.88 0.74 0.85 86.7 0.86 75.5

PF 2 0.84 0.74
Volume function VF 1 0.86 0.51 0.67 75.7 0.70 54.7
VF 2 0.60 0.51
Quality function QF 1 0.81 0.69 0.82 73.8 0.83 61.3
QF 2 0.83 0.72
QF 3 0.71 0.62
Direct functions DF 1 0.66 0.46 0.67 61.1 0.77 53.2
DF 2 0.83 0.50
DF 3 0.69 0.51
Note: w2ð11Þ ¼ 28:92; p ¼ 0.002; GFI ¼ 0.973; AGFI ¼ 0.932; CFI ¼ 0.978; RMSEA ¼ 0.073.
po0.001.
APPENDIX C
Table C1. Results of the Measurement Model Indirect Functions.

Factor Total- Alpha Variance Reliability extracted
(CFA)
Access function AF 1 0.85 0.80 0.90 77.5 0.90 69.9

AF 2 0.80 0.76
AF 3 0.83 0.77
AF 4 0.86 0.80
Scout function SF 1 0.77 0.71 0.85 69.5 0.85 59.0
SF 2 0.72 0.67
SF 3 0.79 0.70
SF 4 0.79 0.71
Innovation InF 1 0.78 0.73 0.89 75.2 0.89 66.8
function InF 2 0.83 0.77
InF 3 0.83 0.77
InF 4 0.83 0.76
Indirect functions IF 1 0.83 0.62 0.74 66.3 0.80 57.8
IF 2 0.84 0.61
IF 3 0.59 0.48
po0.05.
po0.001.
APPENDIX D
Table D1. Results of the Measurement Model.

(CFA)
Relationship value RV 1 0.89 0.85 0.93 82.5 0.93 76.6

(C1) RV 2 0.83 0.80
RV 3 0.93 0.87
RV 4 0.85 0.82
Customer trust CT 1 0.71 0.65 0.85 62.6 0.85 53.0
(C2) CT 2 0.72 0.63
CT 3 0.74 0.66
CT 4 0.70 0.65
CT 5 0.77 0.71
Direct functions DF 1 0.57 0.46 0.67 61.1 0.68 41.6
(C3) DF 2 0.65 0.50
DF 3 0.72 0.51
Table D1. (Continued ).

(CFA)
Indirect functions IF 1 0.76 0.62 0.74 66.3 0.75 50.5

(C4) IF 2 0.76 0.61
IF 3 0.60 0.48
Availability of AS 1 0.92a – – – 0.85 85.0
alternative
suppliers (C5)
po0.001.
a
Variance of error term was fixed at 15%.
APPENDIX E
Table E1. Discriminant Validity of Constructs.
C1 C2 C3 C4 C5
Variance extracted
0.77 0.53 0.42 0.51 0.85
C1 0.77 Squared correlation of constructs
C2 0.53 0.34
C3 0.42 0.41 0.29
C4 0.51 0.16 0.11 0.12
C5 0.85 0.20 0.07 0.06 0.01
TOTAL COST OF OWNERSHIP
AND CUSTOMER VALUE IN
BUSINESS MARKETS
Gabriela Herrera Piscopo, Wesley Johnston and

Dan N. Bellenger
ABSTRACT
This paper explores the use of the total cost of ownership (TCO)
approach from the business marketing perspective. TCO provides a
method to estimate all cost associated with the acquisition, use, and
disposal of a good or service over the lifetime of the purchase.
Organizational buyers can employ TCO analysis to evaluate alternative
offerings from suppliers, to assess ongoing supplier performance, and to
drive process improvement. Sellers can use TCO models to measure,
document, and communicate the value that their offering represents to a
customer in the way of lower costs relative to the next best alternative.
TCO analysis can be a powerful selling tool to demonstrate concrete
customer value creation for alternatives that deliver comparable
benefits. The execution of a TCO analysis requires experts from both
the buyer and seller organizations to work closely together in mapping
and modeling the target customer’s application. Ideally, the sales
representative leads the process in which both parties collaborate. The

ISSN: 1069-0964/doi:10.1016/S1069-0964(08)14006-6
205
206 GABRIELA HERRERA PISCOPO ET AL.
process contributes to the strengthening of trusting, long-term buyer–

seller relationships.
1. INTRODUCTION
Wise organizational buyers understand that basing purchasing decisions

merely on price results in poor choices. Most purchasing agents recognize
the need to evaluate the overall cost that an offering generates to their
organization as well as the benefits offered (Ellram & Siferd, 1998; Plank &
Ferrin, 2002). However, more often than not, purchasing organizations
lack the necessary tools or resources to estimate such costs and benefits
(Ellram, 1993).
A vast majority of purchasing organizations recognizes the advantage of
using a total cost method to evaluate purchases, while a smaller majority
uses an informal total cost of ownership (TCO) approach. An empirical
study by Ellram and Siferd (1993) provides evidence of the use of TCO
models among purchasing organizations: 75% of their 103 samples use TCO
to evaluate purchases, but only 18% use formal models. An informal
approach, without underlying accurate calculations, can be misleading. The
challenge for purchasing organizations lies in the lack of systematic ways of
measuring cost details for thousands of items from hundreds of suppliers.
The supplier can lead the process of TCO estimation. With versus without
TCO estimates, suppliers have better knowledge of their own offering’s
performance. Combining supplier expertise and knowledge with customer-
specific information generates the most complete and accurate calculation.
If the supplier’s offering provides the lowest total cost and the highest value,
the supplier wants to document and demonstrate such value to the buyer.
Conversely, if the supplier’s offering is not the lowest cost alternative, the
process allows the supplier to discover the reasons for the cost disadvantage
and proactively modify the value proposition.
Despite the interest that TCO receives from organizational buyers and
purchasing and logistics researchers, marketing academicians have not paid
adequate attention to the construct. This paper closes the existing gap in
the marketing literature by exploring the TCO concept in the context of
buyer–seller relationships.
This paper examines the theory behind TCO and how TCO relates to
customer value and supplier selection. After examining the conceptual
frameworks of TCO, the paper presents an actual industry case of TCO
analysis to illustrate the total cost approach’s procedures and outcomes. The
Total Cost of Ownership and Customer Value in Business Markets 207
paper concludes with a discussion of conclusions and implications of the use

of TCO in business marketing and how TCO can strengthen buyer–seller
relationships.
2. THE TOTAL COST OF OWNERSHIP CONCEPT
TCO is a method to assess the true overall cost of a purchase from a

particular supplier (Ellram, 1995). Anderson and Narus (2004, p. 98) define
TCO as ‘‘the sum of purchase price plus all expenses incurred during the
productive lifetime of a product or service minus its salvage or resale price.’’
The TCO concept implies three fundamental notions: (1) the inclusion of all
expenses (beyond price) attributable to a particular purchase; (2) the
adoption of a long-term perspective that continues throughout the lifetime
of the product or service; and (3) the recognition of the cost impact of all
activities associated with the purchase situation (Ferrin & Plank, 2002).
The notion of evaluating purchase alternatives on total cost has been
around for years, but practical applications are scarce (Ellram, 1993).
Several concepts and methods adopt a total cost perspective. Life cycle
costing is in use in many applications. Life cycle costing traditionally applies
to the evaluation of alternative capital investment and includes the cost of
maintaining and repairing capital equipment. Other methods adopting a
total cost perspective are the cost-ratio approach and the ‘‘all-in-cost’’ and
‘‘cost-in-use’’ concepts. However, none of these methods are as throughout
and systematic as TCO in estimating total cost from cost driver and activity
analyses. TCO incorporates a broader scope of costs to the calculation than
other total cost approaches (Ellram & Siferd, 1993).
3. TCO COST CATEGORIES

TCO includes a wide range of costs associated with the purchase and owner-
ship of a product or service. Different authors classify the cost components
of TCO in different ways. Fig. 1 shows the different elements of TCO.
3.1. Direct versus Indirect
The most basic classification divides costs into direct and indirect. Direct
costs are those easily attributable to the purchase and include expenses such
Search costs
Processing orders
Delivery charges
Purchasing
Acquisition Financing
Price
Conversion
+ All other Handling & storage
expenses Usage
Disposal
Incorporation to
− Salvage or process
resale value Maintenance
Downtime & repairs
TCO
Discarding & disposal
Fig. 1. Elements of Total Cost of Ownership.
as price or delivery. Indirect costs are those resulting from activities indirectly
related to the purchase and usually require more effort to trace. Examples of
indirect costs are downtime cost due to repairs or the loss of customers due
to poor quality related to the purchase (Ellram & Siferd, 1993).
3.2. Classification Based on Order of Occurrence
Ellram (1993) suggests a classification of costs based on the order in which

they occur. Thus, costs are identifiable as:
Pre-transaction costs: occur prior to placing a purchase order. This

category includes all costs related to activities in the first stages of the
purchasing process, from the moment that a problem is recognized. Pre-
transaction costs are frequently overlooked when evaluating purchasing
alternatives. Activities incurring expenses prior to a transaction may be
information search, negotiation, and supplier qualification.
Transaction costs: occur at the time of order placement and receipt.
Purchasing agents usually recognize and trace this category of costs when
evaluating purchases, probably because the expenses occur closest in time
and space to the transaction itself. Transaction costs include price and
delivery charges, preparing and placing the order, and receiving and
inspecting the items among others.
Post-transaction costs: occur once the purchasing organization owns
the purchased item until the time of disposal. Organizational buyers
can easily overlook this type of cost, given the spacing from the time
of transaction. Examples of post-transaction expenses include the cost
associated with maintenance, repairs, and quality failures (Ellram, 1993).
3.3. Classification Based on Activities
Anderson and Narus (2004) propose a classification of TCO cost

components based on the activity generating the cost. Costs fall into three
categories:
Acquisition expenses: include search costs, processing orders, and delivery
charges.
Conversion costs are those related to the use of the offering, such as
handling and storing items, installation or incorporation into the
production process, maintenance, and repairs and downtime.
Disposal costs are those incurred by activities aiming to discard the
remains of the product after use.
4. USES OF TCO MODELS
TCO models are useful for both organizational buyers and sellers. Suppliers
and customers can employ TCO analysis for a variety of purposes,
depending on the organization’s objective and capabilities.
4.1. For Organizational Buyers
Previous research indicates that organizational buyers employ TCO analysis

for a diversity of purposes (Degraeve, Labro, & Roodhooft, 2000; Ellram &
Siferd, 1998). Buyers estimate the total cost of an offering to support buying
decisions, to improve processes, or to benchmark ongoing supplier
performance among others. Major uses of TCO models by organizational
buyers include the following applications:
Supplier selection decisions: organizational buyers use TCO models
most commonly for the evaluation of alternative offerings and the
selection of a particular supplier (Ellram, 1995; Plank & Ferrin, 2002).
As Degraeve et al. (2000) state, ‘‘TCO facilitates companies in
making the purchasing function more value oriented.’’ Evaluating
purchasing alternatives merely on price provides an incomplete picture.
Organizational buyers recognize the need to incorporate the impact

that the purchase might have in other areas of the business in the long
term. In a study by Plank and Ferrin (2002), purchasing organizations
report the use of TCO more than any other supplier selection decision
method. The same study also reports that organizational buyers use TCO
most often to evaluate manufactured parts and capital goods, but they
also use a total cost approach for other types of purchase like raw
material and services.
Ongoing supplier performance evaluation and benchmarking: an alter-
native use of TCO models is the evaluation of ongoing suppliers in an
existing relationship with the buyer (Ellram, 1995). The procurement
function sets a total cost model and uses actual data gathered from
vendors to evaluate supplier’s performance on a comparable basis.
Qualitative factors such as product quality, on-time delivery, and open
communication receive a monetary value based on the amount of extra
activities they generate. Suppliers receive ranking according to their
relative total cost.
Continuous process improvement and cost savings: TCO analyses often
reveal opportunities to improve processes and reduce cost (Anderson &
Narus, 2004). To implement a TCO model, the first step consists
analyzing all activities related to a purchase. Such analysis exposes
inefficiencies, rework, or other problems that generate unnecessary
additional cost. Purchasing organizations use total cost analysis to find
improved ways of doing business (Ellram, 1995).
Make-or-buy decisions: a variation of supplier selection decisions, make-
or-buy situations, involves deciding between purchasing a component or
service from outside suppliers and producing in-house. Such decisions
require a total cost approach, so no cost impact is left out of the analysis.
Companies use TCO models to incorporate non-pricing considerations
into outsourcing decisions. TCO allows the inclusion of monetary
estimates of factors such as quality or poor customer satisfaction due to
delivery failures. Using a TCO model, procurement can properly compare
the total cost of outsourcing to the total cost of owning the process
(Maltz & Ellram, 1997).
Communication and negotiation with suppliers: TCO models provide
very valuable data for organizational buyers to communicate and
negotiate with suppliers. Having objective measures rather than soft
perceptions of performance helps buyers and sellers to have an open and
fair communication (Ellram, 1995).
4.2. For Sales and Marketing
Marketing and sales organizations can use TCO models as selling tools to
measure, document, and communicate the value that their offering can
create for customers versus competition. Fig. 2 shows how TCO is a key
component of customer value. Major uses of TCO models by sellers in
business markets are:
Understanding the customer’s value function: TCO models allow suppliers
to gain a better understanding of how their offering creates value for their
customers. The comprehensive analysis required to estimate TCO gives
suppliers a better understanding of the customer’s cost drivers and
activities related to the offering. By analyzing buyer’s operations and
processes, suppliers get an in-depth comprehension of the customer’s needs
and requirements. Such knowledge provides excellent clues for future
offering enhancements. Also, a TCO model not only provides the
understanding of customer value but also translates such value to
monetary terms, giving a more powerful tool to the business marketer.
Documenting and demonstrating the customer’s value: creating value is
the main objective of the marketing function. However, the challenge does
not end with value creation. Customers need to be aware of the value that
a supplier is creating for them. As Anderson, Narus, and van Rossum
Perceived
Benefits
TCO Perceived
Customer
Purchasing Value
Price
Perceived
Sacrifices
Other Cost:
- acquisition
- Conversion
- Disposal
Fig. 2. Total Cost of Ownership as a Component of Customer Value.

Price Cost Driver 1: Cost Driver 2: Cost Driver 3: TCO

$70
$24 $60
$60
$12 $52
$50
$15
$40 $15
$30 $10
$11
$20 $15
$10
$10
Ordering Shipping Maintenance
$0
Alternative A Alternative B
Fig. 3. Comparing TCO of Alternative Purchases.
(2006, p. 91) state, ‘‘an offering may actually provide superior value – but
if the supplier doesn’t demonstrate and document the claim, a customer
manager will likely dismiss it as marketing puffery.’’ TCO is an excellent
tool to document value creation. A TCO model assesses the total cost of
an offering relative to the next best alternative. When benefits from
different alternatives are equivalent or not relevant, the TCO is an ideal
measure of the value created (Wouters, Anderson, & Wynstra, 2005).
Fig. 3 shows a TCO comparison of two different alternatives based on the
Rockwell Automation approach. Alternative A has a lower purchasing
price; however, other cost drivers differ significantly between the two
alternatives. Ordering cost is slightly higher for alternative A, while
shipping costs are comparable for both alternatives. The major source of
discrepancy is maintenance cost, which for alternative A is twice as much
as for alternative B. Cumulatively, the TCO for alternative A is higher. If
the purchaser overlooks the maintenance cost in the evaluation of
alternatives and bases the decision solely on price, the purchase would be
more costly in the long run.
Consultative selling tool and discovery of joint profitability opportunities:
in consultative selling, a sales representative acts as a consultant to the
customer, applying a total solution perspective. Instead of just selling a
product, the sales representative analyzes a problem facing the customer
with the purpose of providing a solution. A TCO model can be a powerful
tool to help suppliers unveil potential problems that a customer may have.
The activity analysis at the start of the process, the collaboration and
information sharing between buyer and seller, and the combination of
two different sets of expertise and knowledge generate a much more
powerful solution than if the parties work in silos. The process reveals
activities that add and destroy value. Working together, buyer and seller
find ways to improve processes and to be more efficient, expanding the
size of the joint profits.
Supporting value-based pricing decisions: TCO models also provide
support for pricing decisions. Pricing tactics seek to achieve the highest
price that a customer is willing to pay, which depends on perceived value.
The value a customer perceives in an offering does not necessarily equal
the objective value that the offering delivers. Buyers often are not aware
of such value. Firms that strategically manage pricing influence the
customer’s perception by demonstrating their offering’s objective value.
TCO provides an objective measure of value that can help the selling firm
manage price effectively (Smith & Nagle, 2002).
Improving communication and strengthening relationships with custo-
mers: as supplier and customers work together toward establishing a
value measurement model, both parties augment the understanding each
other. Going through a process of information sharing, communication,
and collaboration, the interorganizational ties become stronger. If the
supplier is able to successfully demonstrate the offering’s superior value,
the customer will feel more confident in keeping the relationship in the
future. The customer incurs lower search costs, and the commitment to
the supplier, both affective and calculative, increases. The supplier’s
commitment to the customer also increases due to deeper understanding
of the customer’s needs and value functions. There might be customiza-
tion and adaptation of the offering to the particular demands of the
customer, as both parties find ways to improve processes and further
create joint value. The result is a stronger bond between buyer and seller,
favoring a long-term relationship.
5. APPROACHES TO CALCULATE TOTAL

COST OF OWNERSHIP
To calculate TCO, the analyst needs to understand all the costs that a
purchase generates across the entire value chain of the firm. Acquiring such
understanding is not an easy task. Some costs are evident and easily
traceable while others are not. The purpose is to include as much impact of
the purchase on other areas of the business as possible. To achieve such level
of thoroughness, three elements are key: (1) a map or diagram of all the
activities related to the purchase; (2) the identification of cost drivers; and
(3) the allocation of costs and expenses based on the amount of activities
and drivers consumed by the purchase. In other words, the calculation of
TCO requires the use of activity based costing (ABC).
Ellram (1993) proposes the following process for purchasing organiza-
tions to calculate TCO. The process starts with the shift from a price
orientation to a total cost philosophy with the support of purchasing
management. The next step involves developing a process flowchart to
identify pre-transaction, transaction, and post-transaction cost elements.
Next, the analyst determines which ‘‘cost components are significant enough
to warrant tracking’’ and decides how to track them. The purchasing agents
then gather the required data, summarize, and analyze the results. Ellram
also proposes the implementation of a TCO project in two steps: first, a pilot
study based only on a controlled group of items and, second, a full
implementation after learning from the pilot study.
Ellram and Siferd (1993) expand on the previous process by proposing a
more detailed and systematic approach. Their approach also starts with the
use of a flowchart of purchasing activities, including formal and support
activities. After mapping the activities, the analyst identifies inputs,
processes, and outputs at each step, having special consideration for the
personnel time involved. Ellram and Siferd (1993) suggest performing a
work sampling to get an estimate of the time employed on activities. The
analysis also involves identification of underlying factors driving the costs.
After the activity analysis is complete, the model requires data gathering.
Purchasing managers need to determine what information is already
available and what additional data the model requires. The cooperation
of upper management and accounting facilitates the data collection. The
process ends with the preparation of a report to access and summarize
the data.
Degraeve, Roodhooft, and van Doveren (2005) propose a generic method
to construct a procurement decision model based on TCO and ABC.
Purchasing departments can apply such method to a wide range of product
groups, including services. The process starts with interviewing managers
and personnel involved with the different products to understand the cost
elements. The interview process results in a TCO matrix, a key element in
their approach. The matrix provides the framework to analyze all activities
and cost drivers according to three dimensions. The first dimension (in
columns) represents the sequence of activities in the value chain and includes
categories such as acquisition, reception, possession, utilization, and
elimination. The second dimension (in rows) represents the hierarchy of
purchasing costs and activities and includes five levels: supplier, product,
order, product/order, and unit level. The last dimension (inside rows) refers
to the type of potential cost saving from eliminating the activity and includes
cash and noncash. Once complete, the matrix translates into a mathematical
programming model that minimizes TCO and indicates the best suppliers
for different items. The mathematical programming model allows the firm
to handle a higher level of complexity while evaluating multiple suppliers
and items at the same time.
Hurkens, van der Valk, and Wynstra (2006) present a TCO model for a
car glass repair firm. The authors develop a spreadsheet-based tool to
calculate the TCO for glass purchases. Their approach begins with a
business process analysis and mapping to determine relevant cost categories
and drivers. The process continues by identifying relevant key performance
indicators, determining cost formulas, and calculating the cost for the
different categories in the spreadsheet model. Purchasing managers can use
such spreadsheet model to compare suppliers on different cost categories
and processes.
The previous examples illustrate TCO calculations by purchasing firms,
without the involvement of suppliers. Marketing and sales organizations
take a similar approach to calculate TCO, with the difference that the
process involves collaboration between customer and supplier. Firms
such as Rockwell Automation use TCO analysis in consultative selling
(Anderson & Narus, 2004). They have developed a model and software to
estimate TCO for particular selling situations. The salesperson works closely
with customer personnel to identify cost drivers and activities. The process
reveals potential cost savings and opportunities to improve mutual
profitability. Rockwell Automation employs the tool to demonstrate the
superior value of the customer’s offering (Anderson & Narus, 2004;
Razum, 2003).
In Rockwell Automation’s approach, the sales representative identifies all
relevant activities and cost drivers. Next, the sales representative enters all
data into the TCO tool software, generating a flowchart for the existing
scenario. The existing scenario can be a competitor’s product or a Rockwell
product requiring update. While gathering information about the existing
situation, the TCO analyst envisions potential solutions to the customer’s
problem. Once a potential solution or offering is identified, a flowchart for
Analyze current scenario
Map processes and activities
Identify cost drivers
Collect activity usage data
Identify potential solution
Estimate potential cost drivers’ improvements
Calculate TCO for both scenarios
Present results to customer
Fig. 4. The Total Cost of Ownership Process.
the proposed scenario can be generated and the cost driver improvements
estimated. Using the TCO tool software, the sales engineer calculates the
TCO of both scenarios and generates a chart that compares both
alternatives. Often, the analysis unveils problems and inefficiencies that
wouldn’t be discovered otherwise. The proposed solution also entails
process changes beyond purchasing a particular product form Rockwell.
The result is a credible claim of value creation that Rockwell’s sales team
can assertively present to the customer. Fig. 4 summarizes the process of
using TCO as a selling tool.
6. A TCO ANALYSIS: HOW A LUBRICATION SYSTEM

CAN LOWER TOTAL COST FOR A FOOD AND
BEVERAGE MANUFACTURER
The following case describes a real sales situation from Rockwell
Automation’s sales history. The case presents fictitious figures to protect
the customer’s confidentiality.
6.1. The Purchasing Situation
A supplier of industrial electric motors and parts employs a TCO approach

to support the sale of a bearing lubrication system to a manufacturer in the
food and beverage industry.
6.2. The Problem
The customer runs, at high temperature and speed, bearings mounted on a

large centrifugal fan for processing exhaust gases. The bearings require oil
lubrication, and the oil accumulates excessive amounts of the corrosive salts
in the atmosphere. Oil contamination and high temperature lead to frequent
bearing changes and downtime.
6.3. The Proposed Solution
The supplier proposes the installation of a lubrication system that provides

continuous oil cooling and filtration while the fan is running. Continuous oil
filtration can lower the outside bearing temperature by 10 degrees Fahrenheit
and the inside temperature by 25 degrees Fahrenheit. Oil filtration reduces oil
contamination. By previous experience, the supplier knows that such
reduction in temperature and contamination increases roller bearing life by
two or three times. As a result, the customer’s maintenance cost and
downtime decline considerably.
6.4. The Savings
To demonstrate the offering’s value, the sales engineer uses a TCO model to
estimate the monetary worth of the potential savings. The sales engineer
meets key experts at the customer site and collects specific data and
information about the application. The engineer then concludes that instead
of the current bearing replacement frequency of twice a year, the customer
could go an average of 18 months without replacement. The savings come
from the following drivers:
Cost of replacement parts: with the new system, the customer needs less
than one bearing per year compared to two or three in the existing
situation.
Table 1. Case Analysis.

Current Scenario: No Proposed Solution:
Lubrication System Lubrication System
Initial purchase price $5,000

Bearing replacements during system 10 4
lifetime
Bearing unit cost $500
Replacement part cost $5,000 $2,000
Replacement time per bearing (h) 6 6
Labor rate ($/h) $150 $150
Replacement labor cost $9,000 $3,600
Downtime (h) 6 6
Downtime cost per hour $600 $600
Total downtime cost $36,000 $14,000
TCO $50,000 $25,000
Inventory cost: due to lower need for replacement parts, the customer can
lower the level of safety inventory of such parts and components.
Maintenance labor cost: on estimate, replacing a bearing requires 5 h of
skilled labor, which can be saved with the lubrication system.
Downtime: probably the most critical cost element in this case. For
bearing replacement, the customer needs to stop the system and halt
production until the replacement is complete. Downtime causes the loss of
production capacity and can be very costly to manufacturers. In this case,
supplier and customer estimate that downtime can cost up to $100/min.
Table 1 shows the TCO estimations from this case. The supplier
documents and effectively communicates the potential savings to the
customer. The customer perceives the value that the lubrication system
creates and accepts the proposal. In the opinion of the sales engineer, the
TCO process improves the chances of a successful sale and strengthens the
relationship with the supplier.
7. LIMITATIONS OF THE TCO APPROACH

Many are the advantages of employing TCO analysis to understand and
document value creation; however, the approach entails some limitations.
The following propositions explain the main limitations of TCO models as
compared to other customer value measurement systems. TCO focuses on

value creation from only one side of the equation: the cost side. The
approach omits benefits, working better for undifferentiated offerings.
When a significant benefit differential exists between alternatives, TCO
might not be the best value-measuring method. Incorporating the benefit
advantage as the opportunity cost of the lowest benefit option can help
overcome the omission of benefits in the model. Being a quantitative
method, TCO can overlook important intangible gains that cannot be
translated into monetary value. Other quantitative value measurement
techniques share the same limitation (Ferrin & Plank, 2002). Some of the
advantages of one option over the next best alternative defy quantification,
as in the case of certain risks or other strategic advantages. Leaving those
advantages out of the analysis might lead to erroneous conclusions. TCO
analysis needs data in specific format, not necessarily available without extra
effort. Accurate TCO calculations require ABC, which complicates the
process and deters some organizations from using the approach. However,
organizations do not require full-blown company-wide ABC systems to
estimate the TCO of purchases as long as the analysis captures the major
relevant costs (Ellram & Siferd, 1993). Even after considering the
limitations, TCO still remains a very effective tool in the estimation of the
value of purchasing alternatives.
8. CONCLUSIONS AND IMPLICATIONS
TCO evaluates and quantifies the total cost involved in acquiring, using, and
disposing offerings over their while usable life. When other benefits are
comparable or when the analysis can treat the lack of benefits as
opportunity cost, TCO is an excellent measure of the value delivered by
an offering. Organizational buyers use TCO on a regular basis to evaluate
purchasing alternatives and suppliers.
A project where suppliers and buyers work together to estimate total cost
is the most effective approach to TCO. In the process, both parties share
information and perform an analysis of the impact of the supplier’s offering
in the customer’s operations. The analysis also unveils opportunities for
improvement in the overall value chain that can improve the efficiency and
expand the profitability of both firms.
TCO can be a powerful tool for business marketers. TCO models help
suppliers to better understand the impact of their offering in the customer’s
operation. Such models also provide an objective measure of value creation
that suppliers can use to manage the customer’s perception and willingness
to pay. The collaborative process fosters communication and strengthens
buyer–seller relationships.
REFERENCES
Anderson, J. C., & Narus, J. A. (2004). Business market management: understanding, creating,
and delivering value (2nd ed.). Upper Saddle River, NJ: Prentice Hall.
Anderson, J. C., Narus, J. A., & van Rossum, W. (2006). Customer value propositions in
business markets. Harvard Business Review, 84(3), 90.
Degraeve, Z., Labro, E., & Roodhooft, F. (2000). An evaluation of vendor selection models
from a total cost of ownership perspective. European Journal of Operational Research,
125(1), 34.
Degraeve, Z., Roodhooft, F., & van Doveren, B. (2005). The use of total cost of ownership for
strategic procurement: a company-wide management information system. The Journal of
the Operational Research Society, 56(1), 51.
Ellram, L. (1993). Total cost of ownership: Elements and implementation. International Journal
of Purchasing and Materials Management, 29(4), 3.
Ellram, L., & Siferd, S. (1998). Total cost of ownership: A key concept in strategic cost
management decisions. Journal of Business Logistics, 19(1), 55.
Ellram, L. M. (1995). Total cost of ownership. International Journal of Physical Distribution &
Logistics Management, 25(8/9), 4.
Ellram, L. M., & Siferd, S. P. (1993). Purchasing: The cornerstone of the total cost of ownership
concept. Journal of Business Logistics, 14(1), 163.
Ferrin, B., & Plank, R. E. (2002). Total cost of ownership models: An exploratory study.
Journal of Supply Chain Management, 38(3), 18.
Hurkens, K., van der Valk, W., & Wynstra, F. (2006). Total cost of ownership in the services
sector: A case study. Journal of Supply Chain Management, 42(1), 27.
Maltz, A. B., & Ellram, L. M. (1997). Total cost of relationship: An analytical framework for
the logistics outsourcing decision. Journal of Business Logistics, 18(1), 45.
Plank, R. E., & Ferrin, B. G. (2002). How manufacturers value purchase offerings an
exploratory study. Industrial Marketing Management, 31(5), 457.
Razum, J. (2003). Envision value: Introducing industrial total cost of ownership. White paper.
Smith, G. E., & Nagle, T. T. (2002). How much are customers willing to pay? Marketing
Research, 14(4), 20.
Wouters, M., Anderson, J., & Wynstra, F. (2005). The adoption of total cost of ownership for
sourcing decisions-a structural equations analysis. Accounting, Organizations and
Society, 30(2), 167.
LINKING CUSTOMER VALUE TO
CUSTOMER SHARE IN BUSINESS
RELATIONSHIPS
Wolfgang Ulaga and Andreas Eggert
ABSTRACT
Marketing metrics represent a growing concern for practitioners and

scholars alike. Among the performance measures at the individual account
level, customer share emerges as a concept of growing interest, yet
marketing lacks rigorous customer share metrics in business markets. In
addition, the construct’s position within the nomological net of relation-
ship marketing in a business-to-business (B2B) context remains unclear.
This research reports findings of a cross-sectional study among
purchasing managers in U.S. manufacturing industries, which indicate a
positive link between customer value and customer share in business
relationships. Relationship benefits have a stronger impact on customer
share than do relationship costs, such that sourcing and operations
benefits appear to represent the most promising levers for effective
customer share management. The results finally suggest that researchers
should operationalize customer share in relative terms when investigating
key supplier relationships across different industries.

ISSN: 1069-0964/doi:10.1016/S1069-0964(08)14007-8
221
222 WOLFGANG ULAGA AND ANDREAS EGGERT
1. INTRODUCTION
Just as research into marketing metrics is growing, top managers

increasingly call for ‘‘marketing accountability,’’ pressuring marketing
practitioners to produce metrics that document marketing’s return on
investment. From an academic perspective, a growing body of research
focuses on performance metrics in marketing, including the Marketing
Science Institute’s (2006) citation of performance metrics and their impact
on marketing decision making in its list of top-tier research priorities for
2006–2008.
Along with this recognition of the strategic importance of marketing
metrics, recent research displays a shift in focus from traditional aggregate
performance measures, such as market share, sales, and profits, toward
performance indicators measured at the individual customer level. At this
individual account level, customer share, which captures the percentage of a
customer’s purchasing budget allocated to a specific vendor within a
particular product category, represents an increasingly popular concept in
the marketing discipline (Berger et al., 2002; Zeithaml, 2000). Shifting
attention from market share to customer share offers a cost-effective means
to increase overall profitability (Griffin, 2002), particularly in business
markets, in which suppliers typically focus greater proportions of their
efforts on fewer customers.
Yet empirical research into customer share in business markets remains in its
infancy (Anderson & Narus, 2003; Leuthesser & Kohli, 1995). A careful review
of this emerging body of research raises several important issues. First,
research fails to demonstrate how marketers should operationalize customer
share in a business-to-business (B2B) context. In particular, the question of
whether the construct should be measured in absolute or relative terms remains
open to debate. Second, knowledge of the customer share metric derives
predominantly from consumer marketing, yet customer share may represent
two different concepts, depending on the research context. In a consumer
marketing environment, the metric typically measures behavioral loyalty as an
outcome of consumers’ buying behavior, whereas in a business marketing
context, the allocation of the purchasing budget among competing vendors
represents a key decision variable. Consequently, customer share represents
a focal construct in business marketing settings. Third, little empirical
research examines the interaction between customer share and related
relationship-relevant constructs (Keiningham, Perkins-Munn, & Evans, 2003;
Perkins-Munn, Aksoy, Keiningham, & Estrin, 2005). In particular, scholars
should investigate the important drivers of customer share in business markets.
Linking Customer Value to Customer Share in Business Relationships 223
This research investigates the relationship between customer-perceived

value and customer share in key supplier relationships. During the past
decade, scholars in business marketing recognize customer value as a
construct of growing interest (Lindgreen & Wynstra, 2005; Möller &
Törrönen, 2003; Ulaga & Eggert, 2006); therefore, this paper adopts the
following structure: The investigation first provides a comprehensive review
of empirical research on customer share and customer value in business
markets. This review encompasses alternative conceptualizations of customer
share and presents key dimensions of relationship value. The paper then
develops a conceptual model to link relationship value dimensions and
customer share on the basis of the literature review. Following a presentation
of the results of a cross-sectional survey among purchasing managers in U.S.
manufacturing industries, this research discusses the study’s findings and
implications. Finally, the concluding section presents some limitations of the
present research and directions for further inquiry.
2. CUSTOMER SHARE AND CUSTOMER VALUE
2.1. Customer Share in Business Markets
Table 1 summarizes previous empirical studies of customer share. To

identify the relevant body of literature, the authors searched the EBSCO
full-text database for scholarly articles using the terms ‘‘customer share,’’
‘‘share of wallet,’’ or ‘‘share of purchase.’’ A careful review of this growing
stream of research leads to several insights into the state of the art, as well as
gaps in the literature.
First, knowledge of customer share mostly stems from consumer research.
Of 29 empirical studies, 20 appear within a consumer marketing context.
Although the widespread availability of consumer panel data that enables
researchers to compute valid customer share measures may explain this
prevalence partly, the relative paucity of studies in business markets still
comes as a surprise. A rich body of literature seemingly should investigate
customer share in B2B contexts because allocating purchasing budgets
among competing suppliers represents a strategic decision for purchasing
managers, whereas consumers rarely craft a strategy for awarding
consumption spending to specific brands or stores. For example, in the
case of fast moving consumer goods, such as food or hygiene products,
customers likely do not consciously or deliberately allocate half of their
monthly purchases to brand A, one-third of their budget to brand B, and the
224
Table 1. Literature Review.
Authors Research Context Sampling Customer Share Definition Major Findings
(Auh & Shih, 2005) B2B, IT services Customers of a single n.s. Customer loyalty relates
IT provider positively to expected
purchase share.
(Babin & Attaway, B2C, retailing Convenience sample of ‘‘The proportion of resources Shopping value relates
2000) mall shoppers given to a single retailer in a positively to customer share.
competitive arena’’ (p. 96)
(Baumann, Burton, & B2C, financial services Retail banking n.s. Length of relationship
Elliott, 2005) customers associates significantly with
WOLFGANG ULAGA AND ANDREAS EGGERT

customer share.
(Bhattacharya, Fader, B2C, retailing Household-level panel ‘‘Share of category Strong negative relationship
Lodish, & DeSarbo, data requirements (SCR) between price and SCR;
1996) measures each brand’s consumer use of retail
market share among the promotion is unrelated to
group of households that SCR; negative relationship
bought the brand at least between the depth of
once during the time period promotional price cuts and
under consideration’’ (p. 6) SCR; positive relationship
between retail availability
and SCR.
(Bowman, Farley, & B2B, financial services Panel data and n.s. Competitive pricing is the
Schmittlein, 2000) interviews with strongest driver of customer
financial managers share.
(Bowman & B2C, retailing Customers of seven ‘‘Household SCR is simply the Postcontact SCR is lower for
Narayandas, 2001) manufacturers of choice share for the brand customers who are heavy
frequently purchased defined at the household users of a product category;
consumer products level’’ (p. 287) postcontact SCR is lower for
complaints than for
inquiries.
(Bowman & B2B, processed metal Customers of a single n.s. Curvilinear relationship
Narayandas, 2004) vendor between satisfaction and
customer share; customer
size and tenure of account
personnel are moderators.
(Brody & Cunningham, B2C, retailing Panel data for coffee ‘‘Brand loyalty was defined as For explaining relative loyalty
1968) brands the percentage of purchases to a family’s favorite brand,
of regular coffee personality variables have no
concentrated in the person’s significant influence.
favorite brand’’ (p. 53)
(Cooil, Keiningham, B2C, financial services Panel data from bank ‘‘Share of wallet represents the Significant and positive, though
Aksoy, & Hsu, 2007) customers percentage of the business somewhat modest,
that households allocate to relationship between change
various financial institutions in satisfaction and the
for different banking concomitant change in total
products/services across all business share of wallet; this
financial institutions that the relationship is moderated by
household uses’’ (p. 72) the baseline satisfaction
level, customer segment,
income, and relationship
length.
(Day, 1969) B2C, retailing Household-level panel n.s. Measures of brand loyalty
data based solely on purchase
data conceal considerable
spurious loyalty.
(De Jong & de Ruyter, B2C, financial services 61 self-managing ‘‘Share of customer or the Proactive recovery behavior
2004) service teams and number of services has a positive effect on share
their customers purchased from a specific of customer; nonroutine
front-line employee’’ (p. 463, services relate negatively to
following Babin & Attaway, share of customer.
2000)
(De Jong, de Ruyter, & B2C, financial services 61 self-managing ‘‘Share of customer or the Positive effect of service climate
Lemmink, 2004) service teams and number of services on share of customer; no
their customers purchased from a specific significant interaction effect
service provider’’ (p. 21, between nonroutine services
following Babin & Attaway, and service climate on share
2000) of customer.
225
226
(De Wulf, Odekerken- B2C, retailing Shopping mall visitors ‘‘Behavioral loyalty defined as Positive path from relationship
Schröder, & a composite measure based quality to behavioral loyalty
Iacobucci, 2001) on a consumer’s purchasing across all samples.
frequency and amount spent
at a retailer compared with
the amount spent at other
retailers from which the
consumer buys’’ (p. 37)

(East, Harris, Willson, B2C, retailing Supermarket shoppers n.s. Small positive correlation
& Lomax, 1995) between store loyalty and
composite brand loyalty.
(East, Hammond, B2C, retailing Supermarket shoppers ‘‘First-store loyalty is the First-store loyalty (FSL)
Harris, & Lomax, customer’s expenditure in associates positively with
2000) the his/her first store (i.e. total supermarket spending;
where most money is spent) strong negative association
divided by total customer between age and FSL;
expenditure in the retail infrequency of shopping,
category (p. 308) attitude to using the store,
brand loyalty, routine
shopping times, and
environmental reasons for
the shopping day all
positively associated with
FSL.
(Keiningham B2B, financial services Customers of a single ‘‘Share-of-wallet is defined as Curvilinear relationship
et al., 2003) financial institution the percentage of the volume between customer
of total business conducted satisfaction and share of
with the firm by a client wallet.
organization within a 12-
month period’’ (p. 39)
(Leenheer, Bijmolt, B2C, retailing Household-level panel ‘‘Customer share defined as Loyalty programs relate
Van Heerde, & data on supermarket number of insurance positively to share-of-wallet;
Smidts, 2002) purchases contracts with the company high discounts do not lead to
divided by the total number higher share-of-wallet.
of insurance products kept’’
(p. 3, following Verhoef,
2001, pp. 97–98)
(Leuthesser, 1997) B2B, cross-sectional Members of the n.s. Relationship quality has a
National positive influence on
Association of customer share; availability
Purchasing of alternative suppliers
Management relates negatively to
customer share; relationship
length is a moderator.
(Leuthesser & Kohli, B2B, cross-sectional Members of the n.s. Buyer satisfaction relates
1995) National positively to customer share;
Association of offering quality has an
Purchasing indirect effect on customer
Management share; availability of
alternative suppliers
negatively influences
customer share.
(Liu, Leach, and B2B, financial staffing Customers of a single ‘‘Share-of-business allocation Customer value relates
Bernhardt, 2005) services service provider intention refers to the positively to share-of-
amount of business an business allocation
organizational buyer intends intentions; relationship
to give to a specific supplier length is a moderator.
relative to other suppliers the
buyer is currently
outsourcing with’’ (p. 564)
(Macintosh & B2C, retailing Wine consumers ‘‘Proportion of total category Purchase intention relates
Lockshin, 1997) purchases at the focal store’’ positively to customer share.
(p. 489)
227
228
(Mägi, 2003) B2C, retailing Household-level panel n.s. Customer satisfaction relates
data positively to customer share;
age, gender, and other
demographic variables do
not affect customer share.
(Perkins-Munn et al., B2B, truck and Purchasing managers For example, Truck industry: Repurchase intention and
2005) pharmaceutical of fleet trucking ‘‘Share of wallet (SOW) is satisfaction link significantly
industry companies and defined as the percentage to share of wallet.

physicians allocated to each
manufacturer of total Class 8
heavy-duty trucks purchased
by transportation fleet
owners between April 2001
and June 2002’’ (p. 249)
(Reynolds & Arnold, B2C, retailing Customer from fashion ‘‘We define Share of Purchases Salesperson and store loyalty
2000) department stores as that portion of a positively affect share of
customer’s total monthly purchases; competitive
clothing/accessories resistance relates positively
purchases that s/he spends in to share of purchases.
the particular store’’ (p. 92,
following Macintosh &
Lockshin, 1997, p. 489)
(Reynolds & Beatty, B2C, retailing Customers of fashion n.s. Company and salesperson
1999) department stores satisfaction are positively
associated with share of
purchases.
(Silvestro & Cross, B2C, retailing Customers and staff n.s. Positive correlation between
2000) members from a mean share of grocery
grocery retailer budget and store profit
margin; nonsignificant
relationship between mean
share of grocery budget and
mean customer satisfaction;
at the individual customer
level, however, satisfaction
correlates positively with
share of budget.
(Verhoef, 2001) B2C, financial services Customers of a single ‘‘Customer share is the ratio of Significant positive effect of
financial services revenues or purchases affective commitment and
company generated by a customer at satisfaction on customer
supplier X over the total share development (CSD).
revenues or purchases in a
product of service category
of that customer’’ (p. 16,
following Fournier & Yao,
1997; Peppers & Rogers,
1999)
(Verhoef, 2003) B2C, financial services Customers of a single ‘‘Customer share is defined as Affective commitment,
financial services the ratio of a customer’s economic incentives, and
company purchases of a particular direct mailings have a
category of products or positive effect on customer
services from supplier X to share development (CSD);
the customer’s total no significant effect of
purchases of that category of satisfaction or payment
products or services from all equity on CSD.
suppliers’’ (p. 30, following
Peppers & Rogers, 1999)
(Wind, 1970) B2B, electronic Purchases of a single ‘‘Number of purchases from Cost savings, price, and dollar
industry electronics firm favourite source as value are the most important
percentage of total number drivers of customer share.
of purchase from all
sources’’ (p. 455)
229
Notes: B2B ¼ business-to-business, B2C ¼ business-to-consumer, n.s. ¼ not specific.
remainder to a retailer’s private label. In other words, the measurement of

customers’ share of wallet clearly represents an important marketing metric
in consumer markets, but the concept is even more critical in business
markets. Nonetheless, a review of the literature reveals an apparent gap
between the need for thorough understanding and the existing body of
knowledge pertaining to customer share in business markets.
Second, empirical research on customer share remains limited to certain
industries or companies. More precisely, 23 studies rely on data from the
financial and retailing industries. Studies in a business marketing context
tend to employ data gathered from the customers of a single company; only
1 study (Leuthesser, 1997; Leuthesser & Kohli, 1995) employs a cross-
sectional sampling plan in a business marketing context. Judged against this
background, the generalizability of current insights into the role of customer
share in business markets remains questionable.
Third, just more than half the studies provide an explicit definition of
customer share. Although the customer share metric may appear self-
evident at first sight, several meaningful yet competing conceptualizations
exist. As Zeithaml (2000, p. 76) highlights, customer share ‘‘requires both
definition and metrics.’’ Analogous to the market share metric, customer
share can involve both absolute and relative terms. In absolute terms, the
metric represents the percentage of a customer’s purchasing budget
allocated to a particular supplier within a specific product category. In
contrast, relative customer share measures employ a comparison between
the percentage awarded to the focal supplier and the strongest competitor.
Computing this comparison may require a difference or a ratio. A literature
review reveals that marketing scholars rely exclusively on absolute customer
share definitions, which indicates the lack of systematic research that
evaluates competing customer share conceptualizations.
Fourth, little empirical research examines the link between customer share
and relationship-relevant constructs (Keiningham et al., 2003; Perkins-Munn
et al., 2005). In many business markets, purchasing managers consider
supply base reduction more and more important (Monczka, Trent, &
Handfield, 2005; Ogden, 2006). Against this background, practitioners and
scholars need a more fine-grained understanding of the drivers of customer
share in business markets.
Based on the literature review and given the rising importance of
customer share as a marketing metric at the individual account level, we
recognize a need for more empirical research in this area. More specifically,
we identify a need for more empirical research (1) in a business marketing
context, (2) based on cross-sectional data, (3) testing competing customer

share definitions, and (4) linking customer share to its antecedents.
2.2. Customer-Perceived Value in Business Relationships
Creating superior customer value is a key to a company’s long-term survival

and success (Slater, 1997; Woodruff, 1997). In business markets in
particular, customer value provides the cornerstone of the marketing
management process (Anderson & Narus, 2004). Yet despite its importance,
research on customer value in business markets remains in an early stage
(Flint, Woodruff, & Gardial, 2002). Although value assessment studies
enjoy a long tradition in business marketing, such research typically focuses
on the value of the physical product and neglects relational dimensions of
customer-perceived value (Dwyer & Tanner, 1999).
Some researchers adopt a relational approach to investigate customer
value from a relationship marketing perspective (e.g., Payne & Holt, 1999).
Although the value of a business relationship entails a multidimensional
concept that reaches beyond the price versus quality trade-off, prevalent in
consumer research (Gassenheimer, Houston, & Davis, 1998), marketing
literature to date still lacks concurrence with regard to the salient value
dimensions of a business relationship (Woodall, 2003).
Cannon and Homburg (2001, p. 29) direct attention to the costs incurred
in business relationships to indicate that ‘‘one method for creating value is
to reduce costs in commercial exchange.’’ On the basis of a multidisciplinary
literature review, these authors identify three sources of relationship costs:
(1) direct costs, (2) acquisition costs, and (3) operations costs. They further
suggest that a supplier’s success in lowering a customer firm’s cost in each of
the three categories leads the customer to expand business with the supplier.
In discussing directions for further research, the authors recognize that
‘‘cost reduction is only one source of value in business relationships. A more
comprehensive theory would consider costs and benefits beyond economic
costs’’ (Cannon & Homburg, 2001, p. 40).
Building on Cannon and Homburg’s (2001) call for further research,
Ulaga and Eggert (2006) investigate both the cost and the benefit
dimensions of key supplier relationships. On the basis of their empirical
findings, they define customer-perceived value in a key supplier relationship
as a formative, higher-order construct that represents the trade-off between
the benefits and costs perceived from the supplier’s core offering, the
sourcing process, and at the level of a customer’s operations, taking into

consideration the available alternative supplier relationships.
3. DEVELOPMENT OF HYPOTHESES
This paper draws on resource-dependence (Pfeffer & Salancik, 1978) and

resource-advantage (Hunt & Morgan, 1995, 1996, 1997) theory as the
foundations for the link between customer value and customer share. The
following discussion expands on the underlying hypotheses.
Resource-dependence theory offers valuable insights for the marketing
domain in general and supply management in particular (Anderson, 1982).
Building on the assumption that firms are open systems (Ackoff, 1961) that
cannot become self-sufficient in their critical resources (Pfeffer, 1982; Pfeffer &
Salancik, 1978), the theory suggests that a lack of self-sufficiency creates
dependencies between a firm and suppliers of critical resources (Pfeffer, 1982).
According to Heide and John (1988), dependence refers to the perceived
difficulty involved in replacing the incumbent supplier. Firms need to
accommodate a certain degree of dependence and employ different strategies
to mitigate those consequences, such as establishing cooperative relationships
with suppliers. When firms build formal and semiformal links, they embrace a
set of ‘‘bridging strategies’’ (Pfeffer, 1982), ‘‘whose main purpose is to gain
control over the other organizations’ resources’’ (Stock, 2006, p. 589).
According to resource-dependence theory, survival represents the
ultimate firm driver (Pfeffer & Salancik, 1978). For open systems to survive,
firms must ensure a constant flow of valuable resources from suppliers.
Resource-advantage theory goes a step further and argues that firms strive
for comparative resource advantages to obtain competitive advantage in the
marketplace and, in turn, superior financial performance (Hunt & Morgan,
1997). Firms can achieve comparative resource advantages in two distinct
yet complementary ways: (1) build up their own resource base or (2) secure
access to superior resources from suppliers. According to the latter
argument, customer value represents a fundamental antecedent of the
customer share metric (Cannon & Homburg, 2001; Liu et al., 2005). In
buyer–seller relationships, value captures the trade-off between customer
perceptions of the benefits and costs associated with a supplier relationship
(Ulaga & Eggert, 2006), such that ‘‘A supplier that enhances customer value
[ . . . ] will increase its ‘share of customer’ at the expense of suppliers that do
not provide such benefit’’ (Cannon & Homburg, 2001, p. 34). Consequently,
we hypothesize:
H1. The higher the customer value, the higher the customer share.
Moreover, from a conceptual point of view, relative customer share
operationalizations should lead to superior results in cross-sectional studies
because they emphasize a competitor orientation. Although more difficult to
comprehend, these operationalizations prove instrumental for making the
customer share metric comparable across industries. For example, an
absolute customer share of 20% may signal a strong position in some
industries, but a relatively weak position in others. Using the strongest
competitor as a comparison standard helps account for contextual
influences and therefore should lead to better fitting models. Whether the
difference or ratio rule dominates, however, remains open to empirical
investigation.
H2. Relative measures lead to better fitting models in a cross-sectional
study than do absolute customer share operationalizations.
4. EMPIRICAL STUDY
4.1. Unit of Analysis
This study investigates key supplier relationships in business markets. The

focus on this particular unit of analysis results from two features. First, the
growing trend toward reduced supplier portfolios means managers’ interest
increasingly focuses on understanding how to achieve and maintain a key
supplier position (Ulaga & Eggert, 2006). Second, Rust, Lemon, and
Narayandas (2004) report, in a study of an industrial packaging company,
that satisfaction links to increasing sales only among key supplier
relationships, ‘‘that is, the vendor who had the major share of a customer’s
total purchases. [ . . . ] Clearly, the incumbent supplier with a majority SCW
[share of customer wallet] accrued benefits that other suppliers could not
usurp’’ (Rust et al., 2004, p. 426). This background recommends key
supplier relationships as the focus of interest in this research.
4.2. Survey Instrument
The survey instrument consists of three parts. The first part asked
respondents to select a specific key component and describe the final
product for which it was sourced. Respondents named their main supplier
for the product and a second-ranked supplier in terms of purchasing

volumes. In the second part, respondents could assess an ongoing
supplier relationship by comparing their main and secondary supplier in
terms of volumes purchased with respect to the value dimensions identified
by Ulaga and Eggert (2006). Respondents indicated the share of
volume they purchased from their main supplier in the selected product
category. Other than the focal customer share construct, all items use 7-point
rating scales (1=‘‘strongly disagree’’ to 7=‘‘strongly agree’’). The third part
of the questionnaire invited participants to respond to a set of questions that
described the respondents, their company, and the supplier relationship.
Because the survey relies on the perceptions of key informants, these
respondents must be sufficiently competent to report on the supplier
relationship. Therefore, objectively, the respondents needed to fulfill
minimum requirements with respect to their position, their tenure with the
company, and the length of the relationship. In addition, respondents
provided self-assessments of their ability to portray the supplier relationship
accurately according to how confident they were in answering the
questionnaire, how involved with and knowledgeable they were about the
supplier, and the extent to which they could influence purchasing decisions.
4.3. Sampling Procedure
A cross-sectional survey among purchasing managers in U.S. manufactur-

ing companies served to gather the empirical data. The study, conducted in
cooperation with the Institute for Supply Management (ISM), a national
association of purchasing professionals, identified 1,950 members of ISM
randomly from the association’s database. Only senior-level managers, as
indicated by job title, such as VP Procurement, Director of Global Sourcing,
Director of Supply Chain Management, Purchasing Manager, or Senior
Buyer, could participate in the study. In addition, the respondents all
represented manufacturing companies (standard industrial classification
codes 28–30 and 32–38).
All managers received a cover letter, the survey instrument, and a business
reply envelope by mail. Two weeks later, they received a reminder letter.
Respondents returned a total of 421 (21.6%) questionnaires, but 18
indicated low levels of respondent competency and therefore do not appear
in the analysis. Furthermore, 32 discarded questionnaires indicated the
respondents were not willing to reveal their customer share data.
4.4. Sample Characteristics
Respondents purchased a broad variety of products for multiple applica-

tions. Customer organizations ranged from small enterprises to multibillion
dollar companies. On average, manufacturers had been buying from the
main supplier for 13 years, with a standard deviation of 9 years.
All retained respondents held senior positions in their firms. They
averaged 17 years of experience in their area and tenure with their
companies of 10.4 years. Responses regarding confidence about answering
the survey and knowledge of the supplier relationship were uniformly high,
with mean ratings of 6.0 (confidence in answering), 6.0 (involvement in
supplier relationship), 6.2 (knowledge about supplier), and 5.9 (influence
over purchase decisions) on 7-point scales.
The key suppliers that this research examines vary greatly with regard to
the focal metric. Absolute customer share averages 73%, with a standard
deviation of 17. Although some key suppliers capture as little as 5% of a
customer’s business in a given product category, others concentrate as much
as 98%. Thus, the need to measure and manage customer share in key
supplier relationships again becomes evident.
4.5. Nonresponse Bias and Common Method Bias
The study assesses nonresponse bias following Mentzer, Flint, and Hult’s
(2001) recommendations – namely, a random sample of 30 nonrespondents
contacted by telephone to answer four questions that capture overall
value perceptions in a supplier relationship (Value 1–Value 4 in the
Appendix). The assessment also includes questions that ask nonrespondents
to provide background information about themselves and their company.
The t-tests of the group means reveal no significant differences between
nonrespondents and the sample, so nonresponse bias is not a problem in
this study.
To assess the strength of common method bias, an additional
confirmatory factor analysis incorporates a common method factor that
loads on every measure of the multi-item scales (Podsakoff, MacKenzie,
Lee, & Podsakoff, 2003). With p-values ranging from 0.81 to 0.88, none of
the additional factor loadings is statistically significant, so no substantial
common method bias is present in the sample.
4.6. Scales
The study relies on Ulaga and Eggert’s (2006) scale to measure customer
value at both the aggregate level and the level of each individual value
dimension. Two items, indicating the percentage of the actual purchasing
budget within the chosen product category allocated to the main and the
second supplier, measure customer share (see the Appendix for item
formulations).
5. RESULTS
The test of H1 uses Lohmöller’s (1989) partial least square (PLS) latent path
modeling because PLS suits formative, higher-order constructs, such as the
customer value construct (Jarvis, MacKenzie, & Podsakoff, 2003). The
bootstrap procedure (Chin, 1998) packaged in the PLS-Graph software
(version 1.8) enables the calculation of the standard deviation and generates
an approximate t-statistic. This approach overcomes the disadvantage of
nonparametric methods, namely, no formal significance tests for the
estimated parameters. Wold (1982) and Fornell and Bookstein (1982)
provide detailed descriptions of PLS.
Although discussions of the psychometric properties of the relationship
value construct appear elsewhere (e.g., Ulaga & Eggert, 2006), Fig. 1
summarizes the results pertaining to the link between customer value and
customer share. All parameter estimates are significant at the 5% level. The
findings include a positive relationship between both constructs, which
supports H1.
To test the second hypothesis, we relied on covariance-based structural
equation modeling as it allows comparing the fit of competing models. The
first model operationalizes customer share in absolute terms, such that
customer share equals the percentage of the customer’s purchasing budget
allocated to the largest supplier within the selected product category. The
second and third models measure customer share in relative terms,
calculated as the difference (model 2) or ratio (model 3) between the
percentage of the customer’s purchasing budget allocated to the largest
supplier versus that assigned to the second largest supplier within the
selected product category. As Table 2 shows, all three models fit the data
well. However, the Akaike information criterion indicates that the ratio rule
for computing customer share leads to the best fitting model. Consequently,
the empirical analysis supports H2.
Core
Benefits 0.11
Sourcing 0.68 Relationship

Benefits Benefits
0.77
Operations 0.27
Benefits
Customer 0.2 Customer
Value Share
Direct
Costs 0.22 0.17
Acquisition 0.44 Relationship

Costs Costs
0.61
Operations
Costs
Fig. 1. The Results Pertaining to the Link between Customer Value and
Customer Share.
Table 2. Comparison of Competing Conceptualizations of Customer

Share.
Model 1 Absolute Model 2 Relative Model 3 Relative
Customer Share Customer Share: Customer Share:
Difference Ratio
Fit measures w2 (df ¼ 5): 21.01 w2 (df ¼ 5): 24.73 w2 (df ¼ 5): 17.26
GFI: 0.98 GFI: 0.97 GFI: 0.98
AGFI: 0.93 AGFI: 0.92 AGFI: 0.94
AIC: 41.01 AIC: 44.73 AIC: 37.26
RMSEA: 0.093 RMSEA: 0.103 RMSEA: 0.081
Notes: GFI ¼ goodness-of-fit index, AGFI ¼ adjusted goodness-of-fit index, AIC ¼ Akaike
information criterion, and RMSEA ¼ root-mean-square error of approximation.
6. DISCUSSION AND IMPLICATIONS

This research contributes to a greater understanding of customer share as a
marketing metric at the individual customer level. In particular, the findings
establish a link between the focal construct and relationship value, an
important antecedent in B2B settings. Against this background, the present

study provides several important insights.
First, on the basis of a cross-sectional study among purchasing managers
in manufacturing industries, this study finds a positive and significant link
between relationship value and customer share. This research operationa-
lizes customer share as the actual order volumes allocated across a
customer’s supplier portfolio and thereby validates and extends existing
literature. Heretofore, the only study that focused on this link suffered a
limitation by measuring the customer share variable intentionally (Liu et al.,
2005). Replicating those previous findings with a behavioral measurement
model is nontrivial. Attitudinal and intentional variables often appear
strongly correlated in a relationship marketing context, but establishing
links to behavioral constructs proves more difficult (Verhoef, 2001). Various
situational factors and contingencies that go far beyond the variables under
research can influence behavioral measures. Judged against this back-
ground, the path estimate of 0.20 herein indicates the importance of
customer value as an antecedent of customer share in B2B settings.
Second, by using the multidimensional measurement model for the
relationship value construct proposed by Ulaga and Eggert (2006), this study
sheds light on ways to manage the customer share variable. According to the
path estimates in Fig. 1, relationship benefits generally have a stronger impact
on customer share than relationship costs. More specifically, sourcing and
operations benefits appear to offer the most promising levers for effective
customer share management. With regard to relationship costs, the operations
and acquisition dimensions have stronger impacts than direct costs, which
represents an important finding, because core benefits and direct costs
traditionally receive the most attention from marketing managers. However,
this research highlights the importance of other value-creating dimensions for
effective customer share management. To win a superior share of customers’
business, marketing managers must broaden their view and systematically
include the whole set of value-creating dimensions in business relationships.
Third, the definition and operationalization of customer share in business
markets extends beyond research, which relies exclusively on absolute
customer share definitions. This study identifies and tests alternative ways to
conceptualize and measure customer share in business markets, and all three
tested models fit the data well. However, the ratio method provides the best
fit; therefore, researchers may want to operationalize customer share as the
ratio between a customer’s main supplier and secondary supplier when
investigating key buyer–supplier relationships across industries. In turn, an
interesting analogy to the market share metric emerges because the latter
metric often gets operationalized in relative terms to capture the

characteristics of different industries.
7. LIMITATIONS AND RESEARCH DIRECTIONS

As in any empirical research, any interpretation of the results of the present
study must take into account the study’s limitations. This research also
generates a set of researchable questions that additional research projects
should address.
First, value can arise within the focal relationship and the connected
network (Anderson, Håkansson, & Johanson, 1994). Whereas this research
focuses on value that stems from the focal relationship, broadening the
perspective to include network effects should provide a promising
opportunity for further research. Second, the reported survey asks
purchasing managers to report their share of business with a respective
supplier. Additional research might go beyond self-reported data and rely
instead on company databases to probe the robustness of the findings.
This paper takes another step toward understanding customer share and
its antecedents. More research can increase understanding further, especially
with regard to the antecedents, outcomes, and contingencies of customer
share marketing.
ACKNOWLEDGMENTS
This research was conducted while the first author was at the Mendoza
College of Business at the University of Notre Dame. The authors thank the
Marketing Department at Notre Dame for its support in this project. In
addition, the authors thank the Institute for the Study of Business Markets
(ISBM) at the Smeal College of Business Administration, Pennsylvania
State University, and the Institute for Supply Management (ISM) for
providing financial and technical support for this study.
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APPENDIX
244
Mean Standard
Deviation
Product quality
Product1 Compared to the second supplier the main supplier provides us with better product 4.55 1.59
quality.
Product2 Compared to the second supplier the main supplier meets our quality standards better. 4.62 1.60
Product3 Compared to the second supplier the main supplier’s products are more reliable. 4.47 1.59
Product4 Compared to the second supplier we reject less products from the main supplier. 4.60 1.69

Product5 Compared to the second supplier the main supplier provides us with more consistent 4.69 1.60
product quality over time.
Product6 Compared to the second supplier we have less variations in product quality with the 4.53 1.68
main supplier.
Service support
Service1 Compared to the second supplier the main supplier provides us with better services. 4.92 1.52
Service2 Compared to the second supplier the main supplier is more available when we need 4.63 1.54
information.
Service3 Compared to the second supplier the main supplier provides us with more appropriate 4.83 1.65
information.
Service4 Compared to the second supplier the main supplier responds faster when we need 4.74 1.50
information.
Delivery performance
Delivery1 Compared to the second supplier the main supplier performs better in meeting delivery 4.83 1.65
due dates.
Delivery2 Compared to the second supplier we have less delivery errors with the main supplier. 4.74 1.68
Delivery3 Compared to the second supplier deliveries from the main supplier are more accurate 4.77 1.69
(no missing or wrong parts).
Supplier know-how
Know-how1 Compared to the second supplier the main supplier provides us a better access to his or 4.68 1.59
her know-how.
Know-how2 Compared to the second supplier the main supplier knows better how to improve our 4.73 1.55
existing products.
Know-how3 Compared to the second supplier the main supplier performs better at presenting us 4.81 1.52
with new products.
Know-how4 Compared to the second supplier the main supplier knows better how to help us drive 4.77 1.69
innovation in our products.
Know-how5 Compared to the second supplier the main supplier knows better how to assist us in new 4.37 1.48
product development.
Time-to-market
Time-to-market1 Compared to the second supplier the main supplier performs better in helping us 4.48 1.50
improve our time-to-market.
Time-to-market2 Compared to the second supplier the main supplier helps us more in improving our 4.55 1.57
cycle time.
Time-to-market3 Compared to the second supplier the main supplier helps us more in getting our 4.40 1.58
products to market faster.
Time-to-market4 Compared to the second supplier the main supplier performs better in helping us speed 4.61 1.55
up product development.
Personal interaction
Personal1 Compared to the second supplier it is easier to work with the main supplier. 4.89 1.61
Personal2 Compared to the second supplier we have a better working relationship with the main 5.07 1.52
supplier.
Personal3 Compared to the second supplier there is a better interaction between the main 5.07 1.54
supplier’s people and ours.
Personal4 Compared to the second supplier we interact better with the main supplier. 4.91 1.57
Personal5 Compared to the second supplier we can address problems more easily with the main 4.83 1.56
supplier.
Personal6 Compared to the second supplier we can discuss problems more freely with the main 4.69 1.59
supplier.
Personal7 Compared to the second supplier the main supplier gives us a greater feeling of being 4.72 1.63
treated as an important customer.
245
246
RELATIONSHIP COSTS
How do each of the following costs of the main supplier compare with the costs of your second-best supplier?
Main Supplier’s Main Supplier’s Costs Main Supplier’s Main Supplier’s Costs Main Supplier’s Mean Standard
Costs are Much are Somewhat Lower Costs are the are Somewhat Higher Costs are Much Deviation

Lower Same Higher
Purchasing price 2.51 1.02

Ordering costs 2.61 0.72
Delivery costs 2.63 0.89
Inventory carrying 2.60 1.81
costs
Coordination & 2.52 0.83
communication
costs
Manufacturing 2.62 0.84
costs
Downtime costs 2.57 0.86
Mean Standard
Deviation
Customer value
Value1 Compared to the second supplier the main supplier adds more 4.99 1.51
value to the relationship overall.
Value2 Compared to the second supplier we gain more in our 4.93 1.45
relationship with the main supplier.
Value3 Compared to the second supplier the relationship with the main 5.01 1.51
supplier is more valuable.
Value4 Compared to the second supplier the main supplier creates more 5.01 1.49
value for us when comparing all costs and benefits in the
relationship.
Customer share
Share1 For this component, we purchased about x% from our main 72.63% 16.85
supplier during the past 12 months.
Share2 For this component, we purchased about x% from our second 19.58% 13.17
supplier during the past 12 months.
247
CONFIGURATIONS AND CONTROL
OF RESOURCE INTERFACES IN
INDUSTRIAL NETWORKS
Enrico Baraldi and Torkel Strömsten
ABSTRACT
The role of management control has not received sufficient attention in the
literature on value creation so far. Therefore, this paper aims to
investigate the role of control in value creation in industrial networks.
More specifically, the aim is to examine the management and control of
interfaces between key resources within and between firms, in the
networks surrounding firms, when they attempt to create value. All the
firms that take part in a value-creation process have both formal and
informal control systems: these firms have budgets, specific routines,
reward systems, and sanctioned ‘‘ways to behave.’’ The paper relates the
Industrial Marketing and Purchasing (IMP) group’s research on
interaction, relationships, and networks with control literature, and
presents a framework for controlling resource interfaces in a network
setting. Two in-depth cases illustrate the role of control in value creation.
The first case covers the development of a low-weight newspaper grade
that Holmen and its paper mill Hallsta initiated. The second case
examines the attempt to develop and commercialize a new, energy
efficient pulping technology.

ISSN: 1069-0964/doi:10.1016/S1069-0964(08)14008-X
251
252 ENRICO BARALDI AND TORKEL STRÖMSTEN
1. INTRODUCTION
Value creation is at the core of all business (Moran & Ghosal, 1999;
Ramirez, 1999; Simons, 1995). A great deal of research is available on the
antecedents of value and how firms create value for their customers in
business markets (e.g., Anderson & Naurus, 2004; Walter, Ritter, &
Gemünden 2001). However, the literature pays less attention to how the
firms in a network control each other’s resources and resource interfaces in
order to create economic value. Therefore, this paper examines the role that
management control plays in the combination of resources and resource
interfaces in industrial networks when the aim is to create value. In the
management control literature (Hopwood, 1996; Håkansson & Lind, 2004;
Dekker, 2004), control is largely looked upon from a firm internal
perspective, while this paper highlights the interorganizational dimensions
of control.
Baraldi and Strömsten (2006) divide value creation into two subprocesses:
value embedding and daily value utilization/production. These two
subprocesses are logically separate, but both must be present for creating
and realizing value (Johanson & Strömsten, 2005) for users, and as a
consequence also for the solution provider. The distinction and specific role
of the two subprocesses are even more important when value embedding
and daily utilization need close connection, as in the creation of unique and
fully customized solutions. In addition, there are variations in the need of
tightly connecting value embedding and daily value production/utilization:
high interface complexity and interdependency result in a tight connection
between value embedding and daily value production/utilization (Baraldi &
Strömsten, 2006). When the two subprocesses are tightly related, it takes
time to find sociotechnical compromises and reciprocal adaptations (Ibid).
Nevertheless, a tight connection between value embedding process and daily
value production/utilization may be an absolute necessity whenever
interfaces are numerous, highly complex, and interdependent (Ibid).
Besides, even if value creation will take longer, chances are high that one
will obtain, through continuous adaptations, a solution that ‘‘fits’’ and
reduces disruptions for several of the involved actors in the network, both
on the supplying and the using side.
Economic value emerges when actors develop resources and there is a use
for these resources that leads to exchange between two parties. Even if
exchange in most cases involves only two parties, there might be several
other actors involved, directly or indirectly in the value-creation process. All
the firms that interact (Håkansson, 1982) in a value-creation process have
Resource Interfaces in Industrial Networks 253
both formal and informal control systems: they have budgets, specific
routines, reward systems, and sanctioned ‘‘ways to behave.’’ A firm that for
example aims at changing a product’s features, or using a new input in its
production process, is affected not only by its own control system when it
starts collaborating with a supplier and/or a customer, but also by the
supplier’s or customer’s control system. In some cases, these firms develop a
joint control system for a limited time or for a specific project (Dekker,
2004). But the current literature on value creation does not pay sufficient
attention to the role of management control systems. Therefore, this paper
aims to extend an earlier analysis (see Baraldi & Strömsten, 2006) in order to
investigate the role of control (both intraorganizational control as well as
interorganizational control) in value creation in industrial networks. This
paper examines the management and control of interfaces between key
resources within and between firms, in the networks surrounding these firms
when they attempt to create value.
Two cases illustrate the role of control in value creation. The first case
covers the development of a low-weight newspaper grade that Holmen and
its paper mill Hallsta initiated. The second case examines the attempt to
develop and commercialize a new pulping technology, ThermoPulp, in
cooperation between Sunds Defibrator and the paper producer SCA.
Studying successful technology development and value-creation episodes
can indeed be valuable, as we learn from good examples. However, less
successful cases are just as valuable but business research tends to under
sample them. The two cases of this paper cover therefore both a success and
a failure, that is, a case where value did not emerge according to the
expectations. The two cases mirror each other in their structure and
contents, so that the successful and the less successful one can be compared
in order to attain a more fine-grained view of how value is created or
possibly not created.
Therefore, at a general level, this paper describes and analyzes value
creation in industrial networks by focusing on how firms combine and
control resources and resource interfaces systematically. Thus, at a more
specific level, the paper aims to penetrate the role of management control in
relation to the opportunities and barriers to value creation present in the
network of resource interfaces surrounding the focal products. By looking at
both successful and less successful value-creation processes it is possible to
pinpoint such opportunities and barriers.
The paper is organized as follows. First, the paper presents a theoretical
frame of reference concerning resources and networks, and how actors
within a network context actively and systematically attempt to control and
combine resource interfaces. After a methodological, the paper describes the

development of a low-weight paper grade in the network around the
newspaper Dagens Nyheter and the supplier Holmen Paper and its
production unit Hallsta. The second case, examines the attempt to develop
and commercialize a new pulping technology, ThermoPulp, which never
became the success matching expectations. Then the paper analyzes and
compares the cases according to the theoretical framework outlined in the
second section. The paper ends with a discussion on the factors that can act
as opportunities or barriers during value creation and provides suggestions
for further research.
2. THEORETICAL FRAME OF REFERENCE
Value creation is a process comprising two subprocesses: (1) value

embedding, whereby a focal resource receives certain features through
innovative combinations with other resources (Baraldi & Strömsten, 2006);
and (2) daily value production and utilization, whereby the embedded
features come to fruition to some actors in the network (Ibid). Both the
embedding and the daily use subprocesses depend on how actors forge,
combine, and modify the interfaces between physical/technical and social/
organizational resources and, generally speaking, on how these interfaces
are configured across the entire industrial network (Håkansson &
Waluszewski, 2002). In this sense, the network entails both possibilities
(opportunities) and barriers (limitations) not only to how the first
subprocess of embedding unfolds, but also to whether daily utilization will
eventually ensue.
A network can create opportunities for value creation. For instance,
Gauri, Hadjiakhani, and Johanson (2005) relate the generalized view of
entrepreneurial opportunities to important network-level processes,
whereby it is the interaction with specific and identified partners that
enables to identify and pursue new development opportunities. Håkansson
(1987, pp. 94–97) specifies three mechanisms through which a business
network can provide opportunities for change and development: the
network can be an ‘‘idea generator’’ (including the possibility to test new
ideas on established business partners), a ‘‘resource source’’ (through the
engagement of those actors that control specific resources necessary during a
value embedding or utilization process), and an ‘‘information transmitter’’
(that lets information flow among the actors involved in the network, but
also connects through weaker ties to actors outside the network).
But as much as the network provides important opportunities and

possibilities, stressing that the network can also act as an obstacle to changes
and thereby to new value creation is important. In fact, Håkansson (1987,
pp. 92–94) points at important and sometimes insurmountable barriers that
a business network can oppose to new developments: these barriers derive
from the dense web of technical, social, knowledge-related, logistics, and
administrative interdependencies which exist within and between the firms
involved in the network. In terms of resource interfaces, such interdepen-
dencies represent such strong interfaces that would be highly costly to break
apart or modify: therefore they create opposition to the changes necessary
for value embedding or daily value utilization. But in order to better
understand how resources and their interfaces across the network can be
sources of both opportunities and barriers, it is necessary to analyze how the
value of resources emerges in the first place.
2.1. The Value of Resources
The notion of resource heterogeneity (Penrose, 1959) stresses that the value
of a resource does not reside in the resources itself, but this value depends on
the combinations of a focal resource with other resources (Ibid: 25, 74–75).
A specific feature of a resource becomes more or less valuable when actors
confront or put together that resource with other resources. In addition,
resources even shape each other’s features during long-term interaction
processes (Håkansson & Waluszewski, 2002). Put differently, the value of a
focal resource emerges from the network of other resources that embed the
focal resource.
This relativistic perspective of value also make explicit that a resource
must be valuable for someone or in relation to something else and for a
particular purpose, that is, nothing could ever be valuable in a vacuum.
These theoretical tenets also make explicit that the creation of value is
necessarily an interactive process and that value is always idiosyncratic and
thus highly context specific. Next to this interactive and relativistic nature,
another key aspect of value is its multidimensionality, that is, there is not
one single value but a multiplicity of values included in the very same
resource that may ‘‘speak’’ to a rather broad audience: a resource always
includes both physical (technical) and social features that can potentially
deliver different values to different actors.
Then, at a more fine-grained level, one can break down, or decompose,
the value of a resource into several dimensions or value-bearing features.
The value of a product can include for instance the following dimensions:
costs, functions/performances, durability, health-friendliness, and style.
Whenever one breaks down the value of a resource down to its components
one can reveal a web of values built into this resource by interactions
(between single resource bits) that create specific value-bearing features.
Whether the single value-bearing features are mutually additive, that is,
progressively increase the value of a focal resource or not, depends very
much on the context that forged and utilizes these resource features: some
values such as low cost and high performances of a product may be
mutually exclusive features because of resource constraints on the
production side; while the low cost of a product may be the trigger that
induces using the product in such high volumes that stimulate other actors
to develop complementary resources that allow achieving very high
performances from using these resources together. In addition, the
economizing on a costly resource might need the development of features
of another resource that has direct or indirect interfaces to the first resource.
Hence, what complicates the attribution of value to resources is the fact that
actors regularly use them together with other resources and that their several
values interact in highly complex ways.
During the value-creation process, both the first-time embedding and the
daily production and utilization of economically relevant values (i.e.,
features affecting cost and performance) proceed at a physical and at a
social level in a network. There is however no automatism and determinism
in the creation of value: some actor must evaluate, and accordingly consider
as valuable, even the most apparent physical features of a resource prior to
activating it in a utilization process that eventually realizes the value of that
resource. Moreover, the creation and activation of the physical and social
features of a resource happen in combination with other physical and social
resources. Therefore not only the social, but also the physical values of each
single resource are highly idiosyncratic: someone has to attribute value even
to the most physically apparent and seemingly objective features of a
resource; and this ‘‘(e-) valuation process’’ is highly specific, depending on
the contextual conditions where actors exchange and utilize the resource.
Someone must find the resource valuable, either because of the way a firm
uses the resource technically together with other resources, or because of the
way the resource helps the firm to create commercial values, for instance for
its customers.
The idea of services of a resource (Penrose, 1959, p. 25), and hence the
notion of value as deriving from the activities that utilize a resource (Wedin,
2001, pp. 41–45; Baraldi, 2003, p. 18) is certainly of great importance,
as well as the knowledge about resource interfaces (Wedin, 2001, p. 29). But
since most activities use several resources at the same time, the value of a
single resource resides in the interfaces and in the combinations with other
resources. Thus a closer look at the notion of resource interfaces is
necessary.
2.2. Resource Interfaces and Value
The relativistic and multidimensional notion of value switches the focus

from a single resource to combinations of resources. Therefore, a more fine-
grained theoretical concept and a more precise analytical tool are useful in
order to unravel the process by which value emerges from combinations, but
also confrontations of resources. In this quest, the theoretical focus is on
‘‘resource interfaces,’’ whereas the analytical tool is a framework high-
lighting the interactions of resources, that is, the ‘‘4Rs model’’ (Håkansson &
Waluszewski, 2002). These two constructs relate tightly with each other:
the review starts therefore with the 4R framework and its single resource
items, moving then to the interactions between such items and concluding
with the notion of resource interface.
The analytical framework classifies resources into the four typologies:
products, facilities, organizational (or business) units, and business relation-
ships (BR) (Ibid). A review of these typologies follows: (a) products (Ps) are
any artifact exchanged between and within firms, including components,
finished, and semifinished goods; (b) facilities (Fs) are equipment,
machinery, artificial systems, and tools that firms utilize to produce or
transform (physically or economically) products; (c) organizational/business
units (OUs or BUs) are resources of social type, whereas the two previous
items are physical and technical. Organizational or BUs possess not only a
structure, a size, and financial assets, but also more immaterial elements
such as identity, reputation, competence, and skills; (d) BRs are social types
of resources too. They are thick forms of interfirm interactions that emerge
as firms progressively adapt to each other (Håkansson & Snehota, 1995).
BRs are quasiorganizations that emerge as governance mode to coordinate
interfirm exchange (Blois, 1972; Richardson, 1972). Being resources,
relationships have a value on their own for the involved firms, who can
use them in order to affect the value of other resources, such as products or
facilities.
Interaction patterns form the four resource types. Products are part of
buying/selling interaction patterns. Facilities are part of interaction
regarding producing/using. OUs are formed in interaction patterns related
to cooperation. Finally, BRs are part of interaction patterns regarding

networking. The interaction patterns both hinder and make things possible
for firms. For example, the commercialization of a product might be
stopped by the interdependencies that exist between physical and organiza-
tional resources, where already existing technologies make the introduction
of a new one difficult. Or, there might be organizational interests that force
out an old product in favor of a new. In other cases, the interdependencies
that the interaction pattern creates are of less importance.
BUs and relationships, are organizing elements for the physical resources,
that is, products and facilities. The 4Rs model makes it possible to analyze
the interactions between single resource items or groups of them. In fact, the
focus should not be on the single resource items, but on the connections
between them. The economic, social, and technical connections between
resources imply that resources ‘‘interact’’ with each other, in the sense that
they affect each other’s features and values. This ‘‘resource interaction’’
approach (Håkansson & Waluszewski, 2002) observes how the value-
bearing features of a resource emerge from its interplay with several others.
In the frame of the 4Rs model the notion of resource interfaces is central
and deserves special attention. Resource interfaces (Ibid: 190–200) are the
specific contact points that indicate how and how much two resources affect
each other along technical (shapes, weights), economic (costs, revenues), and
social (identities, preferences) dimensions. Resource interfaces may partly
depend on the natural features of resources, especially of physical resources,
but they are eventually the result of human intervention in terms of
identifying, expressing, measuring, and forging them (Baraldi, 2003, pp. 21–23).
In a business network context, long-term interaction processes shape
the interfaces between resources involving several firms (Håkansson &
Waluszewski, 2002, pp. 190–200). For instance, the specific shape of a
component can be the result of long-term adaptations to the production
facilities of a specific customer. In other words, resource interfaces are
‘‘meeting places’’ where physical and social resources interplay and affect
each other: physical ‘‘meetings’’ are typical in production processes that
transform and mold resources together; but also social meetings between
resources, typically involving OUs and relationships, matter for the
emergence of resource interfaces.
Several methods are available for categorizing resource interfaces (see
Araujo, Dubois, & Gadde, 1999; Baraldi & Waluszewski, 2007; Håkansson &
Strömsten, 2007; Håkansson & Waluszewski, 2002). But the analysis here
relies on the following categories: physical interfaces that involve only
physical resources (products and facilities); organizational interfaces that
involve only social resources (OUs and relationships); and mixed interfaces
that connect social and physical resources (e.g., a product and an OU).
Examples of physical interfaces between a product and a facility are: (1) the
time necessary to perform certain operations on that product and (2) the
rate of defective products. Examples of organizational interfaces between
a BU and a BR are: (1) the share of time that an OU dedicates to a BR and
(2) the investments that a unit makes for a specific customer relationship.
Examples of mixed interfaces between a facility and a relationship are:
(1) the percentage of output that a specific customer purchases and (2) the
customer trust that the operations of that facility contribute to create. Quite
importantly, the connection between physical and organizational resources
in a mixed interface means that the influence goes in both directions. For
example, an OU certainly can influence the features of a product, but the
product also can have an important impact on the organization (Håkansson &
Strömsten, 2007, p. 6).
Resources and their interfaces form different types of configurations, in
terms of complexity, interdependency, and dispersion of resources interfaces
in the network (Baraldi & Strömsten, 2006). Interface complexity indicates
whether a technology is simple or complex, with processes involving one or
several technological bases, and with a few or many actors involved in the
embedding and the production/using processes. High complexity makes
interfaces hard to oversee, especially if interfaces are very interdependent,
that is, indirect interfaces dominate over direct ones. Whether interfaces are
interdependent indicates whether the function of one interface is (mutually)
dependent upon another and if this influence attempts at value creation and
value realization. Interface dispersion indicates the physical and social
distance between the involved physical and organizational resources in a
specific network situation and whether the technological competencies
necessary for value creation span few or many firms’ boundaries in the
network.
Thus, expanding on the above classification, interfaces can be direct or
indirect, depending on whether the effects between two resources directly
move from one resource to the other or a third resource intervenes as a
mediator. Indirect interfaces become visible through the features created in
an interface farther away from a user for instance (Baraldi & Bocconcelli,
2001, pp. 567–568; Wedin, 2001, p. 168). Extending the analysis to several
resources around two focal ones helps identifying these indirect interfaces.
At the same time, this extension indicates that every resource and every
interface is embedded in a greater whole. The analytical framework in this
paper stresses precisely this point: to understand how the value even only of
a single resource emerges, one needs to unravel several direct and indirect
interfaces that stretch across the whole network. In fact, value emerges not
only alongside single resource-to-resource interfaces (of physical, social, and
mixed type), but also from the complex web of indirect physical,
organizational, and mixed interfaces spread over firms’ boundaries and
across a whole network. Table 1 summarizes the discussion.
Since this paper investigates the values created around a number of focal
products, it is therefore pivotal to stress that the value of each product does
not lie simply in the ‘‘Product–user’’ interface or in the ‘‘buyer–seller’’
interface. Instead, the potential value is distributed in all relevant interfaces
across the resource network. For example, the creation of value for a
newspaper starts as early as in the wood-sorting process where the paper
producer and the wood suppliers take part. But the creation of value for a
newspaper also includes the creation of specific strength features in the
paper during the pulping process. Then printing units activate these features
Table 1. Configurations of Resource Interfaces.

Type of Features of Resources
Resource
Interface Complexity Dispersion Interdependency
Physical What are the numbers How dispersed are Are there
and the nature of the relevant products and interdependencies in
physical resources facilities in the the producing/using
involved around a network around a patterns between
focal resource? focal resource? physical resources
around a focal
resource?
Organizational What are the numbers How dispersed are Are there
and the type of relevant interdependencies in
business logic of the organizational units the buying/selling
organizational and relationships in patterns between
resources involved the network around a organizational
around a focal focal resource? resources around a
resource? focal resource?
Mixed What are the numbers How dispersed are the Are there
of physical and physical and interdependencies
organizational organizational between the
resources involved in resources involved in producing/using and
a mixed interface? a mixed interface? buying/selling
patterns in a mixed
interface?
in the network around the supplier of paper. The fact that several resources
intervene in the creation of value means that several organizations take part,
directly or indirectly, explicitly and implicitly, in the value-creation process.
2.3. Value Creation and the Control of Resource Interfaces
Resource interfaces are not only the underlying sources of value, but they are
ideally the target of managerial actions to create value. In other words,
resource interfaces are the very tools that firms can, at least partially, control
in order to create economic value. However, specifically controlling resource
interfaces, especially at a whole-network level, is not easy, because controlling
requires affecting the behavior of other firms who affect and are affected by
these resource interfaces. Controlling interfaces is thus a highly demanding
endeavor that requires balancing between conflicting pressures between
different interfaces and the interests of different actors and overcoming
several barriers, especially when actors at several sites in the network need to
make costly changes for embedding and utilizing a new value.
The literature traditionally views control as an intraorganizational affair
(Hopwood, 1996). However, a recent interest among accounting and control
researchers also addresses the interorganizational facets of control (e.g.,
Berry, 1994; Otley, 1994; Håkansson & Lind, 2004). Ouchi (1979) introduces
a control framework that Merchant (1985) develops further; this framework
points to three different types of mechanisms applicable to influence and
control actor behavior: result control, action control, and personnel control.
Result control involves the identification of results that are critical for an
organization and the evaluation expost of these results. Action control deals
with the identification of actions (or preventing actions) that are critical for
the organization to reach its objectives. Finally, personnel control deals with
issues such as selecting and training (teaching) people in order to create a
behavior that can help the organization to reach its objectives. Ouchi (1979)
and Merchant (1985) see result and action control as formal control types,
compared to the more informal personnel control. This control framework
is also relevant from an interorganizational perspective (e.g., Dekker, 2004)
and helpful for analyzing how firms can control the three types of resource
interfaces discussed above.
Firms need to coordinate their behavior in relation to other firms and
organizations in order create value. As value resides in the network and not
within the single firm, a focal firm needs to induce other firms to behave in
ways that facilitate the value creation the firm is promoting.
Relating the three types of control mechanisms to the three types of

resource interfaces discussed above (physical, organizational, and mixed
interfaces) provides a framework to analyze the control of resource inter-
faces. It is important to stress here that the control mechanisms intervene
both for intraorganizational as well as for interorganizational purposes.
Sometimes, the control mechanisms are overlapping or have double
purposes, that is, a control mechanism designed partly for an intraorganiza-
tional purpose, might have an interorganizational effect (e.g. to support the
interaction between a customer and a supplier with the help of jointly
defined action control) and vice versa. In fact, most intraorganizational
controls have an effect on how organizations combine and manage resource
interfaces over their legal boundaries.
First, result control can intervene in relation to physical interfaces by
measuring outcomes from resource combinations at a customer in such a
way that rewards customer’s employees for using a certain feature of a
product or adapting to a certain technology. When it comes to organiza-
tional interfaces, result controls might entail setting up targets and rewards
common to two BUs involved in a relationship around a new technology.
To identify and involve the individuals that in their own organizations are
accountable for and capable of affecting the relationship and the whole
value-creation process is of great importance. As for mixed interfaces, result
control can include measuring and following up the usage of facilities in
relation to a customer or supplier relationship.
Second, action control concerning physical interfaces entails informing
other parties and influencing their activities: for instance, how they can run a
specific facility so to extract more value from the facility by using the focal
firm’s products. If an undesired behavior depends on lack of competence by
external actors, the focal firm needs to teach them which activities are
necessary and how to perform them in order to create and realize value. For
instance, a focal firm might teach users how to best utilize a product’s
features together with other products in order to realize value. As for
organizational interfaces, a focal firm might induce a customer to act as a
good reference towards other customers or as a key contributor to product
development by showing clearly the benefits which that customer would gain
from such behavior. Finally, action controls can intervene in mixed interfaces
by facilitating the combination, for example, of a production facility with a
certain relationship: if that facility needs to cover more of its capacity, the
focal firm may induce a specific customer to order larger volumes of that
facility’s output by communicating more clearly the facility’s features and
how well they would fit just that customer’s logistics or production activities.
Third, personnel controls in relation to physical interfaces cover, for

example, the selection of counterparts with deep technical knowledge or the
improvement of existing partners’ competence. A focal firm may reward
customers’ or suppliers’ employees for learning certain technical skills vital
for the focal firm and for a technology that this firm is promoting in the
network. As for organizational interfaces, it is of great importance to select
and target those BUs that have the ability and motivation to cooperate and
have the production needs and volumes that enable realizing the value
embedded in the physical interfaces. Trust can act as an informal control
mechanism: goodwill trust (Sako, 1992) implies that the counterpart
behaves in the focal firm’s interest even in tough times. When it comes to
mixed interfaces, the focal actor can pinpoint a certain facility’s impact on a
Table 2. Examples of Control Mechanisms in Relation to the Three

Types of Resource Interfaces.
Type of Type of Control Mechanism
Resource
Interface Result control Action control Personnel control
Physical Defining critical Influencing the physical Selecting, training and

physical dimensions, details of partners’ mobilizing actors that
measuring results as production/use, buying/ develop and utilize
outcomes of selling and logistic physical resources
combinations of activities that involve
products and/or products and facilities
facilities
Organizational Setting separate or Influencing certain Selecting actors that are
shared objectives organizational actions possible to influence,
(sales, finance) for and preventing others trustable (history of
customers and at counterparts, by ‘‘good’’ collabo-
suppliers. Rewarding communicating rators), and are willing
them for meeting advantages of wanted to share knowledge
targets behavior and experience.
Identifying accoun-
table individuals that
affect value creation
Mixed Defining the results a Influencing a counterpart Selecting and teaching
business unit should unit (via information or actors closely related
meet in relation to a instructions) to perform (via competence,
certain product or specific activities in dependence) to
facility. Rewarding on relation to a certain specific products and
use and development product or facility facilities
of that interface
relationship and then suggest ways to increase the leverage that this facility
has on the development of the relationship. Capability trust (Ibid) is
relevant in the analysis of mixed resource interfaces because this dimension
also involves physical resources, the capability to use and develop resources,
and their interfaces to other resources. Thus, for mixed interfaces also it is a
matter of identifying, selecting, and mobilizing counterparts that are
dependent or interdependent upon a physical resource. Controlling an
interface between a BU and a facility implies influencing how the unit selects
its cooperative partners, directing its competence development towards the
facility so that is beneficial for the focal firm, but also for some other actors
that might affect the functioning of that facility. The table below illustrates
the different types of ‘‘interface-controls’’ (Table 2).
Controlling resources that reside outside the legal boundaries of a firm
can certainly be hard and involves identifying interfaces among the relevant
set of resources. However, considering the long-term relationships the IMP
group’s research tradition (e.g., Axelsson & Easton, 1992; Håkansson, 1982)
identifies, control is understandable from a network perspective as the
attempt of a firm to influence the behaviors and priorities of other relevant
actors within its network horizon (Anderson, Håkansson & Johanson, 1994:
by using result, action, and personnel control in various combinations).
3. METHOD: INVESTIGATING AND ANALYZING

RESOURCE INTERFACES
The empirical material that the two case studies build on is extensive,
entailing more than 100 face-to-face interviews. The first case concerns the
creation of a low-weight paper grade, in the whole network stretching from
electricity production to printing and publishing, and takes as a starting
point a focal organization, Holmen Paper and its production unit Hallsta
Paper Mill, located about 100 km north of Stockholm in Sweden (Wedin,
2001). The second case study relates to the low-weight paper study, and
concerns how an equipment manufacturer developed ThermoPulp, an
electricity efficient pulping technology, and its attempts to commercialize
this technology. For the newspaper and pulping technology cases, more
than 100 interviews were conducted in the period 1995–2001 at more than 40
organizations affecting the focal resource, newsprint. The empirical material
has since then been updated with some 20 additional face-to-face interviews.
The empirical case studies were collected with the explicit goal to analyze
resource interactions stretching to an entire network. Further, the cases

reveal different resource configurations of the networks around the focal
products, which hinted at some interesting and relevant differences in
the value-creation processes. The two cases made it possible to explore
both the success and a failure of how the value-creation process unfolded
during the timeframe of the analysis. From an analytical point of view
this is a strong advantage because we could single out specific resource
configurations behind success and respectively lack of success, with the
possibility of comparison.
The paper highlights the role of different types of control in the value-
creation processes. Even if the empirical parts do not include any specific
section reviewing these two companies’ control systems according to the
model by Merchant (1985), the different types of controls are visible as they
spread in the firms’ whole business (both in their internal operations and in
the resource interfaces to suppliers and customers). Merchant’s (1985)
framework is therefore more explicitly applied in the analysis and discussion
section of the paper.
By analytically comparing the two case studies it was possible to identify
both common, general patterns and salient differences in the issue at hand.
From the extensive empirical material collected two cases were selected.
Therefore, within a general double case study design, an ‘‘embedded case’’
(Yin, 1989) or ‘‘multiple-level-of-analysis case’’ research design is used. This
approach is helpful especially when the research issue to be tackled is a
complex one (Yin, 1989), as in the present investigation, and the approach
was earlier fruitfully applied to tackle the complexities of industrial
networks (Easton, 1995, p. 480).
The two cases in Sections 4 and 5 stress how value embedding,
production, and utilization rely on the interaction among several resources.
Semianalytical sections already included in the empirical parts delve deeper
into some selected interfaces among these resources. The barriers that the
configuration of resource interfaces posed to the completion of a value-
creation process are also hinted upon.
4. CREATING A LIGHT-WEIGHT PAPER:

A SOLUTION TO MANY PROBLEMS
The early 1970s were a turbulent period in many aspects, also for the paper
industry. For a long time Sweden was considered a forest country with an
excess of forests and consequently raw material for the forest industries.
However, in the beginning of the 1970s the industry expected an imminent

wood shortage, which would lead to increased prices. Since the paper
industry was (and still is) a huge user of wood, increased wood prices were
seen as a great threat. Another critical issue at this time was the OPEC
negotiations in 1973 that led to a dramatic increase of the oil price and what
was to be known as the ‘‘oil crisis.’’ Since the paper industry also was a
significant user of oil, the increased oil price affected the industry’s
profitability severely. Both these events induced the paper industry and the
focal BU in this case, Holmen Paper and its production unit, Hallsta paper
mill, to start searching for methods and technologies that could save on
these two raw materials, wood and oil.
This part of the paper examines how Holmen Paper and its production
unit Hallsta in cooperation with some close partners developed a light-
weight paper, Holmen News, a newsprint product aimed for printing daily
news papers. This technological change was to be far from easy to manage.
Several interfaces, both physical and organizational had to be changed and
coordinated before this could happen on a broad scale and the control of the
change was never solely in the hands of Holmen and Hallsta. Today,
Holmen sells Holmen News, with a reduced weight that ranges from 42 to
45 g per square meter. The key actor, where a large part of the development
work took place, Hallsta Paper Mill, was founded in 1915 to serve the
growing newspaper market in the Stockholm area. Today about 1,000
people work at the mill, owned by the paper company Holmen. Among
Holmen and Hallsta’s customers the large publishing companies in
Germany, France, Holland, and Great Britain are the most important.
In the early 1970s, Holmen and Hallsta started to discuss an investment in
a new paper machine. The market for newsprint was booming and this was
an opportunity for Holmen and Hallsta. As a consequence increased pulping
capacity was needed in order to supply the new paper machine. The board of
directors of Holmen had early on decided to invest in a paper machine from
Voith. Initially they also decided to invest in the already established
stoneground wood (SGW) technology from the same supplier. Hallsta had
since the mill was founded in 1915 based its paper production on the SGW
pulping method, where wood logs are pressed against a rotating stone.
Since the 1850s, the paper industry had made newspaper paper from
SGW pulp, that is, from wooden logs that are crushed against a grindstone.
As Hallsta had used the SGW technology ever since the mill was founded,
several production facilities, the use of raw material, the labor skills,
relationships to suppliers, all were adapted to the use of the SGW
technology. The SGW technology had many benefits. It was (and still is)
rather easy to manage; for an operator it is for example considered easy to

operate and the process contains few production steps. Further, the
relationship with Voith, the supplier of SGW technology was well
established as Voith also supplied Hallsta with paper machines. One
drawback of the SGW technology is the weak pulp that it produces, which
forces user to add chemical (sulfite) pulp, in order to increase the strength
features of the paper. Strength features are important in the paper-making
process, as well as in the printing process.
Further, as paper based upon chemical pulp is more transparent, the
opacity of the paper was a problem, especially for Hallsta’s customers and
their customers, the firms that advertised in the newspapers. This meant that
the paper had to be thicker, at least over 50 g per square meter. The sulfite
pulp was produced in-house at the Hallsta premises. However, during the
1970s, environmental organizations started to realize how dangerous the
waste from sulfite cellulose was. The waste products from the production
process was often dumped outside the mills and in the nearby water
resources. Hallsta had been asked by the authorities to lower its pollution
rate (from its sulfite mill) in the sea outside the mill in Hallstavik and this
would involve a great outlay. If sulfite could be substituted the sulfite mill
could be closed, raw material could be saved, and Hallsta would avoid a
costly rebuilding of the sulfite mill.
A solution to the above-mentioned upcoming problems; the increased
cost of wood and oil and the increased environmental concerns regarding
the waste from the sulfite process, was to produce a paper with lower
grammage weight based only on mechanical pulp, a type of pulp where the
wood fibers are mechanically separated in contrast to chemical pulp, where
the wood fibers are separated by chemical treatment. With such a paper,
fewer fibers would be needed in order to produce the same printing surface.
And fewer fibers would also be processed in drying section of the paper
machine, which would demand less steam and accordingly less oil would be
needed. The hope was further that this solution would exclude all insert of
chemical pulp previously required to strengthen the pulp.
Around 1970, the standard grammage weight for newsprint was 52 g per
square meter. This standard was accepted both by the users and customers,
the printing houses and publishing companies, and by the producers, the
paper mills. When Hallsta decided to move from 52 down to 48 g, the goal
could be attained only if several technologies were changed. The involved
engineers understood that ‘‘a lower grammage weight per square meter puts
some serious demands on the final product, the newsprint. And as paper is
produced by pulp, new requirements on the pulp were made, and thus
accordingly also on the technology that produces the pulp.’’ A new

technology to produce a stronger pulp was needed.
After long discussions, both within the board of directors and with Voith,
the supplier of SGW technology, the board decided to abandon the old
established technology in favor of a rather new and unproven one, Thermo
Mechanical Pulping (TMP). ‘‘The accounting people had given us some
reports and we could see how the margins would be affected by the
increased prices,’’ as a manager at Hallsta puts it.
Several interrelated factors made Holmen choose TMP instead of SGW.
It was not only the possibility to lower the usage of oil and wood. In general
the TMP technology promised a lower variable cost since the use of sulfite
and sulfate as reinforcement pulp could be considerably reduced. Another
important reason why TMP won acceptance was that the refiner technology
could be run on wood chips, which was a waste product, from the saw mill
industries. This was certainly good news in times of perceived wood
shortage. In addition, labor cost was also predicted to be lower with TMP.
As mentioned earlier, the environmental movement too played a role in
making TMP more favorable. In general, the whole pulp recipe was
expected to become cheaper and Holmen could therefore anticipate higher
profits with the use of TMP.
At the time, there were only a few different firms that were marketing and
selling the new TMP technology. Two of them were Swedish, Sunds and
Defibrator. A third was the American firm, Bauer Brothers. Hallsta talked
to all of them. In the end, the supplier chosen was Defibrator. In 1974
Defibrator delivered eight RGP 50u single-disc refiners with a total load of
36 MW to Hallsta Paper Mill in 1974. Defibrator’s refiners were built on
ideas that were developed during the manufacturing of masonite board in
the 1930s. Another production unit within Holmen was already using disc
refiners from Defibrator in the production of board, but for newsprint
production the quality of the pulp had to be increased substantially. So far,
the quality of the disc refiner pulp was not good enough to be used for
newspaper production and all test runs were so far problematic. An engineer
at Hallsta explains the choice of supplier: ‘‘Defibrator had long experience
from developing equipment for the paper industry and was known to be a
very innovative company. They had worked with wood chips defibration
and they were already a supplier to another Holmen facility.’’ Defibrator
had started to develop the refiner technology in the late 1960s and wanted to
move it into pulp production for the newsprint industry. In Hallsta they
found a customer that had clear incentives to start using the technology and
that could become a reference mill for other customers: Defibrator needed a
reference customer for the new technology and Hallsta needed a process that
could help it to lower its oil consumption, its chemical pulp use, and
produce a paper with lower weight.
The other Swedish alternative was Sunds. Sunds differed from Defibrator
technically as the firm manufactured another type of refiner, the so-called
double-disc refiners, which were assumed to produce a weaker pulp, not
suiting Hallsta’s production objectives. Defibrator produced single-disc
refiners. Furthermore, Sunds was owned by SCA, one of the main competitors
to Hallsta and Holmen, which was not considered a benefit for Sunds.
The general idea about the new mechanical pulping technology was to
take care of the properties of the wood fiber better than before. The length
of a wood’s fiber and the fibers’ ability to bond generally affect the
properties of the pulp and the paper produced, this is especially true of its
strength. For a publisher or a printing house, the paper’s strength properties
are central in order to obtain an efficient and ‘‘safe’’ printing process.
Several thousands of newspapers are often printed during few hours every
night and there is little time for fixing production errors. For a paper mill,
this would mean that less chemical pulp would be needed as a reinforcement
input. The idea with the new TMP technology was to process the wood
fibers in the pulping process so that different fiber lengths would come out
from the pulping process. The portion of long fibers that gives the final
paper its strength features should increase at the expense of the middle and
short fibers that give the paper its optical features. Thus it was a matter of
finding the right combination of wood fibers that went into the paper
machine and in the paper-making process.
Thus, the challenge was to use the wood fibers and create a paper that
could be used in the customers’ printing presses without problems, despite
the product being much thinner than before. A potential problem also also
the increased use of color in the daily newspapers. In addition, customers
started one-by-one to invest in new printing presses and thereby also shift
from one technology to another. In a few years during the 1970s and 1980s,
the printing industry left the old-fashioned letter press technology and
invested in presses using the offset method. This method had somewhat
other demands on the paper as the interaction between the input resources
was much more intense, as rubber cylinders were used to transfer the ink to
the paper. Moreover, as the offset method was starting to gain ground, more
and more color and also chemical liquids started to be used in the printing
process. That meant, the process became more ‘‘wet’’ than before and
starting to use a lighter and thinner paper during these conditions was a real
challenge.
A TMP unit consists of so-called disc refiners instead of the chain works
that SGW is built up of. Disc refiners had been used in the pulp and paper
industry since the beginning of the 1920s, but for totally different purposes
than Hallsta now wanted them for. The first refiner was developed in the US
early in the 19th century. Bauer Brothers, the American equipment
manufacturer found a refiner that was used for ‘‘breaking down cottonseeds
and peanuts’’ and then adapted it for the pulp and paper industry
(Sundholm, 1998, p. 28) and the concept of grinding raw material between
two counter rotating discs have been used for processing agricultural
products for a long time. In the paper industry, the main application area
for disc refiners was in the production of board. In addition disc refiners
were also used for processing pulp before the pulp was further transported
into the paper machine (after having being processed in the SGW process).
For example, Voith had developed a ‘‘raffineur’’ in the 1850s for this
purpose (Sundholm, 1998). The first step toward using refiners for
producing mechanical pulp was taken in the 1920s when Bauer Brothers
started to develop the refiner concept. The reasons behind the development
of refiner technology in the 1950s and 60s can be traced to the fact that the
raw material in the north eastern parts of USA became more and more
scarce and, therefore, more expensive. At the same time there was an excess
of wood chips from the saw mill industry on the west coast. This made it
interesting to develop equipment that could use wood chips as its raw
material (Waluszewski, 1989). Thus, the very same arguments used in the
USA were used in the Swedish context some 20 years after this (Fig. 1).
Soon after the purchase of TMP equipment, Hallsta and Defibrator
developed a close cooperative relationship as is described by both parties.
1600
1400
Oil consumption
1200
Oil GWh
1000
800
600
400
200
0
60
63
66
69
72
75
78
81
84
87
90
93
96
19
19
19
19
19
19
19
19
19
19
19
19
19
Year
Fig. 1. Oil consumption at Hallsta 1960–1996.
From the initial investment in 1974, Hallsta and Defibrator had a formal
agreement to cooperate. However soon joint problem solving started to
emerge between the parties and a more informal side of the agreement was
developed. The formal part of the agreement meant that Defibrator had the
right to use Hallsta as a reference mill, which meant that Defibrator invited
their customers to Hallsta and also trained customers on Hallstas’ facilities.
The informal part, that was perhaps the most important one for Hallsta,
concerned the development work of the refiners and the TMP process in
general. Defibrator was in need of a customer to be able to develop its
refiners, while Hallsta needed help and advice from Defibrator to run its
facilities. As TMP1 at Hallsta was the first TMP mill in an integrated paper
mill, there were some problems that had to be solved, both in the
configuration of the process and in the refiners themselves. Defibrator
needed to test ideas and equipment and Hallsta needed to develop its
production facilities and make them more efficient. For example, if
Defibrator had manufactured something, a prototype or a component that
could be used in production, it could be tested at Hallsta quite rapidly. This
could, for example, regard new types of refiner segments or new patterns of
a refiner segment, where there is a need for a ‘‘real life’’ testing in order to
evaluate whether the new segment is useful for the customer or not.
Early quality problems included high content of shives, unprocessed fibers
that caused problems in the paper machines, and more critically in the
customers’ printing processes. By increasing the refining intensity and by
changing the patterns of the segments, these problems could be overcome.
These changes were based on trials and errors: ‘‘Still today, we don’t know
what happens inside a disc refiner, even if the knowledge certainly has
increased on what parameters to use in order to increase pulp quality’’ as an
engineer at Defibrator put it.
Eventually, a number of benefits could be reached when the pulp attained
an acceptable quality level, measured on the quality index Freeness, which
indicates the pulp’s drainage ability in the paper machine. This test also
indicates other features such as certain strength properties. One such
strength indicator is the paper’s tear strength. Hallsta’s operators realized
that by increasing the refining intensity the paper got stronger, as long as the
length of the fibers were not damaged by the new mechanical pulping
technology. Thus, less chemical pulp was needed as a reinforcer, just as the
advocates of the technology promised. In addition, with a higher share of
mechanical pulp the opacity increased, which allowed producing a thinner
paper: a paper with lower grammage weight. As the TMP technology
reached higher grounds, Hallsta and Defibrator taught other customers to
Defibrator how to run TMP mills, how to avoid quality problems, and what
pulp recipe worked for what products. As an engineer at Defibrator puts it:
‘‘The development of the TMP process laid the ground to decrease the use of
chemical pulp and facilitated the development of a thinner paper. The
relationship with Hallsta was instrumental in this process.’’
A few years later, another innovation further reduced the consumption of
oil in paper making. Defibrator managed to pressurize disc refiners so that
the large amounts of steam created when wood fibers are defibrated in the
interaction with the refiner segments, could be recovered and used in paper
machines’ drying section. The need for steam in the drying section had
already been reduced by the stronger pulp which in turn admitted a lower
grammage, moreover now the steam was produced in the pulping activity
(as the disc refiners were used as ‘‘steam producers’’). Thus Hallsta’s oil
consumption could be dramatically reduced as can be seen from the figure
above.
Going from 52 g per square meter to 48 and then to 45 g per square meter,
put some new requirements on the input of the paper machine. As
mentioned above, a lighter paper also means that fewer fibers are used to
produce a paper that is going to be printed on and this puts demands on
strength features of the pulp produced. The joint development efforts with
Defibrator were not enough for Hallsta to develop a lighter paper: a
complementary resource was necessary, electronic control devices. Hallsta
collaborated with the supplier of control systems ABB in this project. ‘‘The
cooperation was quite intimate, we had meetings and discussed possible
solutions with ABB, what was possible to do and they explained for us how
we could reach our goals. Then there was an education package for the
operators in order to get to know how the new systems worked, how to
interpret the different measures.’’
The fact that this was a standard that emerged throughout the network of
actors and resources where Hallsta acted certainly helped. The knowledge
that ABB had developed around electronic control devices, in other
relationships with paper producers, could be used within new settings such
as in the case of Hallsta. One critical factor if the new paper machine, PM12,
was going to be able to go down to 45 g was that it was possible to control
the paper web’s profile on a continuous basis, online. Hallsta had invested in
an ABB system earlier and it was further developed to manage this task.
A thinner paper also means that the numbers of running meters per roll of
paper increased. This put demands on a much more even paper profile and
small differences along the paper web caused problems on the rolling
machine as well as on the tambour, where the paper is cut in different
dimensions. Even if these problems could not be totally avoided they could
be managed with help from ABB.
For the paper machine operators it was a learning process to know how
much fiber was about to go into the paper machine. In practice it was an
issue to decrease the amount of pulp from the silo into the paper machine.
Moreover, the demand for increased opacity was increasing. One of the
customers had had problems with the opacity as it was possible to read
the ad from the opposite page. Accordingly, the advertisers complained. The
complaints soon landed in Hallsta. In order to solve this problem, the
operators started to put in clay as filler that increased the opacity of
the paper. This was also good for another reason; clay is cheaper than pulp,
so the total recipe got cheaper with more clay in it. As the manager for PM
12 put it: ‘‘This is a kind of common knowledge in the business, all the paper
mills do the same when they face this type of problem. But how much and in
relation to what paper grades is highly specific.’’
The supplier of paper machines Voith also contributed to solving
Hallsta’s problems with low grammage by developing the paper machine
in a key dimension. Voith was founded 130 years ago in a little town called
Heidenheim in the southern part of Germany, where the headquarters are
still located. The manufacturing and research and development are also
located in Heidenheim for the paper machine division, Voith Sulzer Paper
Technology. Voith is the paper machine supplier with whom Holmen
(including Hallsta) is most involved and is also historically the main supplier
of paper machines to Holmen.
The two companies have historically had a very close relationship. Hallsta
is by tradition known as a so-called ‘‘Voith mill.’’ Since the start in 1915, the
majority of the paper machines at Hallsta are supplied by Voith. The
relationship has continued, with Voith having delivered a paper machine to
Hallsta’s sister mill Braviken in 1996 for 2.1 billion SEK. In 2002, Hallsta
again invested in a new paper machine, and also this time Voith was the
main supplier. An example that illustrates the importance of a close
cooperation is what occurred in the fall of 1996 when one paper machine
had a serious accident when the drying roller broke down. Within hours
Voith representatives had landed in Hallstavik to fix the problem.
Service activities become central when it comes to such complex and
capital intensive equipment as paper machines. To a high degree, the service
activities also influence the economic outcome of the investment of the
facility. Contacts between Hallsta and Voith take place on a regular basis
and can, for example, concern spare parts, maintenance or the rebuilding of
critical parts of the paper machine (Table 3).
Table 3. Paper Machines at Hallsta Paper Mill.

Year Supplier Capacity (Tons) Speed (m/min) Width (m)
PM2 1958 Voith 50,000 800 6.5

PM3 1963 Voith 100,000 900 7.0
PM11 2002 Voith 220,000 1,850 8.0
PM12 1974 Voith/Valmet 200,000 1,200 8.5
The relationship with Voith is important given the properties of the paper
machine and the interfaces to other resources. A modern paper machine
runs at speeds up to 1,700–1,900 m/min, while the older ones at Hallsta run
at speeds from 1,000 to 1,200 m/min. The speed imposes serious quality
demands on the pulp, and especially upon the properties influencing the
strength. As a paper machine is a large capital investment, it is crucial that
its capacity is fully utilized. A breakdown of 1 h in a paper machine is very
costly, reducing revenue by up to 70–80,000 SEK in Hallsta’s case
(depending on the price for the paper and its hourly production capacity).
What is important in terms of reducing the grammage of the paper is the
rule that says, that the weaker the paper, the more the breakdowns that
occur. As a thicker paper, everything else equal, is stronger, the balance of
producing a thinner but still strong paper was a challenge for Hallsta and its
partners in developing the low-weight paper.
Voith’s elimination of the ‘‘free draughts’’ in their paper machines was an
important development step in reducing the grammage. This was important
since the free draughts were the areas where different sections interfaced
each other (e.g., the pressing and drying sections) and also where the paper
webs earlier hung loose. The free draughts required a very strong paper web
and constrained the speed of paper machines. The paper web was stretched
in the free draughts and, if it contained shives or weak parts, the whole web
could break down and the paper machine had to stop. As every stop is
extremely costly (see above), and a high priority goal is to lower unplanned
stoppage time, Voith’s aim with the new paper machine, PM12, was to
eliminate the free draughts.
This innovation could have eased up strength requirements, but it instead
allowed increasing speed in the paper machines, as an increased output in an
growing market paid off more. Therefore, despite the elimination of free
draughts, the paper web had to become stronger due to the increased speed.
As such strength features depend on the fiber-to-fiber bonding created in the
pulping process, when wood fibers are defibrated, Hallsta and Defibrator
examined how the features of the pulp changed with increased load and
changed refiner segment patterns. Hallsta and Defibrator found out together
that the higher the intensity in wood refining, the stronger the pulp. As a
consequence, the higher load necessary to increase refining intensity led to
an increased use of electricity.
Lower grammage was something that Hallsta’s customers also wanted:
one of these was and still is Dagens Nyheter, Sweden’s biggest newspaper.
But to avoid unwanted effects with a lower weight paper, Holmen and
Dagens Nyheter had to work together until the printing presses could run
smoothly. In printing processes, a thinner (and weaker) paper can create
great problems, such as web breaks. Thus, Hallsta and Dagens Nyheter’s
printing house together trimmed the printing process based on a thinner
paper. As discussed above, lower weight paper can cause problems for the
advertisers; when the paper gets thinner, opacity can become insufficient,
that is, the paper becomes transparent. Thus, the amount of ink and how
pictures were composed had to be adapted to the new grammage. This was
something that Dagens Nyheter in turn had to teach its customers and the
advertising agencies. The ink producer Akzo also had to adapt its products
to the thinner newsprint.
4.1. Resource Interfaces in Developing and Using a Low-Weight Newsprint
The firms and the physical and organizational resources that were part of
embedding and using low-weight value in Holmen’s News are illustrated in
the figure below (Fig. 2).
In creating and using low-weight paper there were two main technical
components involved, the first one was the pulp and the second was the disc
refiner, which is a part of the TMP process. Other major physical resources
involved were, on the producing side, the paper machines and wood
facilities and, on the using side, the printing presses and the distribution
apparatus, where the newspaper reached the end user, the reader. We will
start by discussing the physical interfaces, and then move on and examine
the organizational ones.
(1) Interfaces around the disc refiner. A new type of equipment for
producing pulp had to be developed, the disc refiner. This equipment
plays an important role in the surrounding technical system. Further, it
was in the disc refiner that strength features were going to be created.
These features had to be activated later on in the resource and activity
structure, and the interfaces had to be ‘‘working’’ immediately but still
Advertising
agencies
Sunds
Defibrator
DN Distribution
company
Chem Newsprint Printing press

Oi pulp
l
Disc refiners
Paper machine
TMP Dagens Nyheter
Hallsta Paper Mill
Ink MAN Roland
ABB
Akzo
Key:
-Product -Facility -Business unit -Business relat.
Fig. 2. Some of the resources involved in creating low-weight Holmen News. The
arrows indicate a direct interface while the dotted lines indicate an indirect interface.
have potentials to be developed in the future. Low-weight grammage is

today daily utilized in several ways and by several actors in the network
around Hallsta.
(2) Interfaces around the paper machine. Other critical interfaces in the
daily production are the one around PM12. This facility must
coordinate both volume requirements and quality demands. PM12 has
clear demands on the strength features that the pulp must meet in order
to function properly in its operations. One important effect of the new
technology, TMP, is an increased electricity utilization. Soon after
Hallsta invested in the TMP technology in 1974, the use of electricity
steadily increased. However, the use of oil at the same time could be
dramatically decreased. The interface between the TMP and PM12
determines a large part of the economy for the paper machine.
A stronger pulp makes more efficient paper making possible and at
the same time reduces disruptions. But a stronger pulp also consumes
other resources such as electricity.
(3) Interfaces around the printing press: The interfaces around the printing
press links to start with two production facilities that interact system-
atically with each other. The printing presses at Dagens Nyheter are
supplied almost exclusively with paper from specific paper machines,
since the paper features created in a paper machine are almost unique
(even if newsprint is considered to be a standard product). The printing
site of Dagens Nyheter, therefore combines its three printing presses
with paper from certain paper machines and with inks from specific
suppliers in order to get satisfying resource combinations in the printing
presses. One key interface in the daily utilization of lower grammage is
therefore the one between Hallsta’s PM12 and Dagens Nyheter’s
printing presses. The paper quality is tried out with the customer, and its
features should be held constant so that the printing process is reliable
for the customer. Dagens Nyheter’s printing site monitors paper quality
several times a day to identify discrepancies and the exact paper roll that
caused problems. Thanks to bar-coding, Hallsta can consult its IT
system to see if there were any profile problems on that paper web in
their production. Just like the paper machine, the printing press is
composed of a large number of subsystems, some of which are designed
and built in-house by the printing press manufacturer, and some of
which are purchased from external suppliers. A large number of
different kinds of printing presses are available for different purposes
and, within one application area the configuration of one type of
printing press can differ from another. The printing press influences the
development of a large number of different input resources in the paper-
making process, such as ink, rubber blankets, paper, and control
systems. All these resources interact with each other, and the newsprint
is just one of many resources that the customer has to take into
consideration.
(4) Interfaces around the newsprint. The printing process uses low weight
from the very beginning: changing paper rolls create tensions in the
paper web which can lead to web breaks if the paper web is not strong
enough. Thus the interface between paper and printing press is critical.
How long a paper roll lasts depends on the paper grammage: the thinner
the paper, the longer the paper roll will last, and this is positive for
several involved actors: Fewer roll changes reduce the risk of web
breaks. Individual operators’ work gets smoother, since they need to
change fewer rolls.
Further, the interface between newspaper and distribution activities is

also important. A thinner paper makes the whole production system, where
distribution plays an important role, a little bit more vulnerable and
dependent on the strength created in the TMP process. In fact, if the paper
breaks in the printing presses at DNEX, Dagens Nyheter’s printing site,
distribution can be delayed and the publisher cannot charge money from
advertisers for newspapers reaching the reader too late. Thus, distribution is
dependent upon the features created long back in the resource network.
However, newspaper distribution gets more efficient when the paper has a
lower weight: a publisher is able to print the same numbers of newspapers,
with a 9% lower weight. Transport efforts to distribute the same number of
newspapers can be reduced. And the last component in the chain, the
delivery man, can now carry lighter newspapers. Even if the low grammage
feature is institutionalized, it can not really be taken for granted. Now and
then printing presses have web breaks that delay distribution and hence
sometimes the newspaper is not distributed to the end users, the readers.
This interface is decisive for the economy of a newspaper company as
advertisers will not pay for ads that never reach consumers.
Also organizational interfaces were of great importance in creating and
using low-weight newsprint. Here we will first examine the interfaces around
Hallsta and then some organizational interfaces that can be identified
around the customer, Dagens Nyheter. Lastly, the interfaces around the
firms that advertise in a newspaper will be discussed.
(1) Interfaces involving Hallsta Paper Mill: To start with the relationship
with Defibrator was fundamental for introducing the pulping technol-
ogy that decreased wood and oil consumption. This relationship allowed
both companies to learn a lot about TMP at a time when this technology
was relatively unproven. Further, the interface between the mother
company, Holmen Paper and the owners of Dagens Nyheter was
certainly also of great importance. Dagens Nyheter’s demands on a
lower grammage weight were channeled into the production units and
back to the printing sites. Interaction between the producer and the user
of newsprint was necessary in order to create both a reliable printing
process and a nice looking end product. The interface Hallsta–Dagens
Nyheter (the newspaper) rested on a long-term relationships started in
the 1910s when Holmen started to supply newsprint to Dagens Nyheter.
A driving force in developing a thinner paper had to some extent to do
with the economics of paper production. Dagens Nyheters’ Purchasers
saw the lighter paper as a way to save money since the paper is priced
per ton: more printing surface in a longer roll is paid the same amount of
money. Today, the product, Holmen News 42 g per square meter is the
backbone of the relationship. Even, when the lower grammage is part of
the relationship, aspects of the newsprint is managed almost on a
day-to-day basis, but in an indirect way. Every project, every develo-
pment effort starts with the product, Holmen News in the background.
Thus, the historical processes of the relationships are still alive in both
Holmen and Hallsta as well as within Dagens Nyheter and its printing
site DNEX. But the historical processes also live within the ‘‘current’’
relationship processes. The routines that are worked out, how
distribution activities are designed, and how often the product is
shipped from Hallsta to DNEX, everything depends to some extent on
the development of the lighter paper standard.
One organizational interface that was used to coordinate physical
resources was the relationship between Hallsta and ABB which was directed
towards the production facility PM12. ABB had a long-term experience of
industrial control systems, acquired through several BRs, while paper
making had a history of several decades at Hallsta. Moreover, the ability
and the motivation to solve production problems and develop the machine’
capabilities to control the paper web’s profile online was high at both
parties.
(2) Interfaces involving the customer Dagens Nyheter. Taking the
perspective of the customer, Dagens Nyheter, other interfaces must be
handled, not only in relation to the newsprint. These interfaces have an
impact on how the newsprint is both embedded and used on a daily
basis. With a lower grammage there was a need to coordinate the use of
inks and damp in the printing process at Dagens Nyheter. Thus, there
was a need to engage for example, Akzo, a supplier of ink and
chemicals, in order to fix problems of opacity, set-offs, web breaks.
Dagens Nyheter’s personnel worked specifically with the products from
specific paper machines and knew from experience how they reacted
with different types of inks and chemicals. The goal for DNEX was and
still is to produce a product that is identical to its three printing presses.
DNEX has therefore tried to define what result a certain combination of
inputs will give. This was not possible formerly, but the introduction of
a more sophisticated control system has made it at least feasible to be
tried. None of the input goods is a totally independent variable and
there is a continual adaptation process going on to make adjustments to
compensate for the different resources.
(3) Interfaces involving the advertising firms. An interface that was and still
is crucial for the whole network is the one between the firms that
advertise and the product newsprint. The advertisers are the economic
backbone in this network. The advertisers account for 60–70% of
Dagens Nyheter’s revenue (and other daily newspapers), which makes
them a group worth listening to for the publishing firms and the
independent printing houses. The demands from the advertisers drive
the publishers to a large extent, which in turn push these demands down
to the suppliers of raw materials. Technically, the advertisers need to be
aware of the newsprint features in order to obtain a satisfying final print:
DNEX, the printing site, contributes to teaching such features to its
advertising customers in the network. If the newspapers’ advertising
departments could decide, the paper would be thicker and would absorb
more ink, making the quality of the advertisements higher. However,
such paper would be too thick for several reasons: To start with, the cost
would be too much, distribution would be too costly, and handling
would be too hard both for the reader and for the printing house, not to
mention the additional weight that would need to be distributed.
Because of this, the publishers want a paper that is thin and of low
grammage, but that still is white and opaque enough to allow a good
printing result. Thus the advertising firms’ demands have an impact on
the whole of the graphics industry. In order to be able to offer good
quality four color printing, some newspapers have joined forces and
built large printing houses that the newspapers either own together, or
they buy production capacity from an independent printing house.
These newspapers share operations and facilities that concern the
production of editorial material and advertisements, and the printing
and distribution of the newspapers.
Deciding what is possible and not possible to print is an important part of

the prepress operations. Images that are going to be used in a newspaper or
an advertisement must be adapted to the technological capabilities of the
printing press. This adaptation is done in a dialog with different firms, such
as advertisement agencies, the advertisers, the editorial office, the adver-
tisement office, being involved. Thus a significant part of the selling
advertisements is making prospective customers and their advertisement
agencies adjust their advertisement to the existing technical facilities and to
the paper that the printing houses are using. In some cases, the advertisers
try to persuade the printer to use another paper grade. To communicate
with some firms is more vital than communicating with others. For example,
the big advertisement agencies in Stockholm are kept up to date on what

Dagens Nyheter and its printing house can manage in terms of technical
demands. If the advertising agencies would create images that the printing
press could not manage, this would also create customers who would be very
disappointed.
4.2. Control and the Development of a Low-Weight Newsprint Grade
The complexity in the network around Hallsta is evident and a number of

interfaces occur between physical and organizational resources that must be
organized and controlled for. As there are a large number of indirect
interfaces, which makes changes visible several steps away from where a
change was conducted, it is more difficult for a single actor to control or
orchestrate the development project. Here, the way firms account for and
measure the use of certain resources becomes of great importance for
Hallsta, as it makes their products visible in a way they perhaps were not
before. For example, the way DNEX measured the outcome from certain
input combination helped Hallsta support DNEX in their trial and errors
with the aim to create a reliable printing process. Instead we can see that the
number of actors that are involved both in the embedding of the low weight
as in the day-to-day activities are rather many, and they are also more or less
the same taking active part in both processes. All these actors had their
accounting system to take into consideration when assessing if changing the
way the paper was used or produced was a good idea. Thus, the accounting
systems influenced the interaction between the actors in a profound way.
This influence does not mean that single and specific interfaces are not
important in a development project such as this one. The overall objective
and control strategies of Holmen influenced the development of both
organizational and physical interfaces. The organizational interfaces that
Hallsta developed were crucial in the development of low-weight newsprint.
The relationship with Defibrator was, for example, created more or less
from scratch. What is important to remember though is that this
relationship played several roles and served several goals and interests. Not
only the involved parties, but also other actors could reap the benefit from
the development and knowledge creation that took place within the
relationship.
The development work was therefore very distributed in the network
around Hallsta. There were several interfaces that had to be coordinated
locally as problems appeared in local situations, within a specific context
and there was a need for specific knowledge in the problem-solving process.
The knowledge was of general character in the beginning, prior to being
applied, but then it certainly became contextualized. The lack of knowledge
about the resource interfaces made the development process hard to control
with formal control mechanisms. Instead, the low-weight project can be
characterized as several small steps in a distributed and self organized
network, where different types of informal control mechanisms were crucial.
Moreover, one can see how the centre of gravity in the network shifted over
time, where the need to solve problems was the greatest. Early on, there was
Hallsta and Defibrator that had to work intimately together to solve
problems with the new pulping technology. Later on, problems in the
printing press, with runability and with the optical features of the paper
became more apparent and then problem solving was directed to this part of
the network, involving different actors with different competencies. Still the
development work was built on earlier competence developments in other
parts of the network.
As so many actors had something to win on the development of a low-
weight paper, the small efforts really paid off, if everybody went in the same
direction. Thus, the interfaces were geared towards a similar goal, even if the
logics and the interests sometimes were conflicting, the overall strength in a
network marching in the same direction is powerful and make change hard
to stop.
The discussion implicitly mentions both the opportunities and the barriers
to change. The search for a technology that could support low-weight
newsprint went on, at several fronts simultaneously. One actor that got
more power, or at least gained more centrality than before was the developer
and manufacturer of control systems, ABB. As paper got thinner, new
problems would arise in the paper machines as well as in the printing
presses. How to run these facilities in the best possible way became a
crucial task to solve for ABB. Thus, the knowledge that ABB gained
(and has gained over the years) could almost be characterized as a
knowledge integrator. Even the money involved in control systems increases
steadily as a share of investment. Can some small (from a physical
perspective) and financially (from an organizational perspective) less
important interfaces be slightly improved the leverage for some of the
actors within the network can be substantial. ABB was a key actor in this
process, as it made the technical change measurable and controllable for
Hallsta and its partners. For example, the more paper that is rolled up on a
tambour, the more precise must the operation be and here ABB’s
competence was very important. And as the resources and interfaces were
directed towards the saving of wood, oil, increasing efficiency in both paper
machines and printing presses, the control mechanisms were designed in
order to support these goals.
The wood–electricity–disc refiner is one interface with slow but dramatic
change. The role of control is clearly visible. In this interface, the use of
wood has become much more efficient, less wood is used per ton paper
produced, as this was a prioritized performance metric. However, the use of
the other input resource in the interface, electricity has in fact become less
efficient. Mainly because it was not part of the ‘‘system,’’ as it was merely
seen as a supporting resource and further not scarce. This would, however,
change, in a rather dramatic way. The next case will examine an attempt to
develop a more electricity efficient pulping technology.
5. DEVELOPMENT OF AN ELECTRICITY
EFFICIENT PULPING TECHNOLOGY
One consequence of the development of a thinner and stronger paper

illustrated in the previous case was an increased usage of electricity for the
suppliers of newsprint, the paper mills. As the TMP technology soon spread
to most paper mills producing newsprint, the use of electricity did not only
concern Hallsta, the focal unit in the previous case, but the whole industry,
all over the world. Therefore, since the early 1990s, the forest industry has
given greater priority than before to the problem of high electric-energy
consumption in mechanical pulp production. The high usage of electricity in
the TMP process is considered something of a ‘‘classic’’ problem within the
paper industry and the equipment supply firms. One engineer working for
an equipment supplier puts it as follows, ‘‘Theoretically, only five percent of
the consumed electricity is used for defibrating the wood fibers, the rest is
used for steam production, however, that can not really be the objective with
the process.’’
The increasing use of electricity is explainable both by the direct interfaces
between the TMP and the paper machines, and also by the indirect
interfaces to printing presses and demands from advertisers. The paper
machine is a paper mill’s greatest capital asset; the paper machine must be
managed with care, and most importantly, the paper machine should be in
operation all the time. Thus, to produce a strong pulp that creates an
efficient use of the paper machine makes good sense, even if the use of
electricity increases. As the interests in terms of creating a strong pulp and a
strong paper are in harmony with the customers’ demands of a strong paper,
this is a development that has continued over the years.
Of all the electrical energy that a paper mill is using, about 95% can be
traced to the production activities and the TMP process, while the
remaining percent are accounted for by, for example, the provision of light
and heating. Of the 95% used for production activities, the lion’s share of
the utilization can be traced to the disc refiners that produce pulp. In the
electric motors that run these facilities, electricity is consumed in large
quantities every day, every hour, and every minute. In fact, Hallsta’s
electricity consumption is some 2 TWh annually, which corresponds to the
capital of Sweden, Stockholm’s consumption of electricity during a year
(Fig. 3).
Hallsta’s use of electricity has steadily increased over the years and
especially from 1974 when the mill invested in TMP for the first time. See
Fig. 3. Not only the absolute use of electricity has increased but also in
relative terms, per ton pulp produced, and per ton paper produced. Thus,
the use of electricity has in those terms actually become less efficient.
However, if one takes into consideration that the TMP process (and its
increased use of electricity) facilitated an improved pulp quality and this
indirectly has made it possible to use wood more efficiently, increase speed
in paper machines, decrease oil consumption, increase color use in printing
2000 700
1800
600
1600
1400 500
1000s of tons
1200 400
GWh
1000
800 300
600 200
400
100
200
0 0
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
Year
Electricity consumption Oil consumption Production
Fig. 3. Electricity and oil consumption in the period 1960–1999.

presses, the use of electricity in the TMP process comes in another light.
However, when the focus is solely on electricity use, the numbers do not
look impressive for the industry.
Pulping production based on SGW pulping is an old institution in the
forest industry. Since 1850, the paper industry is making newspaper paper
from ground pulp, where wooden logs have been crushed against a
grindstone. This was the predominant process for newspaper paper until the
end of the 1960s. Toward the end of the 1970s, the environment groups
started to realize how dangerous sulfite cellulose was. The sulfite cellulose
factories of the newspaper paper mills were hurriedly shut down. Parallel to
this development, a new technology was introduced that made it easier to
phase out the sulfite factories – the so-called thermomechanical pulp process
(TMP). TMP, developed by American and Scandinavian companies, was
advantageous because it produced a pulp consisting of long fibers that were
so strong that chemical reinforcement pulp eventually could be completely
excluded. TMP development did not occur overnight, however. The first
TMP applications for newspaper paper began to be used in the mid-1950s,
but it was not until the mid-70s that there were paper machines being fed
only with TMP (at Hallsta Paper Mill). More than creating a thinner
paper (as was described in the previous case), paper machines themselves
were also being further developed at the same time. Their speed
was increased through the introduction of such innovations as the gap
former and the zigzag wire. The increase in speed meant that the demand for
pulp strength also increased. To avoid having to mix in chemical (sulfate)
pulp, which has good tensile properties but costs more than TMP and also
affect the properties of the end product negatively, efforts are continuously
being made to make the TMP stronger instead. The result of these efforts is
a pulp-producing process that is very electricity intensive, because
processing the wood fibers requires electric energy. Basically, the more the
electricity used in the process, the higher quality the pulp and subsequently
the paper.
After a succession of mergers and acquisitions, there were only a few
major companies left that produced disc refiners in the 1990s: Among them
there were Sunds Defibrator and Andritz. Andritz was the result of several
acquisitions. Sunds Defibrator, on the other hand was also the result of
several mergers and acquisitions.
However, as the wood costs as well as electricity costs for paper mill
increased during the late 1980s and early 1990s, a competing technology, a
pulping method based upon waste paper, emerged, where the raw material
was cheap and the process much less energy demanding than the TMP
process. The raw material, waste paper, was further heavily subsidized by
governments around Europe. This made the waste paper technology a
crucial threat which soon took market share from Sunds Defibrator. In fact,
the waste paper technology was present since the 1970s, but it had a bad
reputation within the paper industry for a long time. Among paper
engineers, waste paper was seen as a second-rate raw material.
As a response to the new environmental concerns, which also included a
changed view of waste paper in general, both within the industry but also in
the public, SCA and Sunds Defibrator started to develop a new electricity
efficient technology, building on the existing TMP process, called
ThermoPulp. This case illustrates the obstacles that the company had in
commercializing the ThermoPulp concept.
Ever since the TMP process came into use, the manufacturers of refiners
have tried to increase the efficiency of the process’s electric-power
consumption. The results, however, were only marginal. The equipment
firms have invested in such improvements as developing the grinding
patterns of the grinding discs, increasing their number of revolutions.
Sweden’s Skogsindustrins Tekniska Forskningsinstitut (The Forest Indus-
try’s Technological Research Institute), STFI, has also carried out research
in the field of electric-power efficiency for the TMP process.
Sunds Defibrator was during the 1990s one of two existing full-scale
refiner producers. Sunds Defibrator was in turn the result of a merger
between the Swedish firms, Defibrator and Sunds. In much the same way, its
only main competitor Andritz, also consists of merged firms such as Bauer,
Sprout, and Hymac. Thus, the field has undergone significant changes in the
number of actors. Today the refiner producers as a result are quite few
worldwide, as are the number of paper producers. One effect of this is that
the product development process within each firm is hard, if not impossible,
to conceal from the prying eyes of the competitors.
Some of the development processes Sunds Defibrator was involved in
during the 1990s concerned for example a computer simulation program
which aimed at increasing the understanding on what happens within the
disc refiner when wood chips meet and interact with the disc refiner plates.
The basic question is how the different patterns could be optimized in
relation to specific wood qualities. Another project that Sunds Defibrator
undertook in the 1990s was the Pulp Quality Monitor (PQM) project. PQM
is a control device for refiner equipment which among other things is used in
order to monitor physical flows and thereby optimize the distance between
the two disc refiners. Sunds Defibrator had an assortment of nine disc refiner
models of disc refiners, which they can offer their customers.
Traditionally, the product development of refiner manufacturers works

according to a trial-and-error model. Through computer simulations, it is
hoped that the actual use of energy within the refiner can be accurately
assessed and measured. This project was expected to change the construc-
tion solutions used significantly.
Between the years 1964 to 1974, Sunds (before their merger with Defibrator)
were license producers of RMP-refiners (an earlier version of refiners)
developed by Bauer. They have also produced through licenses from IMPCO,
the Improved Machinery Company, in the US. The license agreement with
Bauer did not always prove to be a smooth way of handling business. Sunds
sold a number of refiners to several producers in Sweden, all of which had a
number of technical problems that Sunds had little ability to solve.
Over time, however, Sunds were able to develop their own double-disc
refiner, in a joint development program together with SCA-F, SCAs
research, and development department, which Sunds Defibrator was owned
by. As it turned out, Sunds learnt through informal channels that Bauer was
experimenting with a new technology, the TMP-refiner. In spite of their
earlier clashes with Bauer, Sunds elected immediately to make a visit to
Bauer, where they were presented to the new processes of refining. Together
with SCA, they started in earnest to develop their own solution, using the
TMP process. The solution was successfully tested at a small mill in Sweden
owned by SCA. At virtually the same time, the competitors at Defibrator
developed and installed a TMP-like process in a small Swedish paper mill,
Rockhammar. Therefore, the new technology entered Sweden on a broad
front. As Sunds and Defibrator merged in the 1970s, the process was further
refined.
In the mid 1990s, the need to increase the electricity efficiency was part
of the research and development strategy of Sunds Defibrator as electricity
was rapidly becoming more expensive for Sunds Defibrator’s customers.
They worked on the problem on a broad scale. Together with the large
Swedish–Swiss industrial conglomerate ABB, Sunds Defibrator was
engaged in the development of the AutoTMP system, a control system that
aimed at making the processes more efficient generally. However, ABB also
had contacts with the competitors of Sunds Defibrator concerning similar
systems. For example, the Austrian firm Andritz had initially the intention
of developing a similar system, but gradually rejected the idea. Hymac, a
Canadian firm, before it was taken over by Andritz hade started research
around data simulation. Meanwhile, Andritz worked on a project focusing
on high-speed refiners, all in order to optimize the use of electricity in the
refining process.
However, for a long time, Sunds Defibrator, could take advantage of its
standing as the largest manufacturer of refiners and the company with the
greatest development resources to make sure that no other company came
up with alternative technology for defibrating wood fiber into mechanical
pulp. The overall strategy for Sunds Defibrator was to grow and to gain a
large market share in the mechanical pulping market. The reason was partly
that an installed base would generate revenues in terms of services and
maintenance, but also to be in place when new orders were to be placed.
There was no urgent need to develop technologies that saved electricity in
the TMP process as so many other costs were saved thanks to a high wood
yield and a stronger pulp.
And in fact, the force to develop the refining process did not come from a
refiner manufacture. Instead, it was the equipment firms, such as Voith,
working with recycled paper who – in a relatively short time (although waste
paper was used as raw material since the early 1970s) – developed a process
to turn recycled fiber pulp into a high-quality product. This was a serious
threat to Sunds Defibrator. The Mechanical Pulping Division accounted for
50% of the Group’s total sales in the late 1980s, this share fell sharply to
about 20% during the next few years. This was mostly due to the success of
the recycling equipment firms.
One of the advantages of the recycled paper pulp process is that the
process only requires about 500 kWh per ton, which was and still is 20% of
what the TMP process needs. This together with a cheap raw material, waste
paper, and a general positive view from buyers of newsprint, newspapers
started to demand that a certain share of the newsprint would consist of
recycled paper, in order to be considered environmentally friendly. All this
made the waste paper production process a highly competitive one. Sunds
Defibrator began to realize the significance of the situation, and the wish to
develop the TMP process was very high up at the list of items at this point.
However, even though this was an urgent problem for the refiner
manufacturer Sunds Defibrator, the idea behind ThermoPulp came from
a customer and not from within Sunds Defibrator.
Around 1992, the ThermoPulp project was initiated when a researcher at
Svenska Cellulosa AB (SCA) contacted a couple of engineers at Sunds
Defibrator to discuss a possible joint project for developing refining
technology. Both companies had personnel in their development divisions
with long experience within their branches and in research on mechanical
pulp. In addition, SCA was a major industrial user of electricity and had
clear economic incentives to lower its use of electricity. Their production of
LWC paper, which is a high-quality paper grade, demands intensive
processing in disc refiners and accordingly is a substantial source of

electricity usage. The initiator was then an adjunct professor at the Swedish
Forest Research Institute (STFI), and also R&D manager at SCA, who had
worked on several projects in order to develop the TMP technology. Now,
he thought that there was a possibility to approach one important problem
for the industry. However, for this to happen, there was a need for a
development partner and the choice of Sunds Defibrator was more or less
self evident, being the only equipment supplier left in Sweden at that time.
Through the development work, intensive contacts took place between
the two companies’ R&D divisions and the mechanical pulping division at
Sunds Defibrator and SCA Graphic Paper, the division manufacturing and
selling paper for news print and magazines. An important factor in this
cooperation, as pointed out by the people at Sunds Defibrator, was the
groups’ common background from work at STFI. In fact, three out of four
patent holders had a background as researchers at STFI. Also, the
geographical proximity and the fact that there used to be ownership ties
between the companies were also considered important. The testing of the
pulp went in the Ortviken Paper Mill outside Sundsvall. Even if it was a
joint development work and the costs were divided between the firms, the
indirect costs, such as lost revenues from stoppage time in the paper
machines, were accounted for by SCA.
The formal part of the development was first carried out in the
laboratories of Sunds Defibrator to determine parameters for qualities that
the finished pulp needs, such as fiber strength, brightness level. The second
step in the development process entailed installing a prototype process in
Ortviken, SCAs paper mill outside Sundsvall. This prototype confirmed the
results that were obtained at the laboratory scale (which was conducted at
Sunds facilities outside Sundsvall), which were that the same basic fiber
quality could be obtained using a lower energy input. However, the project
was not without problems, ThermoPulp had for example problems in the
form of mechanical problems, but quality problems were also an issue that
was discussed among the project members.
So, what was the problem with the traditional TMP process? To start with
the dominant raw material cost wise used in the production of TMP is fresh
spruce. Electric power on the other hand is also substantial from a cost
perspective, about 25–30% of the cost for producing a ton of TMP.
Together, the raw wood material and the electric power account for about
90% of the variable production cost of the TMP process. As was illustrated
earlier, the use of electricity for most paper mills, including Hallsta, using
TMP had increased steadily over the years. This was the prime target in the
ThermoPulp project. In the mid 1990s, management at Sunds Defibrator

figured out that the usage of electricity must come down to lower levels,
otherwise Sunds Defibrator should continue to loose business to suppliers of
waste paper equipment. One of the engineers behind the ThermoPulp
technology recall the initial thoughts, ‘‘I remember when I was doing some
calculations, it was clear to me that we had to lower the use of electricity if
the TMP process would continue to be competitive.’’
In the TMP process wood chips are transported into the refiner’s ‘‘pitch
screw,’’ which throws the chips into the refiner at great speed. Well inside
the refiner, the wood chips undergo further processing against the machine’s
grinding discs as they are slung from the center into the outer edge of the
grinding discs. The refiner consists of a number of replaceable refiner
segments. These have a fluted pattern and consist of ‘‘bars’’ and ‘‘dams.’’
The fiber tufts are caught by the dams and made to float over them, thereby
freeing and treating the fibers. It is in this part of the pulping process that
the greater part of the energy is needed, between 2,000 and 2,200 kWh per
ton pulp are consumed in this step. In producing more value-added
products, the electricity usage is even higher. The wood chips are then
processed in the TMP process in a second step, in order to gain the right
physical properties. What is of utmost importance is strength features, so
that the paper machine and printing presses can work efficiently, and also
optical features, so that the advertisements will be appreciated by both the
readers and also the firms buying advertising space.
Before the pulp goes to the paper machines, it is filtered and purified and
then processed once more in a so-called reject refiner. Depending on
the quality of the paper that the pulp is designed for, the process is carried
out more or less completely, meaning that the qualities that are processed
the longest are those that require the most electric energy during the refiner
stage.
The theory behind the ThermoPulp process was to use higher
temperatures in the second refining stage. For a long time, the forest
industry knew about the softening effect of lignin at high temperatures.
Above 1801C, lignin softens and the need for mechanical power to make a
crack in the wood structure decreases noticeably, which in turn means a
reduction in the need for electric power. This technique is used in producing
fiber-board at Sunds Defibrator since the 1930s. Attempts were made to use
higher temperatures in the TMP newspaper paper process as well, but were
stopped because the pulp had to be bleached after exposure to high
temperatures. The resulting pulp lacked the so-called ‘‘fines’’ that give the
paper its scattering qualities (Rindö, 1995).
Studies have shown that in two-step refining, it is in the first step that
most of the pulp’s properties are determined; the second step influences
these properties only marginally. Moreover, the second refining step can be
carried out under atmospheric pressure or under pressurized conditions
without significantly changing the pulp’s properties. SCA and Sunds
Defibrator’s goal of ThermoPulp was therefore to obtain the desired pulp
properties in the first refining stage, after having prewarmed the wood chips
at 1801, the temperature at which lignin softens. Then, energy-saving
measures could be undertaken in the second stage (Höglund, Falk, &
Jackson, 1996). This was what the group of people worked intensively with
during the early and mid 1990s. The optimism was high. One further
advantage of ThermoPulp was that the equipment could be connected to
existent surrounding equipment, since only the modification of one process
stage, the refining, is involved. No ‘‘tying up’’ of investment resources was
therefore involved, either, since the return to conventional TMP production
was possible.
The ThermoPulp seemed initially to gain some momentum, as some
important orders were placed. Of course, the lead user, SCA, were among
the first to place an order and so was Braviken Paper Mill (also part of
Holmen Paper and Hallsta Paper Mill’s sister mill) in Sweden. Irving Paper;
Iroque Falls and two units within Abitibe also purchased a ThermoPulp
system. All in all, six systems were sold early on. What about Hallsta Paper
Mill? Well, even if Hallsta is seen as a pioneer in many aspects when it comes
to try new pulping technologies, in this case they chose a ‘‘wait and see’’
strategy as one of the managers at Hallsta explained. ‘‘We were vulnerable
at the time [due to an owner with financial problems], we had old paper
machines which we had to use in an optimal way. There was not much room
to try out new things or to be experimental. We had to use our old facilities
as efficient as possible. However, as Braviken [Hallsta’s sister mill] was an
early user, we could follow the development closely.’’
Decreasing electric use in the TMP process was and still is no easy game.
In effect, all of the projects carried out at Sunds Defibrator and other
companies during the past years to make energy consumption more efficient
have led to deterioration in the quality of the pulp, which in turn has had a
negative effect on the finished newspaper paper. A study conducted by Sunds
concluded in 1997 that a mill had a period of lower paper machine
performance during a ThermoPulp test. The trials showed that the cause of
the problem was that Thermo-mixer temperatures when going over 1651C
lead to a poorer pulp quality. One possible reason for this was due to thermal
degradation (Johansson, Frith, Falk, & Gareau, 1998; Cannel, 1999).
Both Sunds Defibrator and the people at SCA tried to solve the problems
that occurred. However, this turned out to be too hard a challenge. The
technology also started to gain some bad reputation within the paper
industry, an industry that on the other hand has a reputation of being very
conservative when it comes to trying out new technologies. In fact, the TMP
technology can be considered the latest radical innovation within the industry.
Thus, the problem to reduce the use of electricity turned out to be valid
also for ThermoPulp. Even though a good amount of the invested energy is
converted into heat and steam, ‘‘it is apparently the ‘useful’ energy that is
reduced and that causes a loss in quality,’’ as one of the people involved in
the ThermoPulp project put it. For example, ThermoPulp creates poorer
brightness due to the high temperature in the second refining stage. If
hydroperoxide must be added, this causes extra cost for the mill that installs
a ThermoPulp line. Moreover, the pulp that comes out of ThermoPulp has a
somewhat different fiber distribution, than conventional TMP, with a higher
share of short fibers, which sometimes means that sulfate pulp must be
added to meet with the strength demands of paper machines and printing
presses. If this turns out to be the case, the entire savings in cost from the
reduction in energy consumption may thereby be lost.
5.1. Resource Interfaces Involved in Developing ThermoPulp
The development of ThermoPulp activated some old resource interfaces as

well as created some new. Not all, but some of the resources and their
interfaces are presented in the figure below. We will examine some of the
more important ones (Fig. 4).
(1) Interfaces around electricity. Electricity is an interesting resource since it is

practically invisible. There are hardly any interfaces to identify, still they
are there and they influence the whole production system in a profound
way. For example, errors in the production attributable to the pulp and its
properties are often related to how the raw material (and the pulp) is
processed in the different types of equipment. The pulp can be processed
too much or too little. If the pulp is ‘‘over-processed,’’ the result is a pulp
with a too low freeness, which will make the pulp very hard to dewater on
the paper machine. If the pulp is processed too little, there will be a high
proportion of shives in the pulp, which can lead to a large number of web
breaks. The refining of unprocessed fibers, the so-called shives, is therefore
very important as the utilization rate of a paper machine is highly
Waste paper Electricity

Developing/ mill
Manufacturing
Sunds Defibrator
Disc Paper
Akzo Thermo refiners machine Other
Pulp paper mills
Chemi-
cals Wood Electricity
Development/
Manufacturing
Voith/Manufacturers of waste paper equipment
Disc
refine Paper
machine
SCA Printing
press
Customers/Printing houses
Power
station
Svdkraft/Power
Key:
-Product -Facility -Business unit -Business relat.
Fig. 4. Resource interfaces involved in the ThermoPulp case. The arrows indicate a
direct interface while the dotted lines indicate an indirect interface.
dependent on the proportion of shives in the pulp. The simple rule is that
the larger the proportion of shives, the more breakdowns there will be.
According to a number of the people interviewed, one way to decrease the
use of electricity in the refining process would be to use better methods to
clean the pulp to remove the shives. To avoid breaks, the other fibers in
the surrounding paper web must compensate for the shives making it
necessary to produce so-called ‘‘over strong’’ paper. A uniform pulp is
therefore a must to obtain a production process that is reliable,
predictable, as well as efficient. Electricity consumption is central to the
entire production system represented by the refining of wood fibers, since
it gives the pulp and the paper qualities that are necessary in order for
production activities through the whole activity chain to be carried out
efficiently. The paper must cope with many different situations during the
refining process, from wood to finished newspaper. At the same time,
many presumptive sources of error can be traced in the production, with
the manufacturing of pulp occupying a central role for the result of the
rest of the process, which emphasizes the importance of electrical power.
A change in the manufacture of the pulp, especially in the refining process
(and its use of electricity) – which represents the ‘‘heart’’ of the pulp
production – is a serious intrusion. It is also a production process that
involves heavy capital investments and one where historical investments
strongly influence future ones, something that also was a draw back for
ThermoPulp.
(2) Interfaces around the disc refiner. In general one could say that the
development of ThermoPulp was an incremental technical change.
ThermoPulp was an incremental technical change both in the process,
and in the product, how things were done and resources combined,
rather than developing totally new resources. The increase in the
temperature was not new knowledge but the principle was well known
within the paper industry. The first initiative came from an adjunct
professor at the Royal Institute of Technology who also held a R&D
position at SCA. With the deep knowledge about the technology and the
industry in general that he and his collaborators shared, this was
probably not something surprising. The knowledge that most develop-
ment steps in the capital intensive paper industry must be step-wise or
even incremental, in order to take care of all the resources and
investment that one can find in a paper mill and in the firms around it,
going for an incremental development model was probably a very wise
decision. Still, the fact that the small deviations from what is considered
‘‘good’’ pulp quality (somewhat poorer brightness and poorer tensile
strength) made the commercialization too hard to achieve is interesting
from a researcher’s perspective. The network around a disc refiner is
certainly not forgiving for small flaws, everything must be ‘‘perfect’’ or
according to a given ‘‘standard,’’ otherwise new resource combinations
must be tried out, some resources might even have to be replaced. Since
time is such a scarce resource in this context and constant production is
a key issue, even these small things made it impossible to sell only more
than six ThermoPulp systems.
(3) Interfaces around paper making. In a paper machine, pulp or
suspension goes through three processing stages before it is turned into
a finished product. These three stages correspond to the following parts
of the machine: the wire section, the press section, and the drying
section. A fourth section can be said to be the rolling machine, where the
paper is cut into batches with standard dimensions to match the
demands of the customers.
One reason why ThermoPulp did not become a success, was because
of the configuration of paper machines and the in-built need for a strong
pulp. From the wire section the web goes to the press section, via a pick
up cloth. If the paper web is weak due to a certain amounts of shives or
other defects, the paper machine operator might face a web break here,
with very unpleasant work in the coming hours to be done. The press
section consists of three press nips whose task is to further dewater the
suspension (the pulp). In the press section, the suspension is dewatered
from about 15–43% dry content. In the drying section the suspension is
further dewatered. The web is blown from the last roller in the press
section so that it becomes fixed on the down side on the drying cloth
and is then fed into the drying section. This is the first free ‘‘draught’’ in
relatively modern paper machines. This is also a place in the paper
machine where the paper web can break. In earlier models, the free
draught started between the wire and the press sections, which increased the
risk of web breaks. Any paper producer would go to any length to prevent a
web break to happen. The easiest way to solve this potential problem is to
create a paper web that is strong enough, and the way to do this is to process
the wood fibers intensively and to not add chemical pulp into the pulp
recipe.
Some of the more important organizational interfaces in the development
of ThermoPulp will now be examined and some of these interfaces can also
be seen as barriers to the lack of commercial success that Sunds Defibrator
and the ThermoPulp project experienced.
(1) Interfaces involving Sunds Defibrator. Sunds Defibrator’s Swedish head

quarter and the paper producer SCA, are both are located in Sundsvall
in the northern part of Sweden. The interface between the firms and the
individuals with the common background at STFI was a driving force
when the firms started to develop ThermoPulp. The closeness, both
mentally and the geographical proximity made it possible to test first in
the lab site of Sunds Defibrator and then conduct full-scale tests of the
new technology in the nearby paper mill, Ortviken. Of course, there was
a great deal of vested interests in this project and the issue of groupthink
(e.g. in how individuals viewed resource interfaces, the way certain
resource could and even should be combined) can not be overruled.
However, the same types of features of an organizational interface can
sometimes be used in a positive way and it is too hard for an outsider to
jump to conclusions that these types of mechanisms would explain why
a certain project might fail.
In general, the paper producers are many times as large as the refiner
producers and at times some of them have elected to have the
production of refiners in-house in order to integrate the production of
refiners with the users of refiners. For example, Sunds Defibrator (Sunds
and later Sunds Defibrator) was for a long time period owned by SCA.
Another example is Jyhlävaara (another supplier of disc refiners) that
for a long time was subsequently owned by the Finnish UMP group. In
time, it appears as if this in no way has proved to be more effective than
letting the refiner producers sell to anyone interested in buying. In fact,
being part of a paper producer could many times be bad for business.
Even if the owner in some examples could function as a reference
customer it could also be problematic when the relationship with a
prospect customer and the owner was competitive and in order to avoid
conflict of interests the units selling disc refiners were sold off. For
example, the Holmen Paper mill, Hallsta, refused to buy equipment
from Sunds as long as it was owned by SCA. Letting in Sunds
equipment in the mill was like letting a competitor in, which was out of
question. Was it negative for Sunds Defibrator that their prime
reference customer was their old owner? Also this is hard to speculate
around, even if some of the interviewees in fact pointed in that direction.
(2) Interfaces involving customers. After had run ThermoPulp trials from
1995 to 1996, Irving Paper declared in 1997 that ThermoPulp was an
operational process. In spite of this, due to increasing pulp demand,
Irving later in 1997 reconfigured its disc refiners into a three-stage
system. For Irvine Paper, it was a matter of Increasing TMP production
rate and then the use of the ThermoPulp process was suspended. They
never really started to use ThermoPulp again. Swedish Braviken also
experienced lower quality pulp which affected production cost
negatively. Bleaching costs increased and then the financial logic with
using ThermoPulp had disappeared. As Braviken never really became a
real user, its sister mills within the Holmen Group, such as Hallsta,
never became interested as well. Abitibe’s two units also eventually
decided to stop using ThermoPulp.
5.2. Control and the Development of ThermoPulp
If one thinks about the variety of resources and interfaces existing and
necessary to mobilize in developing the ThermoPulp technology, Sunds
Defibrator or SCA could have not have foreseen every possible obstacle in
the development project. As SCA were both a customer and a former owner
to Sunds Defibrator, the interfaces were not ‘‘far away’’ as in the printed
veneer project, instead, SCA probably faced the same problems with lost
strength and brightness just as the other customers. Why did not a bell ring,
were there no early warning signals that the firms’ control systems could
have captured in some way?
For sure, there was some internal resistance that was concerned with the
financial investment and commitment in going into a development project
like this. There were also some interests within the company that pushed for
meeting competition from the waste paper technology by developing similar
products or facilities. Instead, Sunds Defibrator met competition in their
own back yard, by developing the mechanical pulping technology, where
everything more or less remained the same, even if some of the components
were somewhat altered, the way the activities were performed changed
somewhat and so did the components within the system. Was this a wise
decision? It was at least a decision that the firm could make. Sunds
Defibrator was a company with a background in the mechanical pulping
field, this was their experience and competence and this was where they had
added value over the years to so many paper mills around the world. From
that perspective it seems evident that a firm like that should develop a more
efficient mechanical pulping technology.
As for the organizational interfaces involved in the project, these were
certainly important in order to coordinate and organize the project. Further,
these interfaces were critical in establishing the project to start with to
monitor how it progressed and to solve the problems within it. However,
one can perhaps wonder if the organizational interfaces were too limited to
be defined. Perhaps also other types of competences and other actors with
different types of interests should have been part of the project. Since the
ThermoPulp technology only was a modification of an existing industrial
process, the actors involved might have thought that it would be too
complicated and too little to win in bringing in a diverse set of actors and
competencies.
However, a group of engineers within Sunds Defibrator even wrote a
conference paper about the possible problems that ThermoPulp might cause
users. Even if the problems indeed were small, they in the end were be big
enough to prevent prospect customers and users to jump on the
‘‘bandwagon.’’ This could serve as an example of ‘‘tipping points’’ in
industrial networks. Small margins make a product or an industrial process
a success or a failure. In this case, bleaching costs increased with some 100
SEK per ton of pulp. This may seem much or little. However, as Hallsta
Paper Mill produces, in a good year, 800,000 tons of paper, increased costs
for bleaching would be 800,000 100 SEK ¼ 80,000,000 SEK in extra costs.
If you add that there also was a need to use more chemical pulp, the extra
costs increases even more. In the end this will hurt the profitability of the
firms and hence the ability to pay out dividends to the owners.
Seen from Hallsta Paper Mill’s perspective it was natural not to be a lead
user in this case. As their owner had financial problems the willingness to try
new technical solutions was not great. Since its sister mill Braviken took at
least a semiactive part in the development work, as being one of the first
adapters of ThermoPulp, Hallsta got all the information that they wanted.
One issue that made Hallsta extra resistant to start using ThermoPulp was
the structure of its paper machines. Due to the low-investment activity at
Hallsta, their paper machines had become relatively smaller and smaller
over the years. One way to compensate for this was to produce newsprint
with higher grammage, so-called improved newsprint, and thereby get more
ton out of the small paper machines. These paper grades had to be brighter
than the standard newsprint grade, as they often were used as supplements
and for weekend papers. Using a pulping method that would increase
the need to use bleaching chemicals made very little sense for Hallsta at
the time. Even if the mill consumed enormous amounts of electricity, the
marginal effect was always on the traditional technology’s side. So Hallsta
stayed where they were and played it safe.
Even if there are two different projects and even technologies, consider
how the low-weight newsprint project differs from the ThermoPulp project.
The physical interfaces that Sunds Defibrator and SCA had to deal with
were more or less the same, generally speaking; there were wood chips and
how they interacted with the disc refiner and the refiner segments, the
involvement of printing presses and paper machines. However, the
organizational interfaces were designed or at least looked upon in a different
way. The low-weight newsprint project was distributed, in terms of
development work and many local compromises and problem-solving
activities. The ThermoPulp project, on the other hand, seems to be designed
just like a text book success case, with an extremely competent and
experienced supplier and a lead user that had strong incentives to lower the
use of electricity. However, the development work was very much centralized
to these two actors. There were perhaps the concerns of intellectual property
rights and the fear of a (the single one) competitor would reap the benefits
from the innovation developed within the dyad of SCA and Sunds
Defibrator. More than one firm has lost the battle of technological standard
setting by keeping the innovation too close to oneself.
What should SCA and Sunds Defibrator then have done? The problem
might in fact be the way they formulated the problem and how they
analyzed the future profitability of the firm. The problem, the parties
argued, was how their customers accounted for the use of electricity in the
disc refiner. Sunds Defibrator saw only electricity as a cost component in the
customers economy. Accordingly, the problem should be solved in altering
the disc refiner in one way or the other. Another way to approach the
problem would have been to look outside the focal interface of disc refiner–
electricity–wood and ask simple questions like: What characteristics of the
paper-making process drive the use of electricity in the TMP process and in
the disc refiner? What characteristics of the printing process drive the use of
electricity in the TMP process and in the disc refiner? What in the
distribution of newspapers and what in the demands of advertisements drive
the use of electricity in the TMP process? How is the economy for the
affected actors constituted? This is another way of thinking, not necessarily
better in all situations. However, this way of arguing would identify other
types of barriers and opportunities for creating value than if the problem is
only defined as a local one. As a consequence the ‘‘opportunity space’’ or the
room to maneuver at least in thinking strategically increases substantially.
In fact, when the problem is ‘‘distributed’’ and when resources are
embedded this is in fact what a firm that wants to change something must
do. Otherwise the whole system will work against the firm, instead of in
favor of its objectives, strategies, and ways of measuring development and
change. In fact, if these questions above had been asked, Sunds Defibrator
would have realized that their customers not only saw electricity as a cost,
but also as a ‘‘revenue generator,’’ as the increased use of electricity had
meant higher quality newsprint and a more efficient paper-making process
as well as a more efficient printing process for their customers.
6. ANALYSIS AND DISCUSSION
The paper now analyzes the different configurations of the resource

interfaces involved in the two value-creation episodes reviewed for the two
paper and pulp cases. An important caveat is however that the classification
of successful vs. less successful value-creation episodes is necessarily a
context-based and time-limited one. But despite this word of caution, the
reasons behind success and lack of success will be pinpointed in these two
episodes relying on the notions of resource interfaces and the opportunities
and barriers that they entailed in each of the two episodes. The analysis of
the two cases focuses on the three different types of interfaces discussed
in the theoretical section, physical, organizational, and mixed interfaces,
with the purpose of understanding how their configuration enabled or
hindered the analyzed value-creation processes. Moreover, the analysis also
identifies how the control mechanisms (result, action, and personnel control)
reviewed in the theoretical session are used by the involved firms in relation
to three types of resource interfaces.
6.1. Configuration and Control of Resource Interfaces in the Holmen

Low-Weight Newsprint Case
In this case, creating low-weight newsprint, the involved technologies were

rather complex with many different technologies interacting. For example,
there were a number of production facilities involved, such as pulping units,
paper machines, and printing presses. In addition, if the scope is even
increased, the facility that ‘‘produces’’ wood pulp, the forests, was also
involved in an indirect way. The fact that there was a need to develop a new
type of pulping technology for the low-weight newsprint is certainly an
important issue in this case. Further, the old chemical pulping mill at Hallsta
had to be closed down due to both issues of cost and environmental
concerns (which would end up as substantial costs) is also interesting.
Further, the actors in the case coordinated the facilities systematically, as
developments in the pulping equipment, was coordinated in relation to
changes in paper machines and printing presses. Through the local problem-
solving episodes the facilities were step by step geared and directed towards
or away from each other. Thus, in the case, one could see many indirect or
even hidden interfaces between the physical resources, as when colors are
combined with newsprint from specific paper machines in specific printing
presses. In addition, the technical competence needed to embed and produce
and use a low-weight newsprint grade on a daily basis demanded a broad
technical competence span.
When looking at organizational interfaces, the project that dealt with low-
weight paper also showed an increased complexity by the involvement of
several actors in the value embedding process. Interesting though, there are
due to the tight physical interfaces, a lot of actors that also utilize the value
created. For example, the printing workers take advantage of the fact that
they do not have to change paper rolls as often. The customers’ (and their
purchasers) benefit from the fact that they pay per ton, but get as much
printing surface as before. The producers use the value in the way that they
use wood in a much more efficient way than before, and that they get an
overall better production economy when the chemical pulp could be
excluded, among other things. It was further possible to observe many, both
direct and indirect interfaces between the organizations that both embed
and use the feature of low weight, even if these organizations do not
necessarily know about each other. At least four relationships among the six
units that were active in the value embedding process were identified. In the
daily value production/utilization process there are a large number of actors
that directly and indirectly are involved and use the paper and its different
features, or have to adapt to it.
In the Holmen low-weight paper project the focal mixed interface was the
relationship ‘‘Defibrator-Hallsta’’ and the product ‘‘Newsprint’’. Hallsta
chose a technical solution, the TMP technology, and then involved a
partner, Defibrator, but several other actors had to intervene in the value
embedding phase. The embeddedness of the above mixed interface was quite
substantial. The issue was not if there were going to be technical problems,
the issue was how the problems were going to be solved, and then Defibrator
was seen as the best partner choice. As already mentioned, it is possible to
identify many interorganizational interfaces in the low-weight paper case,
but what is interesting is that these are not explicitly handled to create
low-weight value. Instead, there are several issues that are handled
simultaneously by the involved actors, where low weight is only one issue
among many, and there is subsequently a rather loose coordination of value
creation as the technical change that the newsprint case represent is indeed
multilayered, involving several actors with different interests. There are in
fact several actors that take an active role even if no one takes a strong
initiative in the embedding process. Further, there are several overlapping
and even reinforcing interests that come at play. Present are also several
conflicting interests that need to converge, even if there is no clear mediator.
A lighter paper in the end got momentum through many local compromises.
As these were not costly for the actors in the short run the development was
not stopped and then the development could go on and there was time to
solve technical problems without being too risk averse. Table 4 sums up the
discussion on resource configurations in the low-weight case.
Relating configurations to control we can start with the physical
interfaces (see Table 5 below). Control is used in different ways in this
case in relation to physical interfaces. As for result control mechanisms, the
various actors in the network around Hallsta had identified the same
physical objective: to produce and/or use a low-weight newsprint paper. It
was not only Hallsta who had this objective which made the development
Table 4. Examples of Configurations of Resource Interfaces in the

Holmen Low-Weight Paper Case.
Resource
Physical Several and complex Distant interfaces but Many hidden/indirect

technologies involved these are ‘‘bridged’’ by interfaces
local problem solving
in value embedding
Complex interfaces Large investments, to Heavy physical
Several key facilities develop several interdependencies
related to each other technical solutions making harder to fit the
across the whole new feature into a
network structure
Organizational Many actors involved in Daily production/ Many, both direct and
value embedding utilization across a indirect, organizational
At least four BRs among variegated network of interdependencies
six units are necessary independent actors
to embed value
Fewer but very different
actors utilize value-
Broader competence
span
Mixed Embeddedness Several conflicting Many interorg. interfaces
substantial and interests need to but not explicitly
necessary condition converge, but no handled to create low-
mediator exists weight value
New technology and Some actors risk losing on Loose coordination of
partly new relationship some dimensions value creation
in development work
Old users but new Many local compromises Several actors intervene
parameters and that spreads to the but no one takes strong
knowledge needed in larger network initiative
crafting interfaces
easier to achieve. The objectives were to some extent defined collectively and
the whole network was also under pressure to change the use of both wood
and oil, due to direct and indirect cost issues. The change promised lower
use of oil and a much more efficient, higher yield of wood. Further, the
industry would also increase its reputation as environmentally friendly if
sulfite pulp could be excluded from the paper recipe. The involvement of
ABB and their process control devices meant that the activities on both
paper machines and printing presses could be monitored and altered much
more effectively than before, hence the technical action control increased.
Table 5. Examples of Resource Interfaces and the Use of Control in the

Holmen Low-Weight Paper Case.
Resource
Physical Several actors have the Holmen’s technical Defibrator, ABB and
same objective, low choices steered Voith were selected as
weight development activities partners to increase
Several combinations are to make it possible to Hallstas ability to
tried out over firm reach the goal of a low- manage physical
boundaries in order to weight paper interfaces
create a newspaper
with lower weight
Organizational Holmen’s objective to A formal contract defined Another unit within
lowering weight is due activities within and Holmen had experience
to save raw material outside the relationship of Defibrator which
and cut costs with Defibrator influenced the selection
of Defibrator
This objective was aligned Informal agreement was The image of Defibrator
with several key actors developed over time as an innovative
in the network company played in
Mixed Dagens Nyheter’s Holmen influenced and Mutual learning and
printing site’s objective convinced Dagens teaching between
was clear cut: Print Nyheter about the Hallsta and the
thousands of benefit with a lighter Defibrator people
newspaper in a few paper situated at Hallsta’s site
hours every night around the use and
Customers were Use of certain resources production of disc
rewarded, formally and banned, such as refiners and refiner
informally, when they chemical pulp segments
got the same printing
surface for lower price,
due to the thinner
paper
With the new types of devices it was suddenly possible for operators to
control the process on-line and alter the process when finding it necessary.
Further, the development activities were steered towards lower grammage,
which excluded some activities and motivated the performing of other, such
as search for new technologies and new input resources. Holmen and Hallsta
were certainly active in their selection of Defibrator as a supplier of disc
refiners and TMP technology. Thus, the exercise of personnel control in
relation to technical interfaces was motivated by the fact that Defibrator was
considered the most technically competent supplier of disc refiners available.
Approaching the control mechanisms used taking an organizational

interface perspective in this case, results control in terms of cost objectives
were important. For the focal unit in the case, Hallsta, it was suddenly
constraints in terms of the use of certain resources, such as wood and oil and
this made cost objectives become a prime priority. Further, cost savings, but
on other types of resources, in several BUs in the network seemed to be an
objective that was achievable and central for many actors. This opportunity
seemed further to be well known in the network and motivated the actors to
work for the objective. Further, the knowledge necessary to reach the
objectives seemed also to be distributed and complementary in the network.
When something was achieved, it was possible to reap the benefits from this,
e.g. stronger pulp made it possible to run paper machine faster, creating
revenues and hence creating rewards for the involved unit. The action
control used in terms of organizational resources, was based upon the
formal and informal agreement on developing and letting other customers’
to Defibrator take advantage of Hallsta’s experiences as an advanced user.
However, there was also some external pressure on Hallsta and other actors:
the environmental movement made some activities hard to perform, such as
the production of sulfite pulp. In terms of personnel control looking at
organizational interfaces goodwill trust was important: Hallsta selected
Defibrator, due to an internal reference. The actors also had overlapping
interests in developing the technology which certainly was imperative for the
relationship to develop. Further, the relationship also involved other actors,
as these were trained at Hallsta’s site in the use of the TMP technology.
A similar component can be found in the relationship between Holmen and
Dagens Nyheter since it involved a fair deal of mutual learning and teaching
about how the thinner paper would behave in the printing presses and how
the newsprint would interact with the printing ink.
The overall result control used for Hallsta and Defibrator in the mixed
interface was related to achieving a high-quality pulp in the disc refiners
situated at Hallstas TMP mill. This objective never fully indicated the path
going there, but in the end meant a need to develop and adopt to a new
technology interactively. Result control was in that case used to a large
extent because they relied on exploring new types of resource interfaces and
new knowledge about the mixed interfaces. The overall objective was shared
by both Hallsta and Defibrator in relation to develop newsprint and the
‘‘rewards’’ in the case entailed both intrinsic and monetary rewards. If
succeeding the firms would gain a reputation of being innovative and from
this would follow lower costs for Hallsta, and increased revenues for
Defibrator. The many interfaces, both physically and organizationally
around Hallsta and Defibrator probably influenced the choice of partner as

it was based on what Defibrator had achieved elsewhere in the Holmen
Group; it had a reputation as a reliable problem solver and this made
Hallsta and Holmen to dare to try the new technology. This indicates that
the exercise of personnel control is related to the resource configuration
around the two firms. Following from the above discussion action control is
rather loose since the development activities contained a large share of trial
and error attempts, even if the use of materials, wood and disc refiners, were
predefined and influenced the development work and thus also the action
controls used or even functioned as action controls. The trust in the
relationship was very strong from a capability trust point of view, pointing
to the importance of personnel control in the development work. Further, a
common cultural spirit was developed between Hallsta and Defibrator over
time. The relationship was almost seen as one company internally in relation
to the new technology, the disc refiners, as the collaboration was so intense
during a period. Hallsta also gained a reputation as being innovative during
by working closely with Defibrator (Table 5).
6.2. Resource Configurations and the Use of Control Mechanisms in the

ThermoPulp Case
In the ThermoPulp project, many interrelating components occur where the

causal effects of combining one resource with another were not clearly
investigated or understood. Just as in the low-weight paper case, many
visible and hidden interfaces between the technology and the other
production facilities and between several products and input materials. In
fact, changing the features of the pulp, changed the interfaces between
several other resources, such as there was a need for using chemical pulp
(that was excluded in the previous case), use more bleaching chemicals.
The development of ThermoPulp, activated several physical interfaces that
were spanning several organizational boundaries. The physical interfaces
were ‘‘designed’’ by the innovators and to some extent frozen in relation to
other actors whose resources were affected, directly or indirectly. What
makes it interesting are the close interfaces that are present in the embedding
of the technology, but that closeness might be harmful as the distant
interfaces never managed to absorb the innovation fully.
In terms of organizational interfaces, actually few actors participated in
the embedding process, that is, in the development of the new production
process, ThermoPulp. As is the case often, many actors were involved in the
use processes, where pulping units have to interact with paper machine
units, which in turn have to interact with internal sales organizations and
directly with customers. The organizational interfaces thus follow the
technical ones and this creates an interdependency that must be handled and
taken into consideration. As a consequence, the embedding process reveals a
rather tight network of personal friends that go long back, and this seems to
be critical. However, in order to understand the process of use and
production of a specific product, a wider network picture is necessary.
However, it seems that the actors involved in the project never fully took
this wider network into account. Instead the whole operation was
approached as a ‘‘closed system,’’ where the dyad between Sunds Defibrator
and SCA was the focal point. When the ThermoPulp process was ‘‘finished’’
it was launched to other customers and then some unpleasant surprises came
up, which made the diffusion stop rather early on.
A key mixed interface in the ThermoPulp case is the one between the
relationship ‘‘Sunds Defibrator- SCA’’ and the facility ‘‘ThermoPulp’’ (see
Table 7). The relationship was built on personal ties and mutual technical
objectives through the value embedding process, and the goal was clear for
both parties, a lower electricity usage in the pulping process. The
coordination of the project can be characterized as tight in that there were
a few actors involved during the value embedding process. Further, SCA
and Sunds Defibrator centralized the knowledge development to the dyad
and strictly focused on lowering the electricity utilization in the TMP
process. The focus on lower electricity consumption might have over-
shadowed the need to bridge and compensate for other dimensions in the
pulping process and in the interface to paper making and printing. During
the embedding process, both actors had a mutual interest in lowering
electricity consumption, but the problems started in the day-to-day use of
this new value, as the pulp features were worsened on some important
dimensions. One can in fact argue that in the embedding process, all the
involved actors seemed to be winners. It was in the use of the process its
pitfalls become visible. Even if the compromises necessary can seem to
be minor, they were costly when producing large volumes of pulp and paper:
in the end, this stopped the commercialization of the ThermoPulp
technology. One can even argue that there were no real gains, except for
lower electricity consumption for the users. In the low-weight paper case, it
was instead possible to mobilize a larger number of BUs within and across
companies, since all, and not only users, seemed to have something to win,
small as the gain seemed to be. In the ThermoPulp project, the only
dimension at stake was electricity utilization, but changing although
successfully this single dimension in the production system meant that the
system was no longer in balance: other interrelated components needed to
be altered and ended up in a less favorable positions for most actors. The
ThermoPulp’s resource configurations are summarized in Table 6 below.
Then, if the control dimension is approached, the physical result control
in this case was ‘‘identified’’ by Sunds Defibrator as they lost business to a
substitute technology. The objective was clear for their side: lower electricity
use in disc refiners, otherwise, there was a risk that the firm would go out of
business. However, defining the problem this way meant they fail to notice
the revenue generating feature that electricity actually had for their
customers. Action control was partly based on the research conducted by
one of the initiators at SCA. However, the technical knowledge on how to
achieve an even pulp quality is not resting on safe knowledge grounds.
Instead, the knowledge to a large extent is experiential and ‘‘tacit’’, thus it
was hard to explicitly apply action control in this case for Sunds Defibrator.
The laboratory site of Sunds Defibrator was partly constraining what
could be tested, and then the parties conducted the full-scale tests at SCA’s
mill. The selection of Sunds Defibrator by SCA (and vice versa) was
natural in some sense- Sunds Defibrator was the leading manufacturer of
TMP technology at the time and SCA was and still is one of the major users
of electricity in the paper industry. Moreover, key individuals from both
sides had a joint history working for the forest industry’s research institute
and knew each other well and had worked with the TMP process for
decades. ‘‘Technical’’ trust was an important reason for choosing counter-
parts in this case.
Control from an organizational resource interface perspective is interesting
in this case. For Sunds Defibrator it was important to secure sales and
revenues, which was the main organizational result control. This would be
done through lowering the usage of electricity in the TMP process
(a technical/physical result control). To reach that objective the development
project with SCA was supported from the board and top management team.
One can indeed talk about a mutual selection process which indicates the
rather strong personnel control. The action control at play here can to some
extent be speculated about. The engineers defining the problem of the high
electricity utilization in the TMP process, the ‘‘solution space’’ about how to
lower the electricity use was defined to take place within the overall paradigm
that the TMP technology stands for. Instead of looking ‘‘outside’’ the
technology, to define the problem more broadly, the single equipment, the
disc refiner, would be the component that would absorb a whole technical
system’s use of electricity. Thus, it is possible to argue that the informal
Table 6. Examples of Configurations of Resource Interfaces in the

ThermoPulp Case.
Resource
Physical Many interrelating Close interfaces in Many visible and hidden

components where the embedding interfaces between the
causal effects are not Distant interfaces in use technology and the
clearly investigated never absorbed the environment, other
development of equipment and input
ThermoPulp resources
Small direct investments
necessary
Organizational Few actors involved in the A tight network of Few actors that
embedding process personal friends critical underestimated the
in the embedding phase interdependencies
Broad and deep technical A more distant network Many actors in the use
competence span necessary in the process processes
several organizations of use and production
Many actors involved in
the use processes
Mixed Tight mixed interface as In close embedding of Mutual interest to lower
excluded other firms in physical and use of electricity
the development work organizational
resources, all actors
seem to win
Centralized knowledge In distant use of physical Small but costly
development resources, compromises necessary
organizational pitfalls
become visible
action controls limited the search process among the firms and the
individuals that took part of the development project. The action control
and personnel control played a mutual and reinforcing role here as there was
a group of individuals that had a long common history at the same research
institute and working for same companies and who knew each other
privately. The view on how to solve the technical problem certainly directed
their search for solutions. The fact that there on the organizational level, was
a common owner history also played a role in the selection phase.
Approaching the focal mixed interface in this case from the control
dimension, one can see how result controls were used in the relationship
between Sunds Defibrator–SCA: save business by lowering electricity use in
the disc refiners was the clear objective for both parties. But the two parties’
strong motivation towards this objective was probably both a positive thing
and a very important weakness. In fact, other objectives were more or less
ignored in the project: all focus was on lowering electricity utilization. This
meant that the development team to some extent neglected measurements
concerning how the new technology would affect the customers’ costs (such
as results concerned with increased bleaching chemicals) and revenues.
However, as soon as the ThermoPulp project ‘‘went live,’’ these types of
problems started to emerge. In terms of action control, there were strong
technical interdependencies that steered the development work. For
example, the raw materials (wood chips) had to be the same, the same
types of basic components (e.g. types of refiner segments) were also
Table 7. Examples of Resource Interfaces and the Use of Control in the

ThermoPulp Case.
Resource
Physical Objective to lower Knowledge on how to Selection based upon

electricity use in TMP perform pulping to functional physical
process set by Sunds achieve quality interfaces. High
Defibrator and SCA uncertain technical knowledge
level within
relationship
Sund’s research site However, too ‘‘closed’’
constrained R&D work physical interfaces, not
generalized to rest of
network
Organizational Aligned objectives: SCA’s Formal JV. However, Selection came from small
objective was to lower hard to trace social network: the
electricity use and cut development costs in involved individuals at
costs and Sund the project. Several both firms had a
Defibrator’s objective indirect costs as the use common history at the
was to lower electricity of paper machines in same research institute
usage in the TMP testing paper qualities and had also worked
process and increase/ are not part of the for the same companies
save revenues development budget
Mixed SCA’s and Sunds Using ThermoPulp made Selection of possible
Defibrator’s interface it necessary to also use reference customers
to electricity was direct more chemical pulp. failed for Sunds
and the common This was unintended Defibrators which
objective was to lower type of action control created a vicious circle
use of electricity in
TMP process from two
different perspectives
‘‘givens.’’ However, since the technology never helped customers to reach

their results controls (such as the budgets of the mechanical pulping units’
operating within the paper mills), the new technology was never seen as a
real alternative for pulp and paper managers that by definition have to be
risk averse. As for the more informal personnel control, accepting SCA and
its TMP mill as a self-selected user and development partner of the
ThermoPulp technology probably lead Sunds Defibrator in the wrong
direction. Basically, the focus on SCA’s requirements might have induced
Sunds Defibrator to focus on ‘‘wrong’’ parameters or type of controls: in
fact, compared to other paper producers, SCA focus was catalogue paper,
which is thicker and therefore less sensitive to getting weaker (which
happened with the ThermoPulp technology). Table 7 illustrates some of the
control mechanisms used in this case.
7. CONCLUDING REMARKS: THE ROLE OF

CONTROL IN VALUE CREATION
This paper concludes by pointing at factors behind the more or less
successful outcomes of value-creation episodes in a business network
context. By building on the analysis of the two episodes, a few reasons
behind the specific value-creation outcomes in the two cases can be singled
out. Five important issues that affected these outcomes and all have to do
with how actors attempt to measure and control value creation are
extracted: (1) value creation and interaction with control systems, (2) degree
of complexity and control, (3) degree of fit of the value with resource
configuration and control systems, (4) measuring the level of value created,
and finally (5) feedback from the network. These factors are present in any
value-creation effort and need to be somehow handled by the involved firms.
Screening unsuccessful value-creation episodes can help to see how these
issues acted as barriers to completing a value-creation episode with actual
value being produced daily and utilized. Instead, in successful value-creation
episodes these factors have either acted favorably for the specific effort or, if
they were barriers, they were counteracted. Now consider these five issues in
detail, relying on the two concrete examples.
(1) Value creation and interaction with control systems: All the involved
actors in the two episodes have their own internal control systems. They
have their own objectives, strategies and ways to measure their business
and reward people (Otley, 1999). To be successful, value-creation
strategies like the ones that Holmen pursued should be aligned with, or
at least not collide with, these control systems. For example, Holmen
could benefit from the fact that the development partner, Defibrator,
was in need of a strong reference customer and their efforts (represented
in their control systems) were then aligned. Another strategy is to
change the control systems at important counterparts, if there is no or
little fit between a new offering and a user’s control system. For
example, Holmen’s customer Dagens Nyheter wanted to have a lighter
paper in order to save costs, thus the printing house’s way of measuring
paper by ton but still getting the same printing surface was in favor of
Holmen. These actors used different types of control mechanisms
(result, action, and personnel control) in their efforts of creating and
realizing value. An important source of either support or opposition to a
new technology is the nature and the measuring focus of the various
firms’ control systems. In summary, if you do not have the support of
existing control systems, it is important at least to avoid clashing with
them. But the best situation is when the new solution implies that further
value can be extracted with the further help of a ‘‘supporting’’ control
system, might it be intra- or interorganizational. For instance, in the
Holmen case, light-weight paper was not only an accounting exercise,
but also generated a series of additional values as soon as the result
controls of printing press operators could be improved: their perfor-
mance increased because they did not have to change paper rolls as often
as before. Even if this seems like a small value, several innovations have
found it hard to overcome the hesitations of end users whose control
systems did not support a change in the use of a product.
(2) Degree of complexity and control: When resource combinations give
uncertain outcome, they are hard to control and measure, and
consequently the value-creation process is harder to coordinate.
Therefore, in these situations, one often tries to apply personnel
controls as one trust individuals or companies to solve a certain problem
or develop a new product. This could be seen also in some of the two
episodes presented above. Whenever value creation requires overcoming
complex technical issues, involving several direct and indirect physical
interfaces and large investments at several sites and in a variety of
technical solutions that all need to be attuned with each other, then,
value embedding becomes more difficult or time consuming. Action
control is typically hard to implement as no single actor possesses all
know-how to instruct others on how to perform the relevant activities.
Selecting BUs and individuals that one can trust becomes crucial in
those situations. However, sometimes selecting trustable counterparts is

not enough. In the ThermoPulp case, one can see how complexity made
it hard for a new technology to diffuse, since the improvement in only
one dimension, electricity usage, was not enough. Not enough actors
could in fact realize the value created in the ThermoPulp project. When
investments are to be made by users in order to extract value from a new
solution, a clear facilitating factor for the diffusion of the new
technology is that there is more certainty and clearness on the achievable
advantages. The ideal situation is when these investments can be
employed to increase value simultaneously on several dimensions.
(3) Degree of fit of the value with resource configuration and control
systems: The impact of control systems on the diffusion of new products
or innovations is seldom explicitly analyzed. However, the potentially
negative effect of complexity and of expanded time or space frames can
be overcome if the new solution being developed fits technically,
economically and socially in the existing configuration of the resource
network, including the control systems applied by the relevant actors.
After all, Holmen’s new low-weight product is expected to be utilized
globally and across several different types of printing presses, transport
facilities and distribution units; but it turns out that this value fits well
the technical needs of all this type of facilities and the economic needs of
the many different actors behind them. In addition, in the newsprint
case, despite technical complexities to embed low-weight, in the end a
low-weight paper with a sufficient degree of technical and economic fit
with the whole network became a reality. Instead, fitting the resource
configuration in the ThermoPulp case turned out to be problematic: on
a societal level, the attempts to lower the use of electricity in the world’s
most electricity intensive industrial process must be applauded, and
Sunds Defibrator also got some public attention for the ThermoPulp
project. However, the network fit in terms of technical and economical
issues turned out to be a too hard obstacle. Even if bleaching costs only
marginally increased, and even if the strength index went down only
marginally, for an industry that produces millions of tons of paper even
only marginal decreases in effectiveness are hard to accept. On the other
hand, that means that even marginal improvements also have a great
possibility to create large values in these types of industries.
(4) Measuring the level of value created: As just pointed in the low-weight
paper case, routines and the existing network structure are not so rigid
that they never change. And value creation and the introduction of new
solutions requires, at some place and to some degree, that several actors,
including distributors and users, perform adaptations. It is therefore

pivotal for adopters and users to evaluate exactly how much value they
will eventually obtain from the new solution in the light of eventual
sacrifices they will need to make. Therefore, there must be an accounting
or information system that allows value to be captured, measured and
evaluated. Low-weight newsprint were clearly an example of a
sufficiently high level of value accessible to most actors without the
need of additional investments. Clearly, the evaluation of the value of a
new solution and the level of value required to accept it varies greatly
from an actor to another in the network. These variations are behind
their different motivations in supporting or opposing certain changes
and value-creation processes. Cost accounting entails a high degree of
arbitrariness, as do most accounting information. Still, costing aspects,
that is, how the costs for a product are accounted for, created a barrier
to the diffusion of the ThermoPulp technology. Again, not enough
actors could see in their accounting numbers any value creation from the
new technology. When it comes to the case of low-weight paper, the
buyers got very interested in supporting such a new solution because it
supported their way of accounting for paper costs. A lighter paper
meant lower paper costs for them, but the printing surface would still be
the same. Thus, this way of accounting for paper costs created an
opportunity for the producer of newsprint that enabled to create value
from low-weight paper.
(5) Feedback from the network. All the above episodes can be seen as
change processes. And in change processes space and time issues are of
great importance. When and where a change process is evaluated, for
example, influences the way the change is perceived and also how it is
managed and controlled. A longer and time consuming development
episode might run a bigger risk that the circumstances that framed and
motivated the change can change during its very unfolding: this may
make the development less valuable for at least some of the actors
involved. Going for the lighter paper grade, Holmen and its production
unit, aimed for the publishing houses in Europe. However, the first steps
were involving firms in their geographical proximity. Time played an
important role also in this case, however from a somewhat different
angle than expected. Speed is a crucial issue in the paper industry. The
faster the paper machines, the tougher the requirements on the input,
the pulp. Thus, creating a thinner paper also meant creating a stronger
paper, because of the speed/time issue. Further, timing can play an
essential role to facilitate value creation: in the case of lighter paper,
several reinforcing forces (oil crisis, wood shortages, and environmental

pressures) coalesced to mobilize several actors and facilitated both
embedding and day-to-day use. Such a positive timing effect was instead
not present in the ThermoPulp episode.
This paper has examined how the configuration and control of resources
and interfaces in a network around an innovation can create barriers or
opportunities. The two cases are empirical bases are not enough to draw
general conclusions (not that it ever was an intention), even if one can
certainly make analytical generalizations (Yin, 1994, p. 30). The network
around an innovation and more specifically the configuration of the
resource interfaces and the forms of control systems used by actors can help
to understand why some innovations succeed in overcoming all the
obstacles, while others slowly vanish or meet a more abrupt end, without
creating any actual value for the involved actors. Why do resource
configurations and interorganizational control enable some products and
not others to create value? Further research on this matter is clearly needed:
firstly, in-depth case studies embracing an entire network of actors and
resources could lead to a deeper understanding of the value-creation process
and, quite importantly, to analyze the interactions between the various
control systems used by the actors in the network; secondly, survey-like
studies capable of mapping synthetically different network configurations
and management control systems could help to capture on a larger scale the
impact of the former on the success or failure of value-creation processes.
Finally, another interesting research avenue would be to study the
knowledge and competence dimension behind value creation and the
opportunities and barriers thereof. Some of the issues faced in this paper
point in the direction of knowledge issues, such as routines, accounting
systems and organizational interfaces, but more specific research is certainly
necessary and the framework on resource interfaces proposed in this paper
could be a useful starting point.
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CREATING SUPERIOR VALUE
THROUGH NETWORK OFFERINGS
Bernard Cova and Robert Salle
ABSTRACT
This paper draws on the experiences of project marketing and solution
selling to improve the understanding of how to create superior value for
customers. Project marketing and solution selling have both developed
approaches to deal with complex marketing situations for a number of
years now. The upstream mobilization of customer network actors and the
downstream enlargement of the content and scope of the offering are the
key features of these approaches.
This paper presents two case studies to focus attention on elements that
are crucial to this twin-track approach. The downstream extension of the
offering relies on services supporting the customer’s action (SSC), which
supplement traditional services that support the supplier’s product (SSP).
The upstream extension leads to an introduction to other types of services
or elements of the offering – the services supporting the customer’s
network actors (SSCN).
Furthermore, the paper proposes a marketing process that takes the
supplier’s viewpoint, for whom the entire approach is a network
mobilization, into account. This approach to the offering, which included
SSP, SSC, and SSCN, is typical of a network strategy in which the
supplier recruits and enrolls new actors to (re)model the buying center.

ISSN: 1069-0964/doi:10.1016/S1069-0964(08)14009-1
317
318 BERNARD COVA AND ROBERT SALLE
This marketing process is in tune with the latest developments of the

service-dominant (S-D) logic, as it proposes a move from the value chain
toward a value-creation network/constellation. Consequently, creating
superior value for customer means mobilizing and servicing actors far
beyond the boundaries of the buying center, supply chain, and customer
solution net.
1. INTRODUCTION
The change from the simple idea that a company transfers value to its
customers to meet their needs to the more complex idea that a company can
co-create value with its customer to improve its competitiveness nurtures
industrial marketing theory and practice. The IMP Group’s (Hakansson,
1982) interaction approach represents the catalyst for such a transforma-
tion. The interaction approach now includes the basic principles of the
service-dominant (S-D) logic (Lusch & Vargo, 2006a). This logic emphasizes
that experiences and relationships, especially in the cocreation and sharing
of resources, create customer value. Thus, interorganizational collaboration
in value-production appears highly relevant to understanding 21st century
business marketing in which suppliers and customers’ traditional roles are
becoming more complex and intertwined (Möller, 2006). Currently,
industrial marketing is indeed less about meeting customers’ needs and
more about identifying their latent needs or even creating these needs.
Consequently, suppliers’ strategy is not just to achieve value-added delivery
but also to look for superior value creation for their customers by involving
them appropriately in a co-construction process.
This type of approach is not new. For a number of years, companies in
two particular fields have mostly been responsible for developing such an
approach. The two fields – projects-to-order and solutions – also depict the
complexity of the marketing situations encountered. These ideas are thus
familiar ones for researchers and consultants involved in project marketing
since the early 1980s (Cova, Mazet, & Salle, 1993), as well as marketing and
selling of solutions since the middle of the 1990s (Bosworth, 1995). It would
seem relevant to further examine these two types of companies, their trends,
and marketing practices if one aims at an improved understanding of how to
create superior value for customers.
This paper first presents the history and key concepts of project marketing
and solution selling. The paper then clarifies the common and divergent
points between project marketing and solution selling to produce an initial
Creating Superior Value through Network Offerings 319
reference framework for the creation of superior value. Thereafter, two

recent case studies illustrate this framework, highlighting those elements
that are crucial to the creation of superior value. Finally, the paper
summarizes the reference framework and the case studies’ contributions in a
process model for the delivery of superior value. The model builds on
mobilizing the actors in the customer’s network.
2. PROJECT MARKETING AND SOLUTION SELLING:

HISTORY AND KEY CONCEPTS
To correctly define the contribution of each of the two research streams

identified, as well as their potential parallels, the paper first presents an
examination of the theoretical progression governing them both over the
last two decades.
2.1. Project Marketing
Firms in industries such as aerospace, construction, shipyards, engineering,

etc., are firms that do not conceive, produce, and sell either products or
services, but projects. These firms thus operate in project business, very
closely related to solution business, which is all the rage today (Artto &
Wikström, 2005). Project marketing is an approach focusing on ‘‘a complex
transaction covering a discrete package of products, services and other
actions designed specifically to create capital assets that produce benefits for
the buyer over an extended period of time’’ (Cova & Holstius, 1993, p. 107).
Project marketing’s very definition emphasizes, that a project is something
other than a simple assembly of products and services. In this sense, project
marketing is already close to the S-D logic that Lusch and Vargo (2006a)
have presented.
What does a project typically comprise? It is a transaction comprising a
process of interactions between a supplier and a customer, which has
financial, technical, informational, and social dimensions (Hakansson, 1982).
‘‘A project is a long-lasting, negotiated and interactive process’’ (Cova &
Holstius, 1993, p. 108) that includes numerous phases and interventions from
numerous actors from a variety of origins (e.g., from and around the supplier
firm, from and around the customer firm). All these actors together form a
project network (Dubois & Gadde, 2000). Throughout the process, the
different actors interact in one way or another to shape a project. As these
projects are very often both unique and complex, prior definition of the
entire project is impossible. These projects therefore give rise to a long

process of cocreation in which the different actors participate to a greater or
lesser extent. Very often, the actors create frames to accommodate the
ongoing and future interactions linked to the realization of a project. These
frames are called interfirm linkages (Cova & Holstius, 1993, p. 110) and
encapsulate the interactions between the supplier and the customer ‘‘or an
entity of his network’’ (Cova & Holstius, 1993, p. 110). These kinds of
agreements can not only be formalized but also non-formalized, and can be
legal or illegal, or verging on illegality.
This representation of a project provided the building blocks for project-
marketing theory (Cova & Salle, 2007; Skaates & Tikkanen, 2003). This
theory results in researchers not only focusing their attention on the offer
specificities and project production – as service marketing specialists usually
do – but rather more on the specificities of the stakeholders in this type of
transaction (i.e., the actors in a project network). Researchers stipulate
(Bansard, Cova, & Salle, 1993) that in business-to-business (B2B), a double
fragmentation of the buying center and selling center distinguishes a project
activity from other activities. This fragmentation leads to a multitude of
possible interactions between the actors of these two fragmented centers.
Such interactions show (Cova, Mazet, & Salle, 1996) that the fragmentation
leads to an awareness of these actors’ importance in the buying process. The
latter is true for business and nonbusiness actors alike. In one way or
another, these actors participate in the process and by making the same
decisions (e.g., initiating or kicking off a project, defining a project, setting
up a purchasing procedure, determining specifications, selecting suppliers).
Consequently, such actors introduce concepts to develop awareness of this
type of network that evolves over time – they refer to the milieu (Cova et al.
1996) or a project horizon (Tikkanen, 1998).
This representation of a project as a complex transaction also leads
researchers to investigate its evolutionary character (Cova & Crespin-Mazet,
1997; Skaates & Tikkanen, 2003), as a project is neither a piece of data nor a
predetermined form with which the actors can play. A project is a continually
evolving construct, a co-construction of the actors involved. A project is a
transaction that is well and truly a cocreation destined to produce value for
all the actors who ensure that their preoccupations and ideas are taken into
consideration.
This idea of co-construction applies throughout the process and at every
type of decision, including the definition of the project and its specifications.
According to Cova and Crespin-Mazet (1997), instead of project activities
being subservient to requirement specifications transmitted through the bid

to tender procedure, their dominant idea is joint construction of the demand
through the supplier and other actors. ‘‘[C]urrent marketing strategies in
project business mostly aim at constructing or deconstructing the demand
with the customer, relying in particular on the very long definition,
implementation and completion process of the project (three years on
average)’’ (Cova & Crespin-Mazet, 1997, p. 350).
2.2. Solution Selling
The history of approaches to the marketing and selling of solutions dates

back to the USA (Young Byun & Smith, 1990), where the concept of system
selling first appeared at the start of the 1960s. System selling made
differentiating possible between simple product or service offerings
(Hannaford, 1976; Mattsson, 1973; Page & Siemplenski, 1983). In the US
managerial literature, a research stream appeared from the 1980s onward
that expressed systems selling in a broader perspective that encompassed all
the activities of the targeted customer. Thereafter, the notion of consultative
selling (Dunn, Thomas, & Lubowski, 1981) designated suppliers’ new roles.
Suppliers are no longer just good for selling a product to a customer, but are
consultants who assist their customers in making their activities grow.
Consequently, a combination of products and services is no longer a
sufficient answer to the customer’s needs. Redesigning and reengineering the
customer’s processes require the implementation of consultancy and
expertise. The idea of solutions finally appears, in solution-selling approaches
from the 1990s onward, principally in the capital goods sector, in software-
intensive capital goods sectors, and in sectors delivering complex product
services.
At the end of the 1990s, solution selling (Bosworth, 1995) developed
toward solution marketing. Consequently, solution selling builds as much
on the anticipation and construction of customer needs as on the
mobilization of pertinent actors in and around the customer to generate
integrated solutions. Such integrated solutions are thus projects for the
customer as much as for the supplier. Similar to projects, solutions are not a
simple group of products and services, which, ‘‘bundled together, may give
some increased margins in the form of savings, efficiency, lack of
redundancy, and so on but . . . don’t create new value’’ (Sharma & Molloy,
1999, p. 2). On the contrary, solutions bring an exceptional value.
3. PARALLELS AND REFERENCE FRAMEWORK
The parallel histories of project marketing and solution selling present

common and divergent points (Cova & Salle, 2007) that, if identified, can
assist in building a common framework that companies looking to create
superior value for their customers can use as a reference.
3.1. Project and Solution Transactions
To understand the buying process in a B2B context, researchers rely on two

key concepts: the buying cycle (the phases of the buying process) and the
buying center (members involved in the phases). A high level of risk
characterizes the new buy situation that customers enter when buying
complex items such as projects or solutions. To better understand this
situation, a summary is provided of the literature on buying processes and
buying centers for complex items such as projects and solutions. This leads
to the underlining of a key feature of the buying process for complex items
such as discontinuity.
3.1.1. Buying Center and Transaction Cycles

The long tradition of research on organizational buying behavior has
produced a huge body of knowledge in the B2B field. Many scholars have
demonstrated the role played by what has been termed the buying center
(Webster & Wind, 1972) in the taking of decisions related to present or
future exchanges between suppliers and customers. The past 30 years of
research on organizational buying behavior (Johnston & Lewin, 1994) has
demonstrated that much of the variation in the characteristics of the buying
center appears to link to the level of risk associated with the complexity of
the buying decision.
The two characteristics of the project buying network are: (1) the extreme
complexity of the transaction, which leads to a high level of risk associated
with the purchase situation; and (2) the extreme division of the buying center
into several participating entities originating from both inside and outside
the buying organization (e.g., consultants, banks, engineering firms,
government officials,) (Bansard et al., 1993) that constitute the network of
actors around the buying organization, characterize project, and solution
buying. These two characteristics thus structure the project buying network
(Owusu & Welch, 2007). In other words, other entities within – and
sometimes outside – the organization fulfill the different functions that the
departments within the buying company fulfill if purchases are of low

complexity. Each of these entities is likely to have its own, rather parochial,
view of the expected value required on the project – a view that often
conflicts with those of other entities (Anderson & Chambers, 1985). Tuli,
Kohli, and Bharadwaj (2007) note that one of the major factors affecting
solution effectiveness is the customer’s capability to politically counsel the
supplier concerning its buying center: ‘‘political counseling helps a supplier
better understand the priorities of the various stakeholders in a customer
firm. This enables the supplier to define the customer’s requirements in a
more complete and nuanced manner’’ (Tuli et al., 2007, p. 12).
Cova (1990) conceptualizes the project buying process as a long-lasting,
negotiated, and interactive process that included 15 stages: (1) need
awareness, (2) research on suppliers and contact for advice, (3) specifica-
tions, (4) bidders’ list, (5) request for proposals, (6) exchange of information,
(7) analysis of proposals, (8) shortlist, (9) negotiation, (10) new proposals,
(11) analysis of new proposals, (12) negotiation, (13) final assessment, (14)
final selection, and (15) contract. A project buying and marketing cycle is a
suggestion that attempts to combine the supplier and customer’s perspec-
tives (Cova & Holstius, 1993, p. 111). This cycle integrates the 15 stages of
the buying process into a 6-macro phase cycle (Holstius, 1987), for which the
project management cycle was the inspiration, while going further in the
postcontract stages:
(A) the search phase (stages 1 and 2);
(B) the preparation phase (stages 3–5);
(C) the bidding phase (stages 6–8);
(D) the negotiation phase, which starts at the opening of the bids and
concludes with the signing of the contract (stages 9–15);
(E) the implementation phase, which takes place between the buyer and
seller during the identification and solving of occurring problems; and
(F) the transition phase, which involves evaluation of the project and the
building of knowledge and experience for the future.
This project transaction (marketing and buying) cycle is self-renewing:
each phase leads to the next one and the last phase produces new
approaches and ideas, and results in the identification of new projects
(search phase). This project transaction cycle (Cova & Holstius, 1993) is a
means of differentiating between complex and simple item transactions
(goods and services). The scope of the cycle is generally more limited in
respect of transactions dealing only with goods and services, and wider when
complex items are involved. Indeed, the stages in the project buying and
marketing cycle that are relevant to all transactions are bidding (C) and
negotiation (D). As has been thoroughly determined (Hakansson, 1982),
most industrial transactions that cover goods and services need an
interaction between a buyer and a seller. Consequently, some of the aspects
of preparation (B), implementation (E), and transition (F) may also be
relevant in this case. However, complex item transactions, such as project
transactions, are the only ones that always have to experience the full range
of the cycle from A to F (Cova & Holstius, 1993).
Examining complex item transactions through the perspective of solutions,
Sawhney (2006) identifies the customer activity cycle as the temporally linked
sequence of activities in which customers engage to solve a complex problem.
This cycle consists of three phases (Sawhney, 2006, p. 372):
Pre or before: when customers are deciding what to do to get the desired
result – searching, deciding, acquiring;
During: when customers are doing what they decided on – installing,
using, operating; and
Post or after: when customers are keeping things going – reviewing,
renewing, extending, upgrading, and updating.
Tuli et al. (2007) examine solution transactions as ‘‘a set of four relational
processes’’ (Tuli et al., 2007, p. 5):
Requirement definition: customers are not fully cognizant of their business
needs and should have discussions with the supplier to elaborate them;
Customization and integration: customization involves designing, modify-
ing, or selecting products and services to fit a customer’s environment and
integrating them into a coherent whole;
Deployment: it refers to the delivery of the integrated solution and its
installation within a customer’s environment; and
Post-deployment support: it is more than providing spare parts, operating
information, and routine maintenance; post-deployment support also
includes deploying new solutions in response to customers’ evolving
requirements.
On the whole, these studies call for a comprehensive framework of

complex items’ transaction cycle. Table 1 provides an indication of such a
framework’s conceptualization and furthermore enables differentiation
between simple and complex transactions. Simple transactions cover two
phases of the cycle (proposition and negotiation) that lie at the core of the
transaction, while complex transactions cover the entire cycle spectrum.
Table 1. A Comparison of Complex Transactions Cycles.

Phases Cycle
Cova and Sawhney (2006) Tuli et al. (2007)

Holstius (1993)
Search Search Pre or before Requirements definition

Preparation Preparation Pre or before Requirements definition
Customized and Bidding Pre or before Customization and
integrated proposition integration
Negotiation Negotiation Pre or before Customization and
integration
Deployment Implementation During Deployment
Post-deployment Transition Post or after Post-deployment
3.1.2. Discontinuity as a Key Feature

The supplier and customer’s need to deal with discontinuity is the main
explanation for the complex transaction cycle’s unique characteristics. In
turn, discontinuity results from a low-purchasing frequency. The latter is
often characteristic of these kinds of complex transactions (Hadjikhani,
1996). Understanding a low-purchasing situation by using Hakansson’s
(1982) classification of interactive processes becomes possible. This
classification combines two dimensions: one describes the nature of the
episodes (simple/complex) and the other the relationships (limited/extensive).
Complex transactions relate to the projects and solutions that arise from
complex episode situations within limited relationships. As Hakansson
(1982) points out, ‘‘the episode must be a complete business transaction in
itself; no stages can be left out because the relationship is limited’’ (p. 279).
Consequently, the coordination of exchanges between the supplier and the
customer cannot build on routines developed during previous episodes and
within the framework of an existing relationship. Thus, ‘‘the complexity
within the episode, the need for taking care of all problems within it, and the
need for social exchange all together require a careful planning of the
exchange’’ (Hakansson, 1982, p. 279). The supplier and the customer
therefore integrate the upstream and downstream phases in the transaction
cycle. Conversely, however, in extensive relationship situations, ‘‘the
episodes become part of the relationships. The companies do not have to
solve all the problems within the episode because the relationship is used as
insurance’’ (Hakansson, 1982, p. 279). If the analysis builds solely on a given
transaction, this means omitting some of the transaction cycle phases that
are actually embedded in the supplier–customer relationship.
3.2. Project and Solution Marketing Approaches
Given the low transaction frequency of complex purchases, marketing

approaches in the field of projects and solutions are interpretable as a means
of limiting the supplier–customer relationship discontinuity. The paths
chosen will depend on the possibility of increasing the transaction frequency
in the transaction cycle’s upstream and/or downstream phases. Two
different situations are possible:
In terms of either a system or associated services, the transaction
frequency with a given customer is low and impossible to increase.
Consequently, this lack of frequency contributes to the maintenance of
the relationship discontinuity. In this case, the supplier’s principle lever is
reliance on anticipated upstream actions. The aim is to detect projects well
upstream of the consultation phase by relying on contacts within the
entire group of actors who are directly or indirectly in contact with
customers who have projects. This is typical of the approach in project
marketing (Cova, Ghauri, & Salle, 2002).
By increasing the transaction frequency, it is possible to develop the
continuity in the relationship. The supplier can therefore develop an
approach that concentrates on services that enable an intervention with
an installed base solution like maintenance or revamping actions (Oliva &
Kallenberg, 2003; Wise & Baumgartner, 1999). Setting up these
approaches through services stems from a downstream logic (Wise &
Baumgartner, 1999).
A more detailed discussion of these two situations follows.
3.2.1. Project Marketing: An Upstream Approach

Research into the project marketing (Günter & Bonaccorsi, 1996; Cova &
Salle, 2007) of the two last decades has demonstrated that in terms of
responding to invitations to bid, project marketing extends well beyond the
tactical considerations associated with competitive bidding. In this respect,
project marketing encompasses an activity that one can illustrate in terms of
the strategic options available to a supplier at three key stages of project
development (Cova et al., 2002):
Outside any project opportunities: when the firm establishment of a specific
requirement has yet to occur, thus requiring the supplier to anticipate
and/or create the competitive arena in conjunction with other potential
participants. At this stage, the supplier tries to develop a relational
position in the network (or milieu). Such a position is made up of

relations between business and nonbusiness actors, who are potential
stakeholders in pending projects;
Upstream of the project (pre-bid): when the contractor aims to anticipate
and/or build a project’s expected value in conjunction with the customer
and other influential actors. At this stage, the supplier tries to secure its
relational position in the network of actors around the pending project
(i.e., the project network); and
Inside the project (bid preparation): when the contractor accepts the
established value or seeks to have this rebuilt in order to compete on more
favorable terms. At this stage, the supplier tries to mobilize all its relations
in the network of actors inside and around the buyer (i.e., the buying
network).
Thus, to take the high level of uncertainty relating with low transaction
frequency into account, project marketing toys with anticipation by relying
on relationship elements. Project marketing also takes the complexity and
fragmentation of a buying center into consideration (many actors are
involved: individuals, organizations, business, and nonbusiness actors) when
defining offerings. In order to cope with the characteristics of all the possible
recipients of the value in the buying network, the offerings are of a
multilevel nature (Cova et al., 2002).
Companies dealing with a project use four levels of offering: (1) the
technical/functional offering, which includes products, services (technical
assistance, after sales, training), work, etc.; (2) the financial/contractual
offering, which includes financial terms (price, conditions of payment,
revision formulae, etc.), contract conditions (warranties, hardship clauses,
etc.), as well as details of any financial arrangements (barter, countertrade,
and buyback), and contractual arrangements (Built–Owned–Operated–
Transferred, joint-ventures); (3) the political offering, including formal and
informal agreements between local partners, details of local investments,
and, generally speaking, all investments made by the supplier within the
customer’s milieu to improve his political position; (4) the societal offering,
including all actions taken by the supplier to improve his or her position with
civilian groups with an interest in – or against – the project (associations,
users, and inhabitants).
3.2.2. Solution Selling: A Downstream Approach

According to Wise and Baumgartner (1999, p. 133), companies ‘‘have
moved beyond the factory gate to tap into the valuable economic activity
that occurs throughout the entire product life.’’ In this downstream

movement, firms increasingly incorporate services and evolve to solution
offering. Companies transform their structure and their operational means
to move on from a product-centric logic to a customer-centric logic
(Galbraith, 2005). The literature on offering strategies translates this
evolution, identifying two main dimensions for organizing the evolution:
The dimension around the offering content and, more particularly, the
service dimension of offerings. This dimension explains the offering’s
degree of integration within the customer value chain.
The dimension around the combination of the elements comprising these
offerings and, more specifically, these elements’ degree of integration and
bundling with one another, which gives rise to a unique and indissociable
whole.
In respect of the first dimension, the supplier must ‘‘examine all the
activities the customer performs in using and maintaining a product
throughout its life cycle, from sale to disposal’’ (Wise & Baumgartner, 1999,
p. 135) to increase the extent to which an offering integrates the customer’s
value chain. Such an examination results in the identification of the offering
elements according to the direct recipient of the offering. The identification
occurs by means of the following two divisions (Mathieu, 2001): First,
services supporting the supplier’s product (SSP). SSP ensures the proper
functioning of the product and/or facilitates the customer’s access to the
product. Second, services supporting the customer’s action (SSC). SSC
supports specific initiatives and advances the customer organization’s
mission.
It, therefore, is possible to distinguish SSCs from SSPs, as the former’s
involvement is increasingly downstream from the supplier’s actions. SSC
involvement particularly includes services that support the customer during
the R&D (services centered on the application), during the production phase,
and during the commercial phase. In the field of capital goods equipment,
Oliva and Kallenberg (2003) completed the process of differentiating
between constituent elements by distinguishing services according two
dimensions: (1) the nature of the direct recipient, which recalls Mathieu’s
(2001) distinction built on product-oriented services versus end-user process-
oriented services; and (2) the temporal logic implemented in the offering, or
transaction-based services versus relationship-based services.
The second dimension perceives service as a means of perpetuating the
relationship with the customer. Nevertheless, the combination of these two
dimensions leads Oliva and Kallenberg (2003) to define four types of
services that constitute an offering: (1) installed-based services (transaction-

based and product-oriented), (2) maintenance services (relation-based and
product-oriented), (3) professional services (transaction-based and end-user
process-oriented), and (4) operational services (relationship-based and end-
user process-oriented). With regard to the second dimension, the supplier
can play with the type of interdependence between the constituent elements,
thus increasing their degree of integration. Wise and Baumgartner (1999)
propose three types of service offerings that support successful downstream
business models:
Embedded services: this is an offering where components or subassemblies
are linked, for example, through information technologies. The service is
therefore an integral part of the product;
Comprehensive services: these are services around the product that will
ultimately manage the operations that the customer outsources. This type
of offering creates a strong interdependence between the supplier and the
customer, thus facilitating future sales; and
Integrated solutions: this is an offering that combines products and
services into a seamless offering that addresses a pressing customer need.
Of these three business models, the one that appears to offer the highest
level of integration is integrated solutions. The degree of integration is
extreme, both with regard to the variety of combined elements and degree of
interdependence of these elements (Galbraith, 2005; Davies, Brady, &
Hobday, 2006; Sawhney, 2006). This is the business model that Galbraith
(2005) recognizes as the most customer-centric one. Solutions are therefore a
unique combination of numerous elements that contribute to producing
value for the customer (Stremersch, Wuyts, & Frambach, 2001). Conse-
quently, solutions are the type of value proposition that best marries the
evolution toward greater integration in the value chain and greater
integration of the elements that constitute the offering.
3.3. A Reference Framework
In conclusion, a convergence occurs between project-marketing and solution

marketing approaches. Given the complexity and discontinuity of the
transactions, value creation for the customer relies on the supplier taking
account of the actors involved in the buying process – by going beyond the
sole customer (i.e., by joining all the actors of the buying network) – as well
as on a broadening of the supplier’s offering in terms of content and scope.
The latter enables the supplier to possess those resources required to interact
with the buying network actors in all the phases of the transaction cycle.
Superior value creation for the customer should therefore build on a
marketing process that facilitates both extensions.
Interpreting this twin-track extension in terms of offerings is possible. The
downstream extension of the offering relies on what Mathieu (2001) called
SSC. The upstream extension leads to an introduction to other types of
services or elements of the offering (Cova, Dontenwill, & Salle, 2000) – the
services supporting the customer’s network actors (SSCN). For the latter, it
is not a matter of according favors to facilitate the influence of a specific
actor in the network surrounding the customer, but rather of real
complementary offerings. These are therefore additional services included
in the supplier’s proposition. Such services are not separate elements, but
part of a value proposition dedicated to the actors of the customer network.
These services are therefore a network offering that allows the reconstruc-
tion, or rather the remodeling, of the buying center. By mobilizing the
different actors who can consider the value proposition of these elements of
the offering, it is possible to achieve this remodeling. It is in truth more an
issue of cocreation of value with these actors by combining downstream and
upstream approaches: broadening the content and scope of the offering
while enlarging the buying center.
The approach of the offering, which included SSP, SSC, and SSCN, is
typical of a network approach in which the supplier recruits and enrolls new
actors to remodel the buying center. The supplier is not seeking influence
simply through relations – which could be close to influence peddling – but
tries to create value for business and nonbusiness actors in the customer’s
network. Consequently, the supplier cannot rely on a predetermined
offering that corresponds exactly with the ideal product or service. It is
rather a question of a polymorphous offering that adequately reflects the
customer and his network’s needs. All the elements of the offering that
the supplier is going to accumulate are destined to produce value for the
customer firm and the specific actors within or around this firm.
Works on integrated solutions very rarely take SSCN into consideration
(Windahl & Lakemond, 2006). However, very recently, scholars promoted
the concept customer solution nets (Möller & Rajala, 2007) that constitute
specific partner constellation of companies with complementary resources
and competences. However, these companies only originate from the supply
side when the SSCN concept takes actors, who originate from both the
supply network and the customer network, into account. Indeed, SSCN are
difficult to integrate in a reasoned definition of the offering as a coherent
whole, as they are polymorphous constructions by nature (Cova et al.,

2000). Moreover, very often, but not systematically, SSCN seem to reveal a
societal side to the offering – actions proposed by the supplier to improve
the situation of certain actors or groups of actors who have a say in the
project, whether this is positive or negative (Miller & Lessard, 2000).
4. CASE STUDIES
To illustrate the twin enlargements of the scope of the offering and the
number of buying center actors in the value creation of companies working
with business or solutions, two case studies are offered: BATIR and the 2012
Olympic Games. Case study research is extensively used in B2B marketing to
examine the decisions and behavior of groups and individuals within
organizations and in intercompany relations (Dubois & Araujo, 2004;
Dubois & Gadde, 2002; Halinen & Törnroos, 2005). This method aims at
examining complex issues in a systematic, combining approach (Dubois &
Gadde, 2002). Specifically, this method builds on the study of two cases
concerned with the given phenomenon. The main objective of the research is
to achieve a deep understanding over time (Woodside & Wilson, 2003) of the
actors, interactions, and behaviors during the specific process of offering
strategies aimed at providing projects or solutions.
The first case (BATIR) is part of a long-term program of action research
that the authors undertook with major companies operating within B2B
markets. Interviews with three managers, who took part in the process
under consideration from the supply side, were the main source of the data
collection. The researchers held and tape-recorded these long interviews on
site, remaining with the supply company for several days; this aided the
understanding of the overall context in which the marketing actions took
place. The second case (2012 Olympic Games) describes an extreme
situation. Archival material from the different newspapers that covered the
situation during 2005 was the source of the data collection. Furthermore,
the researchers gathered information from the two major competitor
countries to ensure objectivity.
4.1. Case 1: BATIR and the La Roche Project
BATIR is a small building–contracting firm in the south of France founded

by André Béca. Béca lives in La Roche, a village in the south of France with
3,500 residents. La Roche is situated on an island in the Rhone River.

Through his profession and as a resident of La Roche, Béca is in contact
with Jean Lay, the only realtor in the village. Lay handles land management
and property transactions. Through his professional experience, Lay has
acquired a good knowledge of the way local players operate, which enables
him to hear about land and property opportunities as soon as they become
available.
One day in 1999, Lay told Béca that, ‘‘An extraordinary opportunity has
come up. The La Roche town council is putting the village stadium up for
sale. Numerous companies and craftsmen are sure to target this sale.’’ It is
important to point out that in this village, well-situated plots were rare and
that the sale of approximately 18,000 m2 of potential residential area was a
rare occurrence. Moreover, La Roche village was attractive to potential
residents as it is well-provided with shops and schools, has a swimming pool,
a lake, etc. The call for tender was published and advertised. Lay intended
to answer this call for a tender together with Béca. The bid had to be
submitted by September 1999.
The announcement of the sale of the football stadium for housing plots
generated much discussion in the village. The villagers soon started to
complain about the construction that they would have to endure. They
discussed the matter with the mayor and the municipal councilors. They also
went to see Lay, as they felt that he, as the only realtor in the village, should
keep them abreast of any property development project. The villagers were
very worried.
Lay asked the residents of Les Risées, the housing estate bordering the
stadium to the north, whether they wanted to buy plots. No one was
interested. Thereafter, Béca suggests Lay that: ‘‘Go to see them individually
and ask them whether they are interested in extending their land by buying a
strip of stadium land at the purchase price.’’ Lay did as requested and
discovered that six of the eight residents of Les Risées were indeed interested
in this proposal. Consequently, the six owners became supporters of the
project and regularly visited the town council to lobby for the project on
behalf of Lay and Béca. The company of the latter two was the only one of
all those in the running for the project to offer a proposal that was
acceptable to them.
The reasoning behind Béca’s proposal was that, ‘‘If there is one
competitor to oust, it is the Crédit Immobilier Promotion (CIP). The CIP
is very powerful, as it has built more than half of the housing estates in the
region. Furthermore, the CIP’s strategy is to have the maximum number of
plots on which to construct detached houses and to achieve maximum
profitability. I therefore need to plan a different project, because if I play the

same game as the CIP, I am sure to lose. I play by instinct. I am going to put
my stakes on people who are close to me: the mayor and the manager in
charge of the town council project. However, I don’t feel close to the
manager in charge of La Roche’s technical infrastructure. I have a feeling he
has received kickbacks!’’
All interested parties submitted tenders in October 1999. The town
council would ultimately approve the design of the buildings through its
building permit. Eventually, seven property companies were on the list of
final candidates charged with the land development. BATIR’s main
competitor was CIP, which had built nearly 60% of the buildings in the
region, and which the Crédit Immobilier Bank would underwrite. The
submitted projects all had one common characteristic: they wanted to
maximize the use of the land. Most suggested a herringbone design.
However, this type of construction is problematic, because it is very difficult
for garbage collection trucks to do their rounds, as they have to maneuver a
difficult U-turn. From the beginning, BATIR’s design of project integrated
large roads and a ring-shaped access road. There would therefore be no need
for garbage trucks to make U-turns. This element was important, as the
residents would otherwise have to put their garbage at a collection point at
the entrance of the housing estate. Numerous discussions followed to
explain the project to the town council and to illustrate the reasoning behind
certain points in the design.
Thereafter, the town council of La Roche carried out a comparison of the
submitted projects. A period of intense followed between the town council’s
own planning department, the competitors still in the running, and the
village residents. After several reviews, two projects remained: those of the
CIP and BATIR. The town council’s technical manager tried to put a
spanner in the works. With a view to future elections during which he hoped
to further his ambition, he opposed the existing town council’s plans. He
began to challenge the mayor and set up his own team of candidates.
Nevertheless, at the beginning of 2000, BATIR won the contract.
The BATIR approach had technical, financial, and, specifically, political
dimensions. Over and above this, the societal offering also encompassed
procedural construction – the different groups of nonbusiness stakeholders
who emerged in reaction to the La Roche project. Furthermore, there was
the specification document, as the contractor presented it, as well as the
project’s hidden agenda. The ongoing process emerged progressively with
the materialization of noncustomer actors as they started voicing their
concerns and desires to the mayor. One of their concerns was the translation
of certain residents’ (Les Risées housing estate) desire to conserve the

quality of their personal environment as it had always been prior to the
project. By taking this group of players into consideration, it becomes
obvious that the personal interests of all the players are largely similar.
Other inhabitants (the south housing estate Lotissement Sud) did however
have a particular desire. They wanted to take advantage of the situation to
obtain a strip of land that would enhance the value of their property. This
group of actors’ personal interests are therefore along the same lines as those
of the first group, although they do differ. In both cases, the emergence of
noncustomer actors demolishes the boundaries of the buying center, thus
enlarging it.
BATIR chose to follow a scenario that the societal part of their offering
stipulated: to respond to the concerns of the first actors and not to those of
the second group. They recognized the value of bringing the nonbusiness
actors into play. They did this in a reactive manner by means of permanent
adaptation: alignment with and empowerment of the noncustomer actors of
the Risées. The societal part of the BATIR offering was not sustainable
development for the village community as a whole, but rather development
of the interests of several specific nonbusiness stakeholders. This part of the
offering enabled BATIR to develop a good relational position with regard
to the project. All these aspects of the offering were effective mechanisms for
achieving a differential advantage and a better alignment with emergent
parties in the network.
4.2. Case 2: The 2012 Olympic Games
This case concerns the July 2005 allocation of the 2012 Olympic Games to
either Paris or London. At the outset, Paris seemed to have a head start as
the June 6 report of the IOC Commission awarded Paris the highest marks
of the five candidate cities (London, Paris, Madrid, New York, and
Moscow). The Paris application was also the only one to obtain full marks.
In contrast, there were serious doubts whether London’s Olympic Park
project would meet the deadline.
The Commission report noted that the French were staking their
candidacy on scrupulously following of a 2003 IOC report’s recommenda-
tions on ways to reduce the cost and complexity of the Games. Since
assuming the presidency of the IOC, Jacques Rogge had pushed for cheaper
and smaller Games to encourage less industrialized countries to attend.
Awarding the 2012 Games to a project as compact as that which Paris
presented, would be a clear signal from President Rogge. This was not,
however, to be. London, with a budget four times larger than that of Paris,
obtained the Games.
As expected, the French blamed everyone but themselves for the
International Olympic Committee’s failure to select Paris as the 2012
Games host. The French sports daily L’Equipe, which almost functioned as
the official newspaper of the Paris bid, reported in a front-page editorial that
London had used loopholes in the bidding rules to win. The newspaper
accused London of going beyond propriety in aggressive marketing and
pure demagoguery. L’Equipe specifically cited the London vision of using
the Olympics to encourage children in Britain, as well as in underdeveloped
countries worldwide to practice sports. Only Essar Gabriel, the young (39)
chief operating officer of the Paris, bid seemed to understand the power of
London’s message. ‘‘They took a risk with a vision of universality that went
beyond what we perceived as the vision of the IOC, and it worked.’’
Whereas Tony Blair booked two lifts in his hotel in Singapore in which he
and Sebastian Coe would welcome his guests, who included 40 members of
the IOC, the French President Jacques Chirac slammed British and Finnish
food. Paris lost by two votes; Finland has two IOC members. ‘‘The Finnish
delegates are very proud of their national food,’’ said London Mayor Ken
Livingstone. ‘‘It could have been that.’’ For some observers, the technical
quality of the application was less important than the charm offensive aimed
at members of the Committee, as well the other applicants’ political and
economic interests. In addition, Paris failed to match the Commonwealth
votes (26 votes in the Committee), as the French are almost absent from the
IOC corridors of power. France only has 3 active members out of a total of
125 and one honorary member out of a total of 21.
Beyond the errors in the French strategy and those of its president, the
difference in the different stakeholders’ perceptions of the co-construction
process is striking. Paris honed in on Jacques Rogge, whereas London tried
to interact with as many IOC members as possible. This led Henry Kissinger
to remark that, ‘‘the French have not understood what the IOC is.’’ London
constructed initiatives and local projects far beyond the single organization
of the 2012 Olympic Games with each of the IOC members – which does not
appear to be corruption, despite the clumsy insinuation by Bertrand
Delanoë, the mayor of Paris. Similarly, it is striking that while Paris tried to
produce a value proposition in accordance with the customer’s expressed
needs, London drew on the implications for the customer and his or her
network: boosting and reaffirming the universality of the Olympic Games,
not by reducing the costs but by increasing their impact on the world.
5. TOWARD A GENERAL PROCESS OF SUPERIOR

VALUE CREATION
An analysis of the two case studies and subsequently comparing the analysis
with a reference framework – definable through the convergence of project-
marketing and solution-selling approaches – enable the presentation of a
marketing process for companies looking to create superior value for their
customers. The marketing process is possible by always taking the viewpoint
of the supplier for whom the entire approach is a network mobilization
(Mouzas & Naudé, 2007) paralleling the customer–supplier relational processes
(Tuli et al., 2007). At every step of the process, questions arise regarding the
approach to value creation to which the supplier and the customer network
actors have committed. The existing project-marketing and solution-selling
approaches sometimes provide answers to the following questions.
5.1. Identification of the Actors Around the Customer
How can suppliers ensure that their understanding of the customer network
actors’ [e.g., Mouzas & Naudé’s (2007)] vision is correct? What network
horizon should the supplier choose (Anderson, Hakansson, & Johanson,
1994)? Does one part of the network always remain invisible? Should the
supplier favor one type of actor (business or nonbusiness)? Is the network
position concept that Mattsson (1985) developed relevant in this case? Are
there no hybrid actors that belong to both the customer and supply
networks?
By focusing on the customer rather than on the market, the process of
getting to know and analyzing a customer network can benefit from the
general outline of the method that Johanson and Mattsson (1988) suggested.
This outline encompasses the following questions. (1) Who are the actors in
the customer network: business and nonbusiness actors? Which are the
important relationships between these actors and the customer? (2) What
are the relative positions of these actors in the customer network? What
are their roles? What possibilities do these actors around the customer offer
the supplier regarding access to the customer? This analysis leads to the
definition of the key actors in the customer network. (3) What are the
supplier–actor relationships in the customer network? (4) What incentives
would one offer the actors to mobilize in support of the supplier’s
breakthrough to the customer? (5) What methods can one employ to
mobilize in support of the supplier’s breakthrough to the customer?
In addition, suppliers should not only care about the visible network – the
socioeconomic actors (e.g., the customer, engineering company, bank, and
other institutions) – contractually involved in the buying process, but also
about the hidden network – the socioeconomic actors (e.g., the citizens, local
associations, and international organizations such as Greenpeace, oppo-
nents) – that could enter the buying process on a noncontractual basis.
Solution suppliers who do not grasp this phenomenon and who only
network visible actors may find themselves in the position of having only
managed half of the project network (Sahlin-Andersson, 1992). This is
where the approach becomes difficult, as the supplier has to enter the
network to learn more about the invisible actors. Consequently, it is difficult
for suppliers to plan this type of network approach in full. Suppliers
therefore have to be reactive and know how to evolve by considering events
as they occur.
5.2. Targeting Actors Around the Customer
How can the supplier choose the customer network actors with whom to
interact? How can one avoid turning to actors who are isolated and without
relationships, which is the traditional way of approaching influencers and
stakeholders? What should the basis for selection be: the actor’s importance
in the decision-making process, which is the reason for approaching
stakeholders in project management (Loosemore, 2006), or a fit/matching
process between the supplier and the actor? How can one integrate the
relationship between actors into the selection process? How can one
integrate the relationship between some of these actors and some supply
network actors into the selection process?
5.3. Identification of the Mobilizing Factors of Targeted Actors
How can one identify the aim of the potential value creation between the
targeted actor and the supplier? Can one base the value creation drivers on
the risks associated with any organizational buying behavior? Should
researchers consider each actor’s stakes more strategically? Recognition of
actors’ stakes refers to the process of identifying the factors that allow the
mobilization of certain of these targeted actors. This process involves several
levels: first, the overall corporate level of the actor concerned, thereafter the
functional level of a specific entity or department within this actor and,
finally, the individual level of a particular person within the actor.
The method that could be used on the actors in the customer network is
similar to that used in solution selling (Bosworth, 1995) and project
marketing (Cova et al., 2002). This method involves detecting what is not
going well with an actor and what the actor is as yet unable to identify or
face up to – a latent problem. There is a latent problem when, from their
perspective and building on their experience, suppliers observe a situation in
the actor’s organization that is inefficient or could lead to a potential
problem. This situation is the result of the supplier’s analysis, but of which
the actor is still unaware. The supplier’s dissatisfaction statement thus
indicates that the actor is facing a problem. Generally, the actor does not
know how to approach the poorly formulated problem.
5.4. Setting up an Approach to the Actors Targeted in the

Customer Network
How can the supplier contact the actors in the customer network when he or
she has not yet started any value-creation work with the customer? On what
does the supplier’s legitimacy to interact with these actors build? Should the
supplier use a third party to make contact with these actors? What grounds
can the supplier use to make the initial contact with an actor who has
neither asked for anything nor expressed a need?
5.5. Creation of Value with the Targeted Actors

Leading to their Empowerment
What level and form of investment can the supplier reasonably mobilize in
creating value with these actors? How can the supplier guarantee that the
investment will not be a total loss or, worse, an advantage for a competitor?
How can the supplier hand back power to these actors in their relationship
with the customer? What types of skills should the supplier promote
regarding the targeted actors?
5.6. Setting up a Value-Creation Approach with the Customer
How does the solution generated create value for all the parties involved?
How can the supplier define the relevant content of the integrated solution
and, especially, of the service dimension? How can the supplier define the
appropriate degree of integration and bundling of his or her offering?
6. CONCLUSION
Drawing from the experience of project marketing and solution selling, this
paper demonstrates the importance for the supplier of combining both
upstream and downstream approaches when developing an offering that
creates superior value for the customer. Through an upstream approach, the
supplier identifies all the actors in the customer network who could be
involved in the customer’s decision-making process and tries to understand
what is at stake for them. Through a downstream approach, the supplier
designs the content and the perimeter of an offering in such a way as to
customize it according to the stakes for these customer network actors. This
leads the supplier to develop SSCN.
The development of SSCN is in tune with the latest developments of the
S-D logic (Lusch & Vargo, 2006b), as it proposes a move from the value
chain toward a value-creation network/constellation. Such a move is break
from a goods-dominant logic. Consequently, creating superior value for
customer means mobilizing and servicing actors far beyond the boundaries
of the buying center, supply chain, and customer solution net (Möller &
Rajala, 2007). However, one could question the generalizability of such an
approach outside the realm of project and solution businesses. The growing
trend toward integrated solutions in all types of businesses (Stanley &
Wojcik, 2005) supports our call to expand the validity of this approach to
numerous other industries.
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COMPETENCE-BASED VALUE
FRAMING FOR BUSINESS-TO-
BUSINESS CUSTOMERS
Francesca Golfetto, Fabrizio Zerbini and

Michael Gibbert
ABSTRACT
This paper shows how business suppliers set up processes allowing the
translation of their competencies into value for the customers. As such, this
paper seeks to complement the dominant view in which competencies are
seen mainly as valuable for the firm owning the competencies but not for that
firm’s customers. In so doing, the paper seeks to contribute to two bodies of
research: the notions of core competencies in strategic management and of
value for customer in business marketing. These two bodies of research
interact infrequently thus far, leaving the question of how value is transferred
unanswered. This question is relevant because competencies are immaterial,
tacit, and non-tradable assets. Hence, the research question underlying the
present paper becomes: How can competencies translate into valuable
outputs and be made accessible to the customer? To answer this question, a
qualitative approach is used that involves a multiple-case study analysis
aimed at exploring the competence-based process of value supplying in
business markets. Specifically, this paper suggests the following propositions:
(1) Competence-based value analysis, where suppliers anticipate customers’

ISSN: 1069-0964/doi:10.1016/S1069-0964(08)14010-8
343
344 FRANCESCA GOLFETTO ET AL.
competence needs, require an end-market orientation. (2) Competence-

based value creation implies an accumulation of know-how that overlaps
with customer competencies. (3) Competence-based value communication
builds on live communication tools that allow customers to get an ongoing
experience of the value potential of competencies. (4) Competence-based
value delivery is based on bundles of suppliers’ competencies into tradable
means and direct access to competence tools.
1. INTRODUCTION
The generation of value for customer is a pivotal outcome in achieving

a primary supplier position and gaining superior performance (Ulaga &
Eggert, 2006; Woodruff, 1997). Accordingly, value for customer lies at the
heart of marketing strategy and the underlying implementation processes
(Srivastava, Fahey, & Christensen, 2001).
Business marketing scholars have progressively deepened the conceptual
domain of value for customer, moving from a narrow view of a monetary
dimension of benefits and costs (Shapiro, Rangan, Moriarty, & Ross, 1987)
to a broader view, including nonmonetary components such as social capital
and knowledge exchanges (e.g., Anderson & Narus, 1999; Ravald &
Grönroos, 1996). Furthermore, scholars have considered value sources lying
beyond the core offering, to include sourcing processes and customer
operations (Ulaga & Eggert, 2006). Finally, scholars have explored the time
dimension, arguing that value for customer goes beyond the immediate
product, to embrace the future value-producing potential of the supplier.
This school of thought has argued that, over time, throughout the buyer–
seller relationship, suppliers release complex bundles of knowledge and
skills. The shared competencies significantly contribute to support the
customers’ business, through long-term shifts from the efficiency (mainly
relate to the quality/cost ratio) toward the innovation functions of the
supplier (Möller & Törrönen, 2003).
The literature affirms that a competence-based content is the key to
generating and delivering value to customers in the long term. However, the
literature provides scant knowledge about the processes through which
business suppliers actually convert their competencies into valuable
offerings that the customer can access. Although value supplying is a
well-established process in business marketing (Anderson & Narus, 1999),
little theoretical and empirical development exists in regard to how such
a process can be adapted when its content is relate to competencies, or
Competence-Based Value Framing for B-to-B Customers 345
immaterial, difficult to trade, and based on tacit knowledge (Barney, 1991;

Prahalad & Hamel, 1990).
The issue of how these firm competencies are converted into value for
customer is also relevant for strategy research. Prominent scholars argue
that leading companies outsource noncore competencies to third-party
suppliers that, in turn, become competence suppliers (Prahalad & Hamel,
1990). Furthermore, a key feature of the core competencies of the focal
firm – those that generate competitive advantage – is precisely the capacity
to be valuable for the market (e.g., Barney, 1991; Peteraf, 1993). However,
strategy scholars also acknowledge that little is known about how
firms select competencies relevant for their customers, invest in such
competencies, and deliver value to the market through these competencies
(Harmsen & Jensen, 2004).
This paper deepens the understanding of the processes through which
suppliers’ competencies translate into valuable outputs for the customer.
Gibbert, Golfetto, and Zerbini have argued that the marketing of
competencies is a flip side of the most affirmed domain of marketing
competencies (Gibbert, Golfetto, & Zerbini, 2006; Golfetto & Gibbert,
2006), and have explored the content and mechanisms of competence
marketing (Zerbini, Golfetto, & Gibbert, 2007). This paper therefore
intends to explore how the value-supplying process adapts such bundles
of tacit know-how to non-tradable assets and proposes to reconsider the
value-supplying process building on a competence content.
Four cases that differ in terms of industry and firm size illustrate some
original approaches to value analysis, value creation, value communication,
and value delivery, based upon the competence content. Although these cases
vary in the emphasis posed on each of the value-supplying stages, all contribute
to reinterpret the value-supplying process in a competence-based perspective.
The first case – the Tuscan Spinners – illustrates the process by which a
group of small-to-medium Italian yarn producers facing the emergence of
low-cost competitors invests in a collective strategy of competence-based
communication at an international trade fair. The communication initiatives
aim to elicit the customers’ and prospects’ perception of the firm’s
competencies – partially incorporated on the products and partially
available to the customer – on future fashion trends. This strategy deepens
the Tuscan Spinners awareness of the competencies relevant for the
customers and induces them to invest more in this direction.
The second case – Picanol – concerns a leading manufacturer of textile
machines that invests in significant resources that focus on the competence of
downstream markets in order to defend its leadership within the market. This
investment results in a competence endowment that overlaps with the technical

processes of Picanol’s customers and the subsequent possible increase in the
effectiveness of its solutions and innovations. In this case, the communication
stage is very important and builds on live communication tools.
The third case – Filtrauto – illustrates the internal reorganization and the
communication activities carried out by the original equipment manufacture
(OEM) division of a leading supplier of filtering systems for automotive
manufacturers. The reorganization aims to fulfill the customers’ need for
know-how from their suppliers and to reduce the number of direct supplying
relationships. In other words, the customers’ requested know-how involves
both the competence of a complete filtering system for the car and the
subsequent integration of various layers of part suppliers. This process
draws on the competitive bids that are reorganized in order to increase
Filtrauto’s competence in the eyes of the customer.
The fourth case – IBM – targets the IT leader’s business model
reorganization, from values that are centered on separate standard products
to a competence-based value proposition that aims at supplying on-demand
integrated products and services. The case outlines the process of supporting
and reorganizing internal competencies by industry, geographical market,
and size of customer. IBM’s approach is unique because of its vision
of products, services, and competencies that are regarded as layers of the
same offering. Alternatively, the value delivered to different customers is
interpreted as different slides of the same complex of products and
competencies, thus involving all layers. In this case, competence-based
communication is supported by the firm’s Web site and specific live events.
This paper is organized as follows: First, the paper presents an analysis of
prior research on value creation through competencies. This analysis proposes
two main interpretations: the role of resources and competencies as an input
of value creation and the role of competencies as an output of value creation.
Second, the paper traces basic descriptions of the four case studies. Third, the
paper discusses the research findings and the relationship between the case
studies and the literature on competence-based value supplying. Finally, the
discussion highlights key implications for theory and practice.
2. THE RESOURCE-BASED VIEW OF VALUE

CREATION: A REVIEW OF PREVIOUS RESEARCH
The nexus between value creation and company resources and competencies
has been a much-debated topic for more than a decade in strategy and
marketing research. Within this debate, the conceptualization of value for

customer is considered a key step for deepening the understanding of value
creation.
Consequently, this topic has been addressed from two different
perspectives: an input view and an output view (Table 1). The input view
looks at value creation as an outcome of the combination of resources and
organizational processes. In most recent developments, such an approach
establishes a nexus between the firm’s ability to create value for customer by
means of market-based assets and marketing competencies (e.g., customer
management and channel design capabilities) and the overall value of a
firm’s resources and competencies. The underlying argument is that market-
based assets and marketing competencies increase the firm’s ability to select
and invest only in those competencies that are acknowledged as valuable by
the output markets (rather than by the input-factor markets).
The output view links the firm’s competencies to value for customer
by acknowledging that part of the competencies within the focal firm
not only makes a potential contribution in terms of superior efficiency
and/or effectiveness within the firm processes but also contributes to
increase the efficiency and/or effectiveness of the customer’s own processes.
Thus, in addition to the well-established notion of marketing competencies,
the function of marketing of competencies emerges (Golfetto & Gibbert,
2006).
2.1. Value Creation through Input Resources and Competencies
The notion that a firm’s success ultimately resides in the endowment of

resources and competencies that enter organizational processes to create and
deliver superior value to the customer is a key premise of the resource-based
view (RBV) of the firm (Barney, 1991; Hitt & Ireland, 1986; Thompson &
Strickland, 1983). According to the RBV, organizations are sets of firm-
specific components – the resources – combining physical and immaterial
inputs. Such resources give organizations competitive advantages when they
are heterogeneously distributed across the firms, when they are imperfectly
mobile and do not allow imitation and substitution, and when they are
valuable, for example, when they improve the efficiency and effectiveness of
the organization in the market (Barney, 1991; Peteraf, 1993). Therefore,
once conditions of heterogeneity and imperfect imitability/substitutability
have been assessed, the issue becomes how to identify resources that are
valuable (e.g., sources of value) (Priem & Butler, 2001a, 2001b).
348
Table 1. The Resource-Based View of Value Creation: From the Input to the Output Perspective.
Research Stream Perspective Key References Argument Limitations
Resource-based Input resources, Barney (1986, 1991), VRIN resources as input of production Tautology in key premises of
view inside-out Peteraf (1993) processes that generate superior value for the theory. Missing link
perspective customer and superior performance between competencies and
value for the market
Competence- Organizational Grant (1991), Prahalad Competencies as distinctive routines of
based view factors, inside-out and Hamel (1990) transformation of specific mixes between
perspective physical and immaterial inputs (resources)
producing superior value for customer and
superior performance
Dynamic Organizational Kusunoki, Nonaka, and Ability to continuously innovate and
capabilities factors, inside-out Nagata (1998), Teece, reproduce capabilities over time allows to
perspective Pisano, and Shuen overcome path dependency and gain
(1997) superior value from market transactions
Relational view Output resources, Dyer (1996), Dyer and Value and competitive advantages stems Few indications about how
implicit providing Singh (1998) from coproduction and joint exploitation companies can insulate the
FRANCESCA GOLFETTO ET AL.

of resources and competencies shared competence-sharing effect
throughout the relationship from the overall
relationships making
explicit the competence
value
Output view Organizational Möller and Törrönen Value for customer stems from soft skills Few indications about the
factors, outside-in (2003), Golfetto and provided aside the core product. process through which soft
perspective Gibbert (2006), Competencies that are valuable for skills are developed and
Golfetto and Mazursky customers need to be identified against exploited after being
(2004), Gibbert et al. market needs and throughout customer identified
(2006), Grönroos interfacing processes
(1997), Harmsen and Marketing of competencies requires ad hoc
Jensen (2004), Zerbini tools and experiential content
et al. (2007)
In his seminal work, Barney (1986) identifies value sources in the factor
market, arguing that transactions cannot take into account a priori the
overall potential of exploitation for a given resource within a firm’s
business process. In addition, more recent work translates value generation
into the firm’s internal processes. Barney (1991, p. 106) notes that
‘‘resources are valuable when they enable firms to conceive or implement
strategies that improve their efficiency and effectiveness.’’ Ray, Barney,
and Muhanna (2004, p. 26) emphasize that ‘‘resources can only be a source
of sustained competitive advantage if they are used to ‘do something,’
e.g., if those resources are exploited through business processes.’’ Thus,
the RBV posits that resources and competencies that fulfill certain key
characteristics can be a source of superior value when they are inputs for
business processes. While this approach shifts the unit of analysis from the
firm to the process, it leaves the sources of value for a given resource
largely unexplored.
Similarly, in the competence-based view, an exogenous perspective
of value generation informs subsequent developments of the RBV. The
processes by themselves – intended as specific modalities of production,
management, and market knowledge organization – emerge as key sources
of competitive advantage in the subsequent contributions to the RBV, where
capabilities and core competencies are specific routines of transformation of
specific mixes of physical and immaterial inputs (Grant, 1991). Here, some
researchers point to the strategic approaches to increase the resource and
capability endowment by highlighting that as resources and competencies
are idiosyncratic, they are more easily accumulated internally than
externally (Dierickx & Cool, 1989; Teece et al., 1997). Prahalad and Hamel
(1990) define competencies as how a firm learns to coordinate the set of
production capabilities by integrating different technological flows. They
use a metaphoric picture of the roots of a tree to illustrate that resources
and competencies last longer than products/fruits. The implication of this
illustration is that firms should focus their attention on the identification of
their core competencies in order to feed, develop, and exploit the fruit. Other
authors have contributed to a dynamic perspective of the RBV by focusing
on the continuous innovation and reproduction of capabilities as a means
for a given organization to limit the path-dependence constraints generated
by the resource-accumulation processes and, therefore, as a key component
in a firm’s success (Kusunoki et al., 1998; Teece et al., 1997). However,
the majority of this theoretical discussion fails to answer the initial question
of what gives value in the market to specific resources and competencies
(Priem & Butler, 2001a, 2001b).
According to the relational view, marketing research attempts to answer

this question by pointing to the outside-in (where the outside is represented
by the customers) processes of value creation. Focusing on market-based
assets developed by companies such as Honda and Motorola, Day (1994,
p. 39) observes that ‘‘the most defensible test of the distinctiveness of a
capability is whether it makes a disproportionate contribution to the
provision of superior customer value – as defined from the customer’s
perspective – or permits the business to deliver value to customers in an
appreciably more cost-effective way.’’ He suggests that competencies, and
more generally capabilities, are enhanced by market-oriented programs
aimed at diagnosing current capabilities, anticipating future requirements
to satisfy customer needs, redesigning processes via bottom-up logic, and
supporting these processes through commitment and continuous assessment.
However, with few notable exceptions (Day, 2000; Hunt, 1997; Srivastava
et al., 2001), few authors identify what market-based assets and competen-
cies may help to enhance the benefits/efforts trade-off for the customer.
Recent research probes further in this direction by shedding more light on
the link between market characteristics and company competencies. In
investigating competence-based strategies in the Danish food industry
through managerial cognition techniques, Harmsen and Jensen (2004) have
identified a close connection between specific market characteristics and the
corresponding competencies and developed a market-based approach to
translate market demand in company competencies. However, a need still
exists for a comprehensive framework that analyzes the process through
which firm competencies and market-based assets become more effective
and efficient solutions for customers.
2.2. Value Creation through Output Resources and Competencies
As the previous section suggests, much of the RBV literature implicitly

focuses on resources and competencies as input assets and organizational
routines that nurture the organizational process of value production. In
addition, limited attention is paid to an output view of competence-based
value creation, where suppliers’ competencies are key components of the
business offering. Yet, these studies in this tradition only shed light on a part
of the phenomenon and, in so doing, obscure other important elements.
Four main approaches are discussed below.
First, the idea of supplying competencies is already implicit in some RBV
formulations. The core-competence argument implicitly means that if
companies focus on their core competencies, they purchase noncore

competencies from third parties that become de facto competence suppliers
(Prahalad & Hamel, 1990). At the same time, the RBV itself negates a
competence-supplying view in that it portrays competencies as inherently
non-tradable on factor markets and hence not subject to delivery and
acquisition (e.g., Barney, 1991).
Second, the competence supplier approach finds further support in
the relational view in which competencies and resources are relationship-
specific assets that are codeveloped and exploited throughout cooperation
with partners (Dyer, 1996; Dyer & Singh, 1998). These cooperative
relationships form the locus of the resource-sharing and -transferring
processes that help to create value for both partners. In addition, previous
research on collaborative innovation management supports the same
view: Researchers focusing on competence transfer in new product
design (Tripsas, 1997) and R&D projects (Kogut, 1988) find that partnering
relationships foster knowledge and skill spillovers. Generally, while
these studies primarily focus on competence sharing and exchange from
the point of view of the purchaser, they place less emphasis on the supplier’s
side and the processes facilitating competence supply (Dyer & Nobeoka,
2000).
Third, the idea of strategic suppliers of competencies is implicit in most
industrial marketing and network literature (Dubois & Torvatn, 2002; Foss,
1996; Foss & Knudsen, 1996; Håkansson & Snehota, 1995). This idea stems
from the tendency, over the past decades, of organizations to center on a few
core competencies and externalize key activities such as manufacturing
or product design. This outsourcing of value-added activities has led to
a hierarchical configuration of the supply chain based on several tiers
of suppliers, with strategic ones that provide the customer with many
opportunities to generate innovative products, services, or systems through
a joint value creation process. However, as Möller and Törrönen (2003)
suggest, the strategic supplier must be selected a priori, while the value of
those inputs is delivered in the future. Consequently, as they further explain,
the value-producing potential of the supplier (in terms of efficiency,
effectiveness/innovation, and networking functions) is best assessed by
focusing on the supplier competence profile. Similarly, Borghini and Rinallo
(2003) highlight that buyers in business markets increasingly select their
suppliers on the basis of their competencies rather than their stand-alone
product/service features.
Finally, supplier competencies embed in business offering according
to most relational strategies, including consultative selling (Hanan, 1995;
Mullin, 1997), solution selling (Bosworth, 1995), customer intimacy

(Treacy & Wiersema, 1993), and customer integration (Normann &
Ramirez, 1994; Fisher, Frankemolle, Pape, & Schween, 1997). Overall,
these studies converge on the assumption that competencies allow suppliers
to differ in value creation and consider such competencies as somehow
embedded in the offering (Grönroos, 1997). However, these studies have
not yet disentangled the process through which suppliers include their
own competencies into valuable output offered to their customers.
Furthermore, these studies do not adopt a process focus for an output
view of competence-based value supplying because the processes through
which suppliers build and deliver value mostly assume tradable content
(e.g., Anderson & Narus, 1999). The competence-based view posits that
competencies are intangible and nontransferable assets, primarily embodied
in organizational routines and tacit knowledge (e.g., Prahalad & Hamel,
1990). How is it possible for them to be objects of value-supplying
processes?
Gibbert et al. (2006) were among the first to suggest that competencies
can be marketed in their own right. They also explore the content of
competencies that suppliers offer to their customers (Golfetto & Mazursky,
2004; Gibbert et al., 2006; Golfetto & Gibbert, 2006) and have deepened
the mechanism by which supplier competencies become valuable for
the customers (Zerbini et al., 2007). The subsequent section draws on this
work in exploring how suppliers’ competencies can lead to value for
customers. This section also extends this work in two directions: First, the
starting point of Zerbini et al.’s (2007) analysis was that while the notions of
competence exchange and value creation feature strongly in the relational
perspective of the RBV, they occur only after a relationship has been
established. This begs the question of whether competencies develop
outside established relationships and are marketed to guide industrial
customers’ buying behavior. Zerbini et al. (2007) proposed several key
features of competence-based marketing, including the alignment of the
supplier’s competencies with the customer’s business processes, the
experiential communication of the supplier’s competencies, and the delivery
of competencies to the buyer’s business processes. Second, their perspective
contributed to the authors’ understanding of how competencies are used to
induce purchases or supplier confirmation. The present analysis therefore
extends this work by focusing on a subsequent stage in the buyer–supplier
relationship, namely how competence suppliers can live up to their
promises.
3. RESEARCH METHOD
The empirical analysis was conducted to identify the specific processes

and steps of value supplying by means of competencies (e.g., Golfetto &
Mazursky, 2004). A case study method was adopted due to the lack of prior
theorizing on competence-based value supplying. Case studies are more
demanding in terms of research effort but generate significant benefits
through the induction of more reliable models (Bourgeois & Eisenhardt,
1988). Glaser and Strauss’ (1967) ‘‘grounded theorizing’’ inspires this
analysis. In other words, the approach aims to engage companies in active,
ongoing dialogues that reach beyond classic structured or semi-structured
interviews. The notions of competence-based value creation reported here
emerged from these dialogues (typically involving informants such as the
CEO, the business unit director, and the marketing director).
The data collection and analysis phases overlapped somewhat. The
research commenced by drafting initial process models for value delivery
and subdividing these into the individual process steps learned from the
dialogues with the executives. Typical guiding questions in these dialogues
include: What are the most sought-after competencies in your industry?
How do you find out which competencies your buyer lacks? How do you
deliver these competencies? In doing so, we made ‘‘use of explicit auto-
driving tools to aid in surfacing unconscious mental processes among
informants,’’ coherently with Woodside and Wilson (2003, p. 506).
Blueprints of process models and their individual steps formalized the
analysis of our dialogues with managers. Where inconsistencies in either
content or sequence were discovered, executives were allowed to gather
additional information in order to resolve doubts. The data gathering and
analyzing ended in what Glaser and Strauss (1967) call a ‘‘theoretical
saturation,’’ for example, when the information from various sources and
companies tends to show the highest overlap.
The sampling criteria for company selection included (a) their reputation
as competent players in their industries and (b) the authors’ access to the
companies’ key managers. To increase the external validity of the analysis,
four different industries were selected: automotive OEMs, yarn manufac-
tures, IT systems, and textile machine manufactures. Moreover, the selected
companies differed in size. In one case – the yarn manufacturer – the small
size of the supplier (along with the broad cooperation in the industry)
extended the level of analysis to the industrial district. In this case, the
interviews involved managers from 12 different companies in the district, and
the data considered both the individual firms and the overall district (the
Tuscan Spinners). Finally, as the potential for value supplying from
competence transactions might vary significantly in different stages of
the relationship life cycle, the cases include firms focusing on both new
business relationships (e.g., contacts with prospects) and long-standing
business relationships (e.g., interactions over a period of time). The selected
firms covered a wide spectrum of conditions in buyer–seller relationships
(Table 2).
For each firm, evidence of business relationships was collected through
primary and secondary sources on the Internet. Face-to-face meetings took
place between 2002 and 2004, primarily during the spring/summer of 2003.
Each meeting lasted between 1 and 2 hours, and follow-up discussions were
usually conducted by telephone or e-mail. Managers read (and subsequently
released for publication) the resulting case vignettes. Two investigators
conducted the interviews: One facilitated the discussion, while the other
codified the conversation into text and filled in gaps in the questions. The
extensive archival data from each informant is used for triangulation
purposes. Finally, participant observation at various European trade fairs
offered a substantial amount of qualitative data. This research context is
interesting because it allows the firms to: (1) develop an experiential
approach to competence-based marketing and communication, (2) improve
their ability to anticipate competencies through feedback mechanisms, and
(3) use social interaction to increase the likeliness of implementing
investment and risk-sharing mechanisms.
The research method can be best described as a cross-case analysis (Yin,
1994), or an explorative-cum-descriptive case design (Yin, 1994), in that it
provides an understanding of an empirical phenomenon that has hitherto not
Table 2. The Selection of Cases.

Case Industry Supplier Life Cycle Stage of Customer
Size Relationships
Tuscan Yarn manufacture Small Both prospects and existing customers

Spinners
Picanol Weaving machine Medium– Both prospects and existing customers
manufacture large
Filtrauto Automotive components Large Mainly existing customers
(OEM)
IBM IT IT systems Very large Mainly prospects
systems
been described in sufficient depth the in mainstream theoretical literature. As

suggested (Eisenhardt, 1989), this explorative design, involving multiple-case
studies, is conducive to theory building and the generalizing of findings
in other empirical contexts. Finally, as in all qualitative studies, claims
of internal validity are hard to sustain. However, the active involvement of
the companies (the dialogue approach described above), together with the
publishing of the companies’ real names, is expected to help in resolving
challenges to the credibility and internal validity of the study.
4. CASE PRESENTATION
4.1. Tuscan Spinners
The Tuscan Spinners represent a cluster of small firms based in Tuscany that
produce knitting yarns. The Tuscan Spinners are considered as market
leaders for the quality of the yarn they produce and the creativity and
innovation of their fibers. They control almost the entire supply of top-of-
the-range products and account for a significant share of yarn production
worldwide.
Since the 1990s, the Tuscan Spinners have faced the emergence of low-cost
manufacturers in Far Eastern countries. These new competitors developed
efficient production processes and are skilled in quickly imitating the most
successful creations. As a result, the Tuscan Spinners faced a serious threat
to their knitting-yarn manufacturers, owing to the risk that yarn, a relatively
simple product, became a commodity, so eroding the income potential
of their high-quality and high-creativity products. The Tuscan Spinners
could not respond to this kind of competition by focusing on cost-advantage
strategies, nor could they defend their innovations against imitations.
However, their ability to anticipate the fashion trends that become establis-
hed styles in the future downstream market and to incorporate these styles
into their fibers was far more difficult to replicate. These skills were
particularly appreciated by the customers (the knitwear producers), as a
yarn supplier who is skilled in fashion trends can quickly align the company
with the customer (distributor and consumer) needs, even if the fashion
trends are evident only months later. However, the value potential of the
Tuscan Spinners’ soft skills is not easy to communicate to the market and to
translate into a customers’ willingness to pay a premium price.
In order to convey the new message across their customers, the Tuscan
Spinners heavily reengineered their communication strategy. They joined
the organizer of an international trade fair held in Florence (Pitti Filati) in

order to promote a collective image of the skills incorporated in their
products and ability to work as partners with competencies on downstream
markets.
At Pitti Filati, the Tuscan Spinners started to base their communication
on touchable proposals for their customers, such as clothes and knitwear
prototypes, and to suggest innovative interpretations of future fashion with
specific fashion shows. The proposals stemmed from collective research on
the use of yarn, research on fashion trends, or studies on final market
behavior and consumer taste. Moreover, the exhibition included trend areas
that presented various items (fabrics, clothes, symbolic objects, suggestions,
shows, pictorial representations, etc.) expected in the following 2-year
fashion season, which used new knitting techniques other than colors,
textures, and styles. The participating manufacturers developed these items
in collaboration with famous designers and fashion experts selected and
funded by the Pitti Filati organizers.
The presentations on the individual stands were also improved.
Exhibitors started to show clothes and fashion ideas for end markets,
together with their collections of yarns for the season. Some particularly
innovative exhibitors also displayed the trends that had emerged from their
own research into style and consumer behavior. Finally, the companies
displayed products in such a way that visitors could take home a part or a
sample of yarn or fabric from the different stands. While describing the
characteristics and technical solutions of the products on show, the
designers and the company staff also presented and discussed the meaning
of their creations with the visitors.
What happened in the case of the Tuscan Spinners is, in fact, a process of
sharing with customers the results that suppliers obtain from R&D into the
downstream phases. The disclosure and sharing of the outcome of the
exploration and research conducted by the supplier’s designers is evident
when multiple elements of communication, such as video, images, claims,
and other communicative items on the stand, all focus on rendering the
message in the products clear and visible.
Such a value communication strategy turned out to be an immediate
success, placing the event and its exhibitors even more decisively in the niche
of the most creative, top-of-the-range actors. The skills promotion
initiatives, which were initially supported only by the historical group of
spinning companies, soon spread to all the other manufacturers, and
competence-based communication became the communication style of the
whole event. Overall, the event grew from 4,000 visitors (buyers) in 1994 to
8,300 in 2003. Today, visitors to Pitti Filati consider the event as a strong
learning experience, while the Tuscan Spinners represent the reference
manufacturers for the sector. Although the Tuscan Spinners are not immune
to future competition, their competence-based marketing approach has put
them in such a strong position that they can charge a premium price.
4.2. Picanol
Picanol is a company based in Belgium, with a leading position in the

production of textile machines. Founded in 1936, Picanol has since recorded
major successes in using emerging technologies, which have been presented
over the years as major attractions at the sector’s leading trade fair, the
ITMA. From the outset, the company’s competitive advantage has centered
on its ability to innovate weaving machines.
In a way reminiscent of the Tuscan Spinners, Picanol needed to address
the threat of price competition started by Far Eastern competitors in the
1990s. As a result, the company embarked on a deep restructuring process.
Picanol has redefined its own mission to become suppliers of solutions and
innovation to the textile industry, rather than merely becoming suppliers of
machines. For this reason, the company has invested significant resources to
focus on downstream markets and develop analytical and know-how skills
to anticipate and deal with the business problems of the customer’s
customer, which are specific and vary from sector to sector.
Such a reorganization has caused Picanol to focus internally on the
specialization and specific competencies of their customers’ three main end
markets (clothing, home textiles, and technical fabrics) while re-orientating
the communication content and strategy. Among the broader revision of
Picanol’s business processes, a specific business unit to monitor different end
markets for weaving machines has been set up within the systems’ division
to extend the company’s range toward capital goods for all stages of the
textile production process. This business unit was also used to evaluate the
changes in fashion trends, as well as the subsequent consequences in
manufacturing (and therefore in weaving machines). Moreover, the
company created a new division for customer support services, called
the Global Textile Partners. The underlying rationale of this division is
to provide support and consultancy (even to noncustomers) in order to
construct new skills, including customer best practices.
In terms of marketing communication, the new strategy has implied a
reorientation of the communication approach and the content transferred
through the traditional tools. First, Picanol uses advertising extensively

during the reorientation in order to demonstrate their new strategy to the
market. Advertising no longer shows machines but finished products from
the three end markets (clothing, home textiles, and technical fabrics).
Moreover, the images all evoke current fashion trends specific for each
market. Second, sales people are given specific responsibility to propose
total solutions to customers, and a direct link has been established between
the sales force and the service department, thus enhancing the competencies
available to the customer. Third, Picanol has implemented significant
changes in the way the company presents machines at trade shows. These
live means of communication are very important in order to satisfy the
customers’ need to see test products and interact with technicians to get
information about the supplier competence or ability to offer support for
specific business issues. In these presentations, the focus has shifted from the
weaving machines to the products obtained using the machines (the fabrics),
as well as to the possibilities for weaving (e.g., the softness/rigidity of the
fabrics, finishing, and texture) where the new fashion trends were involved.
More recently, Picanol has also begun to attend fabrics trade shows
(or events where typical Picanol customers exhibit) in order to illustrate to
clothes designers, with products realized with the help of famous stylists, the
multifaceted functionalities and the fashion awareness of its machines.
Technicians also play a fundamental role at trade fairs by discussing the
different problems and solutions that visitors have found and by possibly
demonstrating these for other customers.
Finally, Picanol has invested significant resources in open houses: special
events on the production site for selected prospects and customers to
support the introduction of new products. Entertainment animates these
events, and technical discussions are combined with guided visits, as open
houses primarily aim at allowing customers to socialize among themselves
and with the company staff. These events were found to be strategic for
Picanol, as they contributed significantly to the development of an image of
expertise, precisely as a result of the contact with the technicians. This
contact avoids the usual breakdown in information that occurs when
intermediaries distribute products. More importantly, the events resulted in
significant feedback from customers with regard to how to improve the
product performance.
Picanol benefited from these new strategies and methods of communica-
tion programs. Although the market had been stagnant, turnover picked up
in 2004. This turnover made 2004 the first year in which the effects of the
communication efforts and attendance at different events became visible.
Furthermore, the company has managed to maintain its position in

emerging markets, even in the face of low-price competition.
4.3. Filtrauto
Filtrauto is a leading OEM, specializing in filtering systems for air and fuel.
The firm is part of the automotive French–Italian group Sogefi, which
supplies automotive components to the world market. In 2003, Sogefi had a
turnover of almost h1,000 million. Sogefi is the world’s fourth largest
supplier of suspensions and the fifth largest supplier of filters.
Filtrauto has developed a unique approach to the management of major
customers in the automotive industry. In this sector, suppliers usually
request to tender from the manufacturers for each new product. The
manufacturers define the design and performance of the vehicle and
the dimensions of the individual parts, while the suppliers present a pre-
project of specific parts or solutions. The manufacturers seek to reduce
the number of suppliers to control quality and ensure strong collaboration
in problem solving. This results in supplier selections becoming an
increasingly competitive process. The past decade has seen a decrease of
38% in the number of suppliers to car manufacturers; in 2004, the total
number of OEMs was around 1,500. Companies forecast a reduction in
the number of OEMs to 40 within the next 5 years. Moreover, car
manufacturers are increasingly asking suppliers to propose new solutions
and, specifically for filters, to widen the range from single cartridges to
broad filtration systems.
As it recognized this trend in customer needs, Filtrauto has modified
its own business model. Rather than merely providing stand-alone
filters, Filtrauto now offers know-how and integrated filtering systems.
The new approach was consistent with the competence overlap (with
the customer competence) already developed by Filtrauto, which inte-
grates the single filter into the customer’s end product (the car). However,
the competitive market required the development of new competencies,
and Filtrauto therefore started to take on specialized technicians to
oversee the design of the system and coordinate the specialized component
suppliers.
In order to support this integrated solution approach, the commer-
cial activity of the OEM division shifted its focus from sales representatives
and advertising toward competitive presentations of the pre-project
requested by the car manufacturer. These presentations raised Filtrauto’s
competence in the eyes of the customer. In the past, a project was presented
solely by the technical director. The technical director then collected
customer feedback and provided inputs to the project group and
production. Now, a larger project team undertakes the drafting of the
project bid. The project team includes: the platform director (an expert
on the customer’s specific platform), the computation technicians, the
product conception technician, and the quality technician. This team
includes well-prepared technicians who can discuss the customer’s problems
and provide innovative solutions. The traditional sales representatives who
visited the car manufacturer/purchaser, maintained customer relations, and
presented the products to the purchasing department or the various
technicians in the customer’s product and innovation groups no longer
operate.
As a result, the OEM division has significantly improved in performance.
Its contribution to the overall turnover grew from 30% to 60% (50% for
original equipment and 50% for original spares). At the same time, it
reduced the weight of the after-market sales in which Filtrauto has remained
largely a supplier of products. Although the company’s turnover has not
risen, the new policy has been successful in maintaining turnover levels in a
very difficult market situation.
4.4. IBM IT Systems
IBM is widely known as one of the largest IT companies worldwide. In

2004, the IBM systems division, which is the focus of this analysis, employed
329,000 people in 30 laboratories and 24 factories in 164 countries, with
revenues of $93.6 billion. The firm is organized around a three-dimensional
matrix based on: (1) business units (products and services); (2) customer
clusters, identified through a combined sector-dimensional approach, in
large organizations (finance/banks, distribution, communication and media,
public sector authorities, small and medium enterprises, OEM, technology
integrators); and (3) geographic markets.
IBM’s IT systems division undertook a deep reorganization of its business
model by shifting from a value-centered approach on an IT product to a
competence-based value proposition aimed at exploiting and nurturing the
company’s skills in providing on-demand integrated services to small,
medium, and large customers.
From 1994 to 1997, following a serious slump caused by the adoption
of closed standards and resulting in a significant loss of market share,
the company undertook a restructuring process. The leitmotif of this

reorganization was to center the organization on the goal of delivering value
to the customer through the sale of integrated IT systems and services.
Interestingly, this reorientation made it apparent that customers were asking
for an integration and provision of skills that were already well developed by
IBM. However, these capacities were spread across the organization and
had little focus on the specific needs of different customers. The company
had to make considerable investments to discover which skills were needed,
where they were located in the firm, and how ad hoc solutions for specific
customer problems could be provided. To reinforce and speed up
competence accumulation, IBM acquired and integrated, in its processes,
the activities of PricewaterhouseCoopers (PWC), a leading management
consulting company whose employees developed problem-solving skills
specific to the targeted industries and relationships of trust with the industry
managers. Today, IBM’s marketing and sales are primarily driven by their
accumulated skills in the main target industries.
According to an IBM manager, the expertise available to customers can
be viewed in layers: At the base are competencies contained in components,
which include hardware and software and system administration and
maintenance. At the top are competencies founded on services and ad hoc
solutions. These levels provide a layering of skills from products to services
and supplier availability. The expertise tied to individual customer industries
can be viewed as vertical slices through these layers, meaning that the skills
associated with a given group of customers represent the entire layered
expertise of the company. This layered approach is a key driver in the
success of the market orientation strategy. The approach allows specialized
investment to spread across a wider customer base (and sales pro-capita),
enhancing loyalty and leveraging customer relationships through add-on
selling of products and services.
The integrated perspective of the product/service relationship is what
pulled IBM out of the 1997 slump and allowed for further expansion. As
a result, IBM is one of the few companies in this industry that survived
the last 30 years. IBM’s competence delivery is closely coupled with a
communication strategy aimed at transmitting the integration of product-and
customer-based competencies, notwithstanding the considerable size of the
overall IBM business and the worldwide dispersion of its customer base.
Benefiting from its information and communications technology (ICT) skills,
IBM has focused on web and tele-web communication and developed highly
flexible contact and communication tools that are strongly oriented toward
customization and partially based on a promotional transfer of competencies
(i.e., publication of cases on problem solutions and direct contact with

technicians).
The successful contacts (i.e., contacts converted into purchase orders)
that exploit web communication account for 20% of the total contacts,
therefore demonstrating the success of this approach. Today, the IBM site is
structured by target industry and presents all the company’s expertise in
the specific sector. The site addresses customer problems and provides a
customized learning path that includes access to a series of in-depth case
histories about customer companies and extensive illustration of the value
proposition and original solutions.
5. FINDINGS
The evidence from our case studies suggests that the novelty of a
competence-based approach to value for customer does not lie so much in
the structure of the supplying process but is more apparent and significant
in its content. The value-supplying process remains primarily anchored
to the established structure of analysis–creation–communication–delivery
(e.g., Anderson & Narus, 1999). However, when it comes to the content
of the new approach for value for customer, the problem of dealing with
competencies emerges. The literature suggests a number of features that
make competencies inherently difficult to market as economic goods. These
difficulties include causal ambiguity, intangibility, and the nonavailability of
factor markets (e.g., Prahalad & Hamel, 1990; Barney, 1991). Thus, these
difficulties require ad hoc tools in the diagnosis of value sources (causal
ambiguity), in the communication of value (tacit nature), and in their
delivery to the customer (non-tradability).
The following sections summarize the key findings at each step of the
value-supplying competence-based process. These sections also show how
competence-based marketing can lead to value for customer, despite or
because of the difficult characteristics of competencies.
5.1. Competence-Based Value Analysis: A Forward-Looking

Diagnosis of Competence Needs
A primary pattern in the pursuit of competence-based value supplying is

that the diagnosis of valuable competencies stems from the marketer’s
ability to anticipate its customer’s needs by detecting know-how gaps in its
own business processes and developing specific competencies accordingly.

This approach, which we call end-market orientation, requires a focus not
only on the direct buyer but also on understanding of the customer’s
customer needs (Fisher et al., 1997).
For example, Picanol’s ability to differentiate its value proposition and
maintain a premium price against low-cost competitors was grounded on
the firm’s focus on the customers’ success. This differentiation was achieved
by identifying gaps in the customer’s ability to adapt its production
processes to the seasonal fashion range and the specifics required for
different downstream markets (clothes, home textiles, and technical fabrics).
By virtue of its end-market orientation, Picanol was able to propose specific
solutions and provide technicians (from the Global Textile Partners
division) who were specialized in the customers’ particular business issues.
As noted during an interview with a marketing manager, this specialization
involves understanding downstream market needs and providing solutions
and innovation:
. . . we paid attention to all the technical and the technological problems, so that the
customers can forget about it and just concentrate on their real core business (using
creativity, weaving . . . .) . . . The strategy of the Picanol Group is to act as a supplier of
total solutions and a partner for innovation for the textile industry. To this end, the
Picanol Group is expanding its package of activities; from being a traditional supplier of
weaving machines it is becoming a supplier of total solutions and services for weavers.
Our solutions foresee the customer’s problems, which take account of changes
determined by fashion trends and down-stream markets. (Interview with the director
of marketing.)
Similarly, as was evident in interviews with both suppliers and customers

during the trade fairs, the Tuscan Spinners’ success is based on their ability
to anticipate and incorporate into their yarn the future trends in end-user
fashion markets.
The Italian Spinners know the future fashion trends, they are creative, they know how to
adapt products quickly to the tastes of our customers; they often even influence fashion
along the entire production chain, they are excellent problem-solvers, they have loads of
ideas, they offer what we really need. (Interviews with two business customers at the Pitti
Filati trade fair.)
Our research on the end-user market and the styles embodied in our products and in
the specialized competence of our companies allow us to overcome competition from low
cost producers. (Interview with a Tuscan Spinners general manager at the Pitti Filati
trade fair.)
In the IBM case study, what emerged during the analyses in support of
the reorientation was that customers were seeking the ability to integrate
and receive flexible solutions adapted to their industry-specific needs and

firm size. Interestingly, most of these skills were already well established
within IBM. However, these specialized capacities were spread across the
organization and had little focus on the specific needs of different customers.
For example, the sales representatives’ limited knowledge of IBM products
implied that purchasing proposals required the intervention of other
technicians. This intervention will increase the delivery time and reduce
the capacity to adequately interpret customer needs.
The focus on internal processes related to the delivery of specific
solutions, together with customer relationship management, therefore
became the main strategic priority for IBM. This focus also helped to
develop a value proposition where services align with the specific needs of
different customer clusters and sectors. The concentration of previously
dispersed skills into new divisions organized around customer segments
enabled the firm to redesign its services to cater for the specific business
issues in different customer industries. IBM could therefore provide ad hoc
solutions both for its customers’ production issues and for their end
markets. As a result, IBM experienced a vast improvement in the conversion
rate of prospects to customers.
Finally, the growth of Filtrauto’s OEM division builds on its ability to
identify customers’ needs for skills in integrating OEM components into
platforms that perform specific functions. Exploiting this gap, Filtrauto
introduced project teams to coordinate and provide all of the firm’s
competencies in integrating the filtering system into the buyer’s end product
(the car). This increased competitiveness, and performance begins from as
early as the presales bid phase (the design phase of the car). In this phase,
constructors send out specific requests to tender to the three to four primary
suppliers and subsequently assess the bids and ask for further modifications
and customization. Filtrauto was able to increase its responsiveness by
investing significant resources in project development and communicating
this to the customer.
In summary, our analysis suggests that orienting a firm’s internal (IBM)
or customer-interfacing processes (Picanol, Tuscan Spinners) according to a
forward-looking approach, or end-market orientation, fosters the potential
for competence-based value analysis. This approach allows the supplier
to acquire intimate knowledge of the customer’s business processes and
the marketplace, to anticipate the emergence of know-how gaps in the
customer’s activity, and to gauge the relevance of such skills for
performance within the customer’s marketplace.
This finding builds an important bridge between current literature on

customer value in business markets, the research stream on market
orientation (Kohli & Jaworski, 1990), and the traditional perspective of
the RBV (Barney, 1991, 2001) by suggesting a viable path to diagnose the
valuable feature of competencies in business markets. Such a path toward
market-based assets (Srivastava et al., 2001) is based upon the supplier’s
forward-looking orientation: the ability to look beyond the immediate, both
by investing in knowledge of downstream markets and by anticipating the
long-term evolution of relevant knowledge.
5.2. Competence-Based Value Creation: Overlapping Suppliers’

Know-How with Buyer’s Business Processes
In the case studies, a forward-looking approach was followed by the

systematic efforts of suppliers toward the accumulation of competencies in
managing and innovating the customer’s business processes. Interestingly,
our suppliers’ expertise in the customers’ business did not result in the
presumed forward integration.
More specifically, Filtrauto’s successful approach to developing inte-
grated filtering systems was founded on previously accumulated compe-
tencies in the design of highly compatible components that increase
the performance of customers’ filtering systems. As constructors demand
compatibility between filters and other mechanisms inserted into the
automobile, significant investments need to be made in order to acquire
new skills. These include: (1) hiring specific technicians to oversee the design
of the system and (2) bringing together qualified suppliers with whom
Filtrauto interacts with an approach similar to the one adopted by its
customers (the automotive manufacturers).
Furthermore, the success of IBM’s reconfiguration toward solution selling
pivoted on the acquisition of competencies regarding the integration of the
IT systems into the customers’ specific processes. IBM’s acquisition of
PWC’s management consulting division was not motivated merely by the
desire to enter the downstream consulting services market but rather by the
willingness to utilize PWC’s specific competencies in IBM’s target industries.
IBM also sought to utilize PWC’s skills in identifying and dealing with
customers’ business problems.
The Tuscan Spinners invested collectively in research teams to integrate
and concentrate the know-how that was dispersed within their district,
gaining a better understanding of the evolution of fashion trends and

improving their alignment to future market evolution. Regular meetings
were held to discuss how best to integrate the skills of professionals in
fashion analysis (e.g., sociologists and opinion makers), together with
downstream manufacturers and retailers. In doing so, they were able to act
as a repository of the original knowledge and as guides in the fashion setting
process. Thus, they created a distinctive set of competencies, including the
anticipation of fashion trends and the development of prototypes embody-
ing such trends in advance. Similarly, Picanol’s success in delivering value
was grounded in their investments in specialized competencies, which
targeted their customers’ activities in the downstream markets. Such
competences were devoted to solving the problems that weavers would
meet in the fashion evolution.
These findings build on the business marketing view of value creation, which
calls for integration with customers (Fisher et al., 1997; Normann & Ramirez,
1994), intimacy (Azimont, Cova, & Salle, 1999; Treacy & Wiersema, 1993),
and, more recently, the supplier’s ability to solve the customers’ problem by
actively managing the interaction process (Tuli, Kohli, & Bharadwaj, 2007).
The findings suggest that companies generate value for customer not only
through input competencies that support their own business and customer-
interfacing processes but also by establishing and favoring a continuous
overlap between their own activity and that of their customers. This overlap
then acts as the basis for the development of original know-how, which will be
applicable to customers’ business processes.
Such an approach seems consistent with the RBV, as the consequence of a
buyer’s focus on core competence is the emergence of an implicit need for
noncore competencies from a supplier (Prahalad & Hamel, 1990). However,
the competence supplier does not simply substitute the buyer by in-sourcing
its noncore competencies: Merely substituting the buyer in a task that the
latter could reproduce internally cannot be distinctive or a source of value
for the supplier. Rather, value potential stems from a proactive approach,
whereby the supplier adopts the buyer’s view and focuses on value creation
from the buyer’s point of view (industry foresight).
5.3. Competence-Based Value Communication: Sharing the Tacit Elements

of Competencies through Experience-Based Communication Approaches
The tacit nature of competencies requires the marketers to set up original

practices in order to allow prospects and customers to perceive the value
of their competence-based selling proposition. The analysis suggests that

practices of experiential marketing (Pine & Gilmore, 1998) could be key in
this respect. Consistent with insights from prior research (Golfetto &
Mazursky, 2004), the research found that the four companies significantly
relied on a wide array of experiential techniques. These included:
in-company events, active dialogues, presentations at exhibitions, and
multimedia presentations available on the web whose content was primarily
designed to demonstrate (and partially anticipate) competencies at work
with prospective and existing customers. In addition, the analysis high-
lighted that such an approach was highly effective in enhancing buyers’
perception of the value delivered through the supply of competence.
More specifically, IBM was able to convert a large proportion of its
prospects into customers by adopting bilateral, customizable communica-
tion on its Web site, which leveraged successful case histories of competence
supplying and offered the opportunity to contact industry experts and
technicians. Filtrauto fostered relationships through direct communication
and early disclosure of competencies to automotive manufacturers during
the presentation of competitive projects.
Picanol was far more successful once it had defined the experiential
content of competence delivering for its on-event communication. This
included free samples of its specialized competencies in the customer’s field
and discussions with technicians.
Trade fairs were the obvious context in which such an approach results
from, as was described during an interview:
The trade fairs have proved to be fundamental in giving the idea of company expertise
which we want to communicate with the new strategy. The machines are always at the
fairs, because the customers want to touch, see the movement, hear the noise and smell
the oil. They want to see what the machines can do for them; they want to talk to
technicians to find out if they understand their problems, if they can make changes in
response to customer needs. (Interview with the marketing director.)
The revision in Picanol’s strategy has also led to a significant change over
the last 2–3 years in the way in which the machines are presented. Originally,
only machines were on display, and primarily technological solutions were
shown. Today, the machines are presented in groups defined by the sector
for which they are built, thus emphasizing the specific technical solutions
provided and the products that may be made with the machines. At ITMA
2003 (the world event for textile machines), different creations were
presented for each of the three market divisions (clothing, home textiles,
and technical fabrics). A famous Belgian designer designed the various
models and products, which were then made on Picanol machines. The
presentations demonstrated that the offered solutions were aligned with the
problems posed by the new fashion trends. For example, in order to market
the machines used in textiles for clothing, Picanol mounted a spectacular
show of white ‘‘woven-on-Picanol’’ clothes onto which images of the firm’s
looms at work were projected:
With these presentations we want to initiate our closeness with the customer, our
expertise and knowledge of the specific end-markets. We want to communicate that we
are aware of the new trends in fashion, that we know the problems that these new trends
present, and that our machines already have the best solutions. We want to communicate
that our machines can be updated when fashion changes. In a nutshell, we want to
show our interest and our skills, in order to partner with our customers . . . . These
presentations differentiate us from the competition, because our low-price competitors
cannot offer all this. (Interview with a marketing manager.)
Similarly, the Tuscan Spinners’ event-based communication at trade fairs

displayed real and touchable clothes as prototypes with yarn inside.
Moreover, the discussion of production and marketing issues with visitors
(to demonstrate how R&D in yarn can impact customers’ outcomes) had a
significant effect on buyers’ perceptions of the suppliers’ ability to solve
problems and predict market developments.
During direct observation at the Pitti Filati trade fair, stands with
catwalks to present clothing fabrics were observed, while in the trend areas,
prototypes of future fashion trends were displayed. Moreover, many
international buyers were visiting the stands to take free samples of the
products and talk to technicians and stylists about future trends in the
consumer market. This context-sharing approach aims at making customers
aware of the firm’s potential competencies. As one trade fair visitor noted,
The visit to Pitti Filati is a true learning expedition and we get competencies from our
suppliers. (Interview with a knitting-yarn buyer during the Pitti Filati trade fair.)
Many suppliers exhibiting at the trade fair used this opportunity as a

learning experience based on the promotional transfer of end-market
knowledge and competencies:
Our research on the end market, the styles proposed in our products and generally
the specialized competence of our companies allow us to overcome competition from
low-cost producers . . . we distribute samples of our creations to visitors, even if few of
them come back as customers. Nevertheless, this release of creativity serves to underline
that just as we can offer free creativity for everyone, we can also create specifically for
individual customers. The approach pays off, because the world’s leading fashion
designers are among our customers. Others can copy an individual item, but not our
essential ability, which is to create new items continuously. (Interview with a Tuscan
Spinner general manager during the Pitti Filati trade fair.)
This evidence suggests that if buyers become aware of competencies and

appreciate, through direct interaction, how and to what extent the supplier’s
competencies may fit into their business, then buyers can be expected to be
more willing to choose/maintain the supplier and accept a premium price for
the value of the competencies provided.
5.4. Competence-Based Value Delivery: Enabling

Competence Accessibility
Value-supplying processes face the challenge of failure in the delivery of

value potential aimed at innovation. Prior research suggests that the value
potential of suppliers is deeply rooted in their competence profile (Möller &
Törrönen, 2003). However, little is said on how such non-tradable assets are
accessed by the customer, as most studies are somehow limited to the
assumption that relationships serve as a ground to share and codevelop
strategic assets (e.g., Dyer & Singh, 1998).
This study further explores such a direction by showing that some
competencies – which can be labeled as solid – are normally delivered and
valued via the baseline product and service. This baseline product
incorporates the standard product of the supplier’s resources and
competence (Prahalad & Hamel, 1990). In addition, our case studies show
that some competencies become available only through the adaptation and
customization of products and services according to the customer processes.
Such competencies – which can be labeled as fluid – are naturally tacit
(Nonaka, 1994) and cannot be transferred without direct contact between
the supplier’s and customer’s processes. In this case, we found that the
means for supplying competence is a bundled value proposition, explicitly
including the buyer’s direct access to the supplier’s competencies via the
business relationship.
More specifically, the IBM case shows how the restructuring of the value
proposition into a layer of products and services enclosing different types of
skills (from those tied to product manufacturing to those allowing product
customization) was successful because it can provide a bundle of solid
and fluid competencies to the customer on demand. IBM translated
competencies into an embedded value proposition that customers can
access according to their specific needs (business on demand). Big Blue
also provided access to technicians and business experts with an
industry-specific background. These two moves enabled IBM to augment its

baseline offer and avoid the risk of becoming a supplier of standardized,
stand-alone hardware that the market increasingly viewed as a commodity.
Similarly, Filtrauto was able to maintain its competitive position in
the filtering market by translating its ability in integrating its filter with
different components into an overall filtering system specifically adapted to
each customer’s end-market needs. The Tuscan Spinners defeated low-cost
competitors by incorporating the anticipated fashion content into their
yarn. Finally, Picanol limited pressure from Asian competitors by working
as a supplier of total solutions, where competencies in innovation
and problem solving become the value-added component of a baseline
offer centered on a physical product. In this case, a support service
is introduced and the sellers’ technical competencies are enhanced in the
effort to integrate Picanol’s expertise in the customers’ business into the
product.
6. DISCUSSION AND CONCLUSION
The nexus between value for customer and the supplier’s competencies is
at the heart of current research on business markets (Grönroos, 1997;
Håkansson & Snehota, 1995; Harmsen & Jensen, 2004; Möller, 2006).
Traditionally, a resource-based theory has analyzed the contribution of
competencies to the creation of value by focusing on the input side of
production processes (Barney, 1986, 2001). However, in business markets, a
supplier’s competencies typically target production processes that overlap
those of the buyer, being de facto provided by the former and accessed by
the latter, who obtains extra value. For this reason, the competencies
delivered in a business relationship increasingly determine the supplier’s
value to the customer (Golfetto & Gibbert, 2006). The supply of
competencies is therefore relevant for value creation (Grönroos, 1997), but
exceptions (e.g., Golfetto & Mazursky, 2004; Zerbini et al., 2007) remain
largely unexplored in current literature.
This study looks at the process through which business marketers
promote and supply their competencies. Evidence from the four case studies
(in the automotive component, yarn manufacturers, IT systems, and textile
machine industry) suggests that a competence-based value-supplying
process is more unique in its content and mechanisms than in its structure.
Such a process stems from the supplier’s ability to identify competence gaps
in the customer’s portfolio. This process is further based upon investments
that aim at developing an overlap between the supplier’s know-how and the
customer’s processes. The value-for-customer process ultimately rests on the
effectiveness of experiential techniques to foster the customers’ perception
of values, besides the supplier’s ability to set up facilitating interfaces in
the relationship, which ensure that customers have access to their own
know-how (Table 3, Fig. 1).
The present study makes two main theoretical contributions. First,
the study further investigates the relationship between value supplying
(Anderson & Narus, 1999) and company competencies (Möller & Törrönen,
2003; Srivastava et al., 2001) by focusing on the distinctive content
of value-supplying processes whose unique contents are competencies.
More specifically, a competence supplier’s ability to create value depends
on their forward-looking orientation, which targets the customer’s
market (end-market orientation), and directs the effort to accumulate
specialized skills relevant to the customer’s business processes. However,
competence supplying differs from market orientation (e.g., Kohli &
Jaworski, 1990; Helfert, Ritter, & Walter, 2002) both in terms of focus
(it is limited to a customer’s specific need) and in its proactive approach
(as it goes beyond the receipt of insights from customers, to anticipate
end-market trends). Thus, although all competence suppliers are market
oriented, not all market-oriented business suppliers are competence
providers.
Second, the research advances the understanding of marketing compe-
tencies (Gibbert et al., 2006; Golfetto & Gibbert, 2006; Zerbini et al., 2007)
by identifying crucial mechanisms that business marketers may implement
to satisfy their customer’s competence needs. The research focuses on the
rationale underlying the identification and selection of competencies in
which to invest. This is performed by targeting the skills required in the
customer’s activities, rather than by focusing on (and leveraging) bundles
of competencies that enhance internal processes. However, this work
emphasizes the peculiarities of competence-based communication with
respect to the more common means of promoting skills and identifying the
role that live techniques play in allowing customers to experience how
suppliers’ competencies work in their own specific environment. In other
words, live communication techniques reach beyond the mere support of
reputation and brand image.
The competence-supplying framework developed in this study has some
limitations, however. First, the paper is based upon limited case study
research. A larger set of data would be needed to strengthen the conclusions
of the analysis. Nevertheless, the presentation of novel evidence of cases of
372
Table 3. The Competence-Based Process of Value Creation in the Four-Case Study.
Tuscan Spinners IBM Filtrauto Picanol
Competence-based Anticipation and incorporation Bundling of IT systems and Integrating OEM components into Adapting the supply to the
value analysis in the yarn of future fashion services and customization platforms performing specific seasonal fashion and to the
trends in the end markets according to downstream functions in the end product specifics required for
markets (from filters to filtering systems) downstream markets
(apparels, home textiles,
technical fabrics)
Competence-based Collective investments in Acquisition of PWC’s Accumulation of architectural Specialization and internal
value creation knowledge on future consultant experts in competencies on integrated development of competencies
consumer tastes and customers’ businesses to fill filtering systems relevant for each of the main
behaviors the competence gap between markets
IBM’s IT potential and
customers’ needs
Reconfiguration of sector- Reorganization of R&D processes
specific competencies per customer platform in order to
dispersed in the organization ensure superior responsiveness in
through a layering approach the pre-bid deals
FRANCESCA GOLFETTO ET AL.

Competence-based Promotional transfer of Communication focused on Competence-free delivery during the Live communication tools (e.g.,
value competencies during trade displaying the accumulated competitive offering open houses) to share tacit
communication fairs through: knowledge on specific presentations in the OEM elements of competencies and
Touchable presentations of industries and on cases of division raise awareness of
results of R&D efforts in delivered solutions competencies in downstream
the innovation area markets
Touchable prototypes of Live communication tools and Intensive use of technicians to
products for downstream free solution presentations support sales force’s
markets improve information competencies
acquisition by prospects
Competence-based Offering yarns with high Solution offering specific for Filtering solution and systems From machine sellers to
value delivery content of fashion, different customer clusters offering; availability of know- solution provider: ‘‘why
incorporating supplier’s (by industry, location, size) how and fluid-customizable weavers win’’: problem-
competencies in fashion Availability of technicians and competence through technicians solving skills become an
business business experts with an specialized per platform/ integral part of the value
industry-specific background destination market proposition
CB-Value CB-Value CB-Value CB-Value

analysis: creation: communication: delivery:
forward looking Overlapping Sharing Enabling

diagnosis supplier’s the tacit competence
of competence know-how Throughout accessibility
gaps with customer’s experiences
business processes
Fig. 1. The Competence-Based Value-Supplying Process.
value creation based on competencies as an output is a first step toward

a sounder theory of competence supplying. Second, as the present work
is primarily focused on effectiveness, it does not address the cost of
investments to specialize in competencies relevant for the customer. The
analysis suggests that both a replication of competencies over clusters of
customers showing homogeneous competence needs (IBM case) and a
repartition of competence investments through social sharing routines (the
Tuscan Spinners) might operate at this level. Additional research is needed
to clarify this issue.
An area of further investigation that requires exploration is the strategic
risk implied by competence supplying. While this paper focuses on the
generation of value for the customer, the competence-supplying framework
also raises the issue of value appropriation by the supplier. One could argue
that while allowing for the accumulation of competencies that are highly
valuable for a specific cluster of customers, investing in competence
supplying leads to specialization paths that require specific investments
that are difficult to convert into other business transactions. Hence,
investments in competence supplying might force the supplier into a
bargaining situation where the buyer may threaten to switch off, so limiting
the opportunity to obtain value from the competencies. Further research is
necessary to investigate how value for customer is translated into superior
returns for the supplier.
Moreover, as competence supplying involves the disclosure of potential
value through live communication, the supplier also risks, being imitated by
competitors. The analysis suggests that competence supplying leads to
unique and difficult-to-imitate output competencies because of the idiosyn-
cratic nature of buyer–seller relationships, in which a competence gap
emerges and the competence to be provided is crafted. However, as is
shown in the Tuscan Spinners case, competence communication and
promotional delivery also foster imitation processes in competitors and

potential buyers. Future research should clarify to what extent the
disclosure of competencies is tied to competence accumulation and
development.
Finally, this study has three main practical implications. First, the study
suggests that the efforts in intelligence acquisition benefit from a focus on
the customers’ end market, which guides suppliers in understanding how
to orient their competencies and make them valuable for the business
customer. Second, the study discusses how to address the organizational
issues related to competence supplying, emphasizing that effectiveness
depends upon the ability to identify competencies relevant for the customer;
identify those already available in the organization; and reorganize these
resources by cross-functional teams centered on specific customer groups.
Third, effectiveness in delivering customer value appears to benefit from
ad hoc tools, such as tradable means allowing the customer to access the
supplier’s competencies and live communication to solicit the customer’s
perception of the value of knowledge and skills.
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CUSTOMER VALUE METRICS
Bruno Busacca, Michele Costabile and

Fabio Ancarani
ABSTRACT
This paper focuses on customer value analysis and measurement, framing

customer value management as one of the main antecedents of the
company value-creation process. The paper builds on three main pillars.
First, the paper highlights the critical role of customer value in business-
to-business markets, focusing on the links between the company’s ability
to manage customer value-creation processes and the positive financial
and economic outcomes generated by loyalty effects. Secondly, the paper
develops key analytical stages for an understanding of customer value.
The focus is on the customer value-chain concept, including consideration
of the customer information and acquisition process and its decision rules.
Third, the paper illustrates the measurement process, offering an
organizational framework for selecting the most suitable method for
measuring perceived customer value. The methodological alternatives
range from desk measures (e.g., technical computation of the total cost of
ownership (TCO)) to field analysis, like those considered under both
compositional and the decomposition approaches (e.g., conjoint analysis).
The paper concludes with remarks on the managerial implications of these
measures, as well as offering suggestions for further research on value for
the customer.

ISSN: 1069-0964/doi:10.1016/S1069-0964(08)14005-4
149
150 BRUNO BUSACCA ET AL.
1. VALUE FOR THE CUSTOMER AND FIRM

GROWTH: LINKING CUSTOMER VALUE TO
COMPANY VALUE
The increasing attention that managers and scholars are paying customer
value management builds on the consequences of effective customer value
management and the links between the quality of customer relationships
and company value. Both consequences and links drive the need to analyze,
measure, and manage customer value. Furthermore, the ever-increasing
intensity and variety of competition enhances the focus on customer value as
a means to create or regenerate competitive advantage.
To enable full appreciation of the wide range of customer value analysis
and measurement methods, this paper first presents a general framework of
the strategic rationales behind customer value management. The paper
adopts two different but complementary perspectives: the first focuses on
customer value as a competitive weapon; the second highlights how
customer value can drive company performances.
1.1. Value for the Customer and Competitive Landscape
The deep changes that stem from market globalization and new digital
technologies result in the competitive landscape’s growing complexity. Two
visible traits of this complexity are the intensification of firm rivalry and the
gradual extension of competitive boundaries. The following phenomena
inform these traits (D’Aveni, 1994; Porter, 1985):
the increasing level of infraindustry competition;
the increasing opportunities that firms have to enter new business areas by
exploiting the technological skills and competitive advantages acquired in
their original field of activity (cross-industry competition);
the increasing interdependence of companies belonging to different
markets but satisfying the same sets of customer needs through the use
of different technologies (interindustry competition);
the proliferation of indirect competitive relationships due to the spread of
diversification strategies, which makes it highly probable that a mutual
competitor will link firms operating in different contexts (chain competition).
All these phenomena enhance the importance of customer value analysis

and management. The increase in infraindustry competition implies, first,
Customer Value Metrics 151
the constant strengthening of the value proposition to reinforce differentia-

tion from direct competitors. In turn, this goal is only achievable through
refinement of the firm’s ability to analyze and manage the decision process
underlying buying and consumption behavior. A clear understanding of
customer specificities in terms of needs, benefits, and perceptions of
products’ attributes is therefore crucial.
The analysis of value for the customer is critical in the management of
cross-industry competition – from both a defensive and offensive position.
From a defensive position (prevention of the threat of entrance into one’s
area of activity), to adopt mobile defense strategies that build on the early
coverage of value gaps is fundamental. This implies a systematic monitoring
of the consonance between the perceived performance of existing products
and customers’ expectations. From an offensive position (exploitation of
various forms of synergy in order to gain entrance into new markets), to
establish critical interrelations between different areas of activity by seeking
a comprehensive answer to purchase and consumption requirements is very
important. Again, a constant focus on the customer is critical to strengthen
and supplement the value proposition.
This focus is even more crucial when having to deal successfully with
interindustry competition and chain competition, as they do not take the
form of direct rivalry. By definition, interindustry competition focuses on
value for the customer as the choice between products that are technologi-
cally heterogeneous but able to satisfy the same needs undoubtedly builds
on the analysis of their relative perceived value. Although this analysis is
sometimes immediate when the substitution relationship appears obvious
(e.g., the competition between video-conferencing systems and airline
companies), it may, in other cases, imply a wide-ranging definition of the
competitive landscape. For instance, steel producers could be a threat to
suture thread producers if they were to market high precision, durable
suturing systems for surgical operations.
Chain competition operates at an even less visible level in that, from the
customer’s perspective, this competition takes place in the absence of any
substitution relationship. In fact, competitive interdependence originates
when companies operating in two (very different) industries share a
competitor that is active in both. IBM and Sony are a case in point.
Although they operate in different core business areas, they share an
important competitor in Microsoft. However, Microsoft’s behavior in the
computer software business could shift in response to intensification in the
videogames industry competition and not necessarily due to changes in
the computer software business.
In the above-mentioned cases, the value for the customer is critical due to
the causal relationships that connect this variable to customer satisfaction
and, thus, to customer loyalty. Only a real customer loyalty – a loyalty
based on sound perceptions of value – can protect the firm from indirect
forms of competition (that are difficult to detect ex ante).
In summary, the current evolution in the dynamics of competition forces
firms to focus on the analysis and management of value for the customer.
This imperative becomes clear when considering the links between the value
for the customer and shareholder value concepts (Anderson, Fornell, &
Mazvancheryl, 2004; Berger et al., 2006; Gupta, Lehman, & Stuart, 2004;
Gustafsson, Johnson, & Roos, 2005; Kooil & Keiningham, 2007; Reinartz,
Thomas, & Kumar, 2005; Stahl, Matzler, & Hinterhuber, 2003; Schoder,
2007; Venkatesan & Kumar, 2005; Zeithaml, Rust, & Lemon, 2001).
1.2. From Customer Value to Company Value: Towards a Customer-Based

View of the Firm
Products come and go; firms keep customers, if well managed, ensuring the
survival and development of the company. Simple, direct statements such as
these often convey the increasing importance of customer orientation and
draw attention to the new marketing frontiers: from a focus on sales, market
share, margins, and short-term profitability to a forward orientation aimed at
building strong customer relationships. However, the shift towards customer
orientation does not decrease the relevance of customer profitability, but
provides a new perspective by considering each customer as the company’s
asset in place and, even more, as a vector of growth opportunities.
A conceptual framework – called the customer-based view (CBV) of the
firm – expresses the critical role of the customer in a firm’s value-creation
process. The following propositions summarize the central assumptions of
the value-creation process: (Fig. 1)
P1: Shareholder value is a function of the value of the firm’s customer base
(customer equity)
P2: Customer equity originates from the size and quality of the market and
customer relationships
P3: The size and quality of the customer relationships depend on customer
satisfaction, trust, and loyalty
P4: Customer satisfaction, trust, and loyalty depend on the firm’s capability
to manage customer value over time (customer life cycle)
Customer Equity
Size and Quality of

Customer Base Shareholder Value
Customer Investments to
Satisfaction Increase Dynamic
Capabilities
Value for the

Customer
Fig. 1. Customer Based View of the Firm.
P5: Value for the customer depends on the firm’s stock of resources,
competences, and capabilities
P6: Investments aimed at improving customer value management capabil-
ities have to enhance resources and competences continuously.
1.2.1. Shareholder Value is a Function of the Value of the Firm’s

Customer Base (Customer Equity)
Justifying the first proposition becomes possible by remembering that the
basic factors determining shareholder value consist of the size of the cash
flows, their distribution over time, and their risk level. From a customer-
based perspective, the following drive these value components:
(a) the value of purchases that current and potential customers make in
each time period, net of costs that the company incurs to establish new
relationships, and to improve and consolidate current relationships. In
analytical terms, according to Wayland and Cole (1997, pp. 103–106):
Xn
Qt pt Xn
Dt þ Rt
WC ¼ t þ (1)
t¼1
ð1 þ iÞ t¼1
ð1 þ iÞt A1
where WC is the customer value (customer equity); Qt the quantity of

purchases in each time period (t1, t2, . . . tn); pt the net profit margin per
purchase unit; Dt the customer development cost; Rt the customer

retention cost; A1 the customer acquisition cost; i the discount rate; n the
number of time periods considered on the basis of the expected duration
of the relationship.
(b) customer loyalty level;
(c) the sustainability of competitive advantage resulting from the emphasis
on the continuous creation of value for the customer.
To understand – and measure – the economic value of lasting and loyal
relationships with customers, a useful starting point is an examination of the
two main elements usually considered in a company evaluation:
the current value of the customer base;
the value of the growth opportunities (real options) with the same
customer base.
The two elements are accountable for each customer relationship, as well
as for the entire customer base. In fact, each customer has a current value
(lifetime value) and a potential value. These values originate from
opportunities for relationship development and define the sum of the
customer’s lifetime value and the growth opportunities as customer equity.
Moreover, the assumption is that the cumulated customer equity of each
customer determines the value of the company customer base and hence of
the company itself.
The first element of the formula, which represents company present value
as well as customer present value, is
X
n
Ft
Wj ¼ (2)
t¼1
ð1 þ iÞt
with W (worth) indicating value; ‘‘t’’ indicating the time horizon of the cash
flows (‘‘F ’’); and ‘‘i ’’ indicating the rate at which future cash flows can be
discounted in order to take account of the risk. By adopting the CBV all
three components of the company’s current value benefit from lasting and
loyal customer relationships. And the company present value is right the
sum of the customer-base present value (or customer lifetime value).
The cash flows that a company generates over time are the result of its
ability to establish, maintain, and develop customer relations. All conditions
being equal, the longer a company keeps such relationships going, the
greater the value of ‘‘t’’ will be. Calculating the ‘‘t’’ value is possible by
means of the expected average longevity (EAL) index, which estimates the
duration of relationships by means of the customer loyalty results – the
customer retention rate (CRR) that the company achieves. The assumption
is that the greater the customer-base’s degree of loyalty, the longer the
relationships will last. The formula for the estimation of the average
potential longevity is therefore:
1
EAL ¼ (3)
1 CRR
with CRR being calculable at the end of every year (x) as:
Customers at the end of 200x New customers 200x
CRR200x ¼ (4)
Customers at the beginning of 200x
By way of example: if a company succeeds in retaining 80% of its

customers, the expected potential longevity, and therefore ‘‘t’’ in the current
value calculation, would be 5 years. If the CRR were to be as high as 90%,
‘‘t’’ would be 10 years.
Sound and stable relationships with customers enable projections of the
company’s financial and economic results over a relatively longer time
horizon and, thus, determine a higher company value. The duration of
customer relations also influences the value of ‘‘F,’’ which is the size of the
cash flows the company is able to generate year after year. All conditions
being equal, loyal customers generate greater profitability than recently
acquired customers or those who are not particularly loyal. Both single
business cases and the aggregate data on several industries indicate that
close connections exist between loyalty and profitability (Anderson et al.,
2004; Reichheld, 1996), as well as customer lifetime value and company
value (Berger et al., 2006). More generally, a large number of theoretical and
empirical studies reinforce this relationship (Anderson et al., 2004; Berger
et al., 2006; Gupta et al., 2004; Gustafsson et al., 2005; Kooil &
Keiningham, 2007; Reinartz et al., 2005; Schoder, 2007; Stahl et al., 2003;
Venkatesan & Kumar, 2005; Zeithaml et al., 2001).
Thorough investigations provide useful reasons for the link between
loyalty and profitability. One of these reasons is, for example, that retaining
a customer requires less of an economic effort than acquiring a new one; and
retaining a customer over time means amortizing the costs of acquisition
over a longer period. After this period, customers acquired during the
introduction and development stages of a new business are worth more.
Customers are then innovators or early adopters of new products in
comparison with the rest of the market. Furthermore, these kinds of
customers consume more on average and are prepared to pay higher prices
due to the greater value that they perceive in the new products. The
combined outcomes of these two considerations – lower maintenance costs
and higher returns (in terms of quantity, price, and their combination) for
customers already in the company portfolio – make the greater profitability
of companies that can depend on customer loyalty more understandable
than those that systematically lose customers and have to reinvest in order
to acquire new ones.
In addition, a truly loyal customer becomes less sensitive to price and will
therefore reward the company’s product by paying a premium rather than
buying its competitors’ discounted products (Huber, Herrmann, & Wricke,
2001). By making relatively better use of the company’s products and
facilities, loyal customers generate lower costs. Loyal customers also make
the company’s marketing investments more profitable, as targeting these
investments is possible by grounding them on long-term customers’
knowledge. Finally, loyal relationships are less risky and affect the value
of ‘‘i’’ positively, which consequently decreases.
1.2.2. Customer Equity Originates from the Size and Quality of the
Market and Customer Relationships
The second proposition suggests that customer equity depends on the size
and the quality of the relationships that the firm established with its
customer base (Reinartz & Kumar, 2003). The first factor (size) originates
from the ability to generate new relationships (measured in terms of the
customer attraction rate) and from the ability to deploy (growth
opportunities) existing relationships, mainly through positive referrals.
An overview of the many growth opportunities stemming from a
customer loyalty base emerges from an adaptation of the matrix by Ansoff
(1965) as in Fig. 2.
Growth opportunities are identifiable – and estimated – in every
quadrant. Each customer, as well as the whole customer base, can increase
the value generated for the company (hence its customer equity) by buying
more or spending more: cross selling, trading up, or up-selling are the
company options to increase customer equity (quadrant 2). By leveraging
the current customer base, the company attracts new customers, thus linking
further growth opportunities to it (quadrant 3). The positive reputation,
spread through traditional customer word of mouth until it achieves viral
communication effects, is the main driver of this customer base. Finally, a
truly loyal customer base is collaborative and responsive in supporting new
product development and adopting innovation marketed under the
company brand. Consequently, brand or business extensions become more
Business Base
Current Potential
Current
Penetration
(upselling) Business or
Trading Up Brand
Cross Selling Extension
Customer Base
Reputation
spread Combined
by Word of Mouth, Development
Mouse, and Eyes
Potential
Fig. 2. The Strategic Options on the Customer Base.
successful, and could become a means of combining new customer

attraction and new product launch (quadrant 4). These latter options are
particularly valuable in businesses featuring rapid changes in technology
and a competitive scenario.
Having collaborative customers, whom a company can involve in
experimenting and developing innovations when technological develop-
ments generate more innovation options than they can test, is a unique and
priceless source of competitive advantage (Verona & Prandelli, 2006).
1.2.3. The Size and Quality of Customer Relationships Depend on

Customer Satisfaction, Trust, and Loyalty
The third proposition considers customer satisfaction the main determinant
of the size and quality of the relationship network that the firm has
established with the customer base. To understand this causal link, we
should remember that, as several studies point out, customer satisfaction
works as an antecedent due to the trust on which market relationships build
(Anderson & Narus, 1990; Martin, 1991).
Not all relationships with customers contribute equally to generating
value and growth opportunities for the company. The structural dimension
of the customer (e.g., its company profile) and the strength of the
relationships that the firm is able to develop over time determine the
opportunities generated. All conditions being equal, loyal relationships
enable the maximization of customer equity.
At the same time, the development of loyal relationships with customers is
anything but simple in that development requires the effective management
of value for the customer during all the main stages. The following section
describes these stages, highlighting the critical role that value for the
customer plays in the development of relationships.
1.2.4. Customer Satisfaction, Trust, and Loyalty Depend on the Firm’s

Capability to Manage Customer Value Over Time (Customer Life Cycle)
Identifying the value of the customer concept substantiates the fourth
proposition. The specialist literature has various definitions of value for the
customer (Anderson, Jain, & Chintagunta, 1993, p. 5; Butz & Goodstein,
1996, p. 63; Gale, 1994; Monroe, 1990, p. 46; Woodruff, 1997, p. 142;
Zeithaml, 1988, p. 14). Consequently, this paper regards value for the
customer as a synthetic cognitive construct originating from the ratio
between the functional and symbolic benefits that the product offers in given
usage situations, and the various costs (e.g., purchasing, information,
finding, learning, maintenance, obsolescence, and conversion costs) that the
customer bears to obtain these benefits.
The customer value chain indicates the determinants of the value that the
firm’s product offers customers by pointing out the cognitive links that
connect products (in terms of a combination of tangible and intangible
features) to required benefits and pursued consumption goals. The latter
sequence connects directly with the means-end chain model (Gutman, 1982;
Olson & Reynolds, 1983; Peter & Olson, 1990; Reynolds & Gutman, 1988).
The analysis of the relevant links implies an understanding of customers’
motivating, perception, and evaluation systems. The analysis is also
fundamental to determine:
normative value expectations, which are customers’ desired value in terms
of their objectives and ideal reference standards (Swan & Trawick, 1980);
predictive value expectations, which are the value that customers expect
from the various choice options (based on their beliefs) and that
originates from the firm’s implicit or explicit promises;
perceptions of the received value, which not only depend on the absolute
level of the benefits/costs ratio in the purchased product, but also on the
relativization of this ratio in relation to what the firm provides (dyadic
equity) and its developments within the relationship life cycle (serial equity).
Customer satisfaction represents a subtractive construct (Oliver, 1997)
resulting from the perceived difference between desired value, expected
value, and perceived value. Generally, the higher the expected value gap
(expected value vs. perceived value) on the total deviation, the greater the
negative impact that the difference between desired value and received value
exerts on customer satisfaction. Customer satisfaction with a firm therefore

largely depends on confirmation of the expectations developed during the
purchase process (previously referred to as predictive), which is firm specific.
This, however, should not lead to underestimation of the importance of the
negative differential between desired and expected values (desired value
gap). This negative differential highlights the wide scope for increasing
customer satisfaction, as well as value gaps, which current and potential
competitors can exploit.
As an antecedent of the customer satisfaction level, and thus of trust
resources, the value that a product offers the customer not only has an effect
on cash flows and their distribution over time, but also on the third
determinant of shareholder value. The association of the risk profile with
these cash flows. The latter has an inverse association with the strength of
the firm’s competitive position. This position largely depends on the firm’s
ability to provide its customers with a significantly higher value than the one
that its benchmark competitors offer. In short, the firm’s ability to retain a
substantial share of the value generated globally.
Customer behavior manifests itself in different ways over a period.
Furthermore, the attitudes that underlie these ways are very heterogeneous.
Some customers are merely satisfied; others repeat the purchase even though
they are dissatisfied; still others have considerable confidence in the
company and are faithful.
In this context, relational states differ considerably in terms of impact on
the economic and competitive value of the relationship, and therefore of the
company in the long run.
Customers do not become loyal immediately or easily. To understand and
manage customer behavior, a dynamic perspective is advisable, as the
evolutionary nature of customer–company relationships – from the initial
decision to purchase through to loyal status – is a natural continuum.
Fig. 3 describes the four principal phases that characterize customer
behavior over time.
Different customer evaluations and value perceptions always determine
the passage from one phase to the next in the relationship life cycle. In other
words, customers base their evaluation processes, attitudes, and subsequent
behavior on different configurations of value. Furthermore, depending on
their perception over time, their relationship with the company experiences
four main phases:
the satisfaction and the accumulation of trust phase;

the behavioral loyalty phase;
Phase1
Satisfaction and Trust
Expected Value
versus
Perceived Value
Phase2
Behavioral Loyalty
Perceived Value
versus
Competitor’s Value
Phase 3
Mental Loyalty
“Get”value
versus
“Give”value
Phase5
Full Loyalty
Fig. 3. From Customer Satisfaction to Customer Loyalty.
the mental loyalty phase;

the full loyalty phase.
The satisfaction–trust phase: this marks the passage from transaction to

relationship and begins with the customer’s evaluation, which amounts to
satisfaction – the result of a perception that the company has provided the
expected value (Oliver, 1997). Satisfaction leads to behavior involving
repurchase and later perceptions of satisfaction determine the consolidation
of attitudes connoting trust in the company. In this sense, the flows of
satisfaction that emerge after every purchase or consumption experience
either consciously or subconsciously lay down a stock of trust. This trust is a
favorable prejudgment of the company’s future behavior and of its
products’ performance. When this attitude consolidates and reaches a level
where the customer no longer considers competitors’ offers worth
evaluating, this determines the passage to the next level.
The phase of behavioral loyalty: a high level of trust positively influences
subsequent repurchases due to the economies that accrue to the customer’s
advantage (cognitive, emotive, and operative). In effect, a customer who
repurchases the same product (or brand) does not have to repeat the process
of choosing. The customer therefore makes savings in terms of time, cost,
and various kinds of effort, reduces the perception of risk, may cut learning
time, and economize through integration with other compatible goods and
services. At least in the short term, economies of trust seem to make the
customer loyal. However, the length of this phase and of this relational state
depends on competition pressures and on the evolution of technologies that
could render the customer’s apparently loyal behavior no more than a mere
repurchase. Sometimes, loyal behavior is just the result of lock-in conditions
determined by the economies of trust developed in the early phases of the
relationship life cycle. Consequently, this kind of relationship is definable as
behavioral loyalty.
The phase of mental loyalty: the behavioral loyalty phase does not last
indefinitely. During the relationship life-cycle conflict circumstances emerge,
usually caused by environmental (also casual) or competitive issues (e.g., a
particularly effective advertising campaign), pushing customers towards
comparing the product of the company that has so far commanded their
loyalty with those of its competitors. For the outcome of this conflict to be
positive, customers’ perception of the value differential should favor the
company’s products and not those of its competitors. Bear in mind that the
customer’s perspective is purely subjective and that the specific experience of
purchasing and consuming over time influences such a perspective.
Consequently, the value that the customer perceives at this stage is definable
as monadic.
If, following this evaluation process, the value offered by the company,
net of the costs of transfer to a competitor, is higher than that of the
alternatives, customers will enter the phase of mental loyalty; if not, their
loyalty will be only behavioral – determined by the transition costs involved
in choosing a competitor as a supplier.
Mental loyalty is definable as a firm conviction that the company’s
products offer the best value over time. The intertemporal nature of this
conviction concerns the company’s dynamic capacities – its ability to
improve its product over time – and acts as the determinant in the inferential
process concerning the value that the producer will offer the customer in
future. In this sense, the experience of the differential value that the
company offers over time generates the customer’s strong sense of
commitment to continue the relationship.
The phase of full loyalty: in general, loyal, longstanding customers get to
know the company and its products and, eventually, liken the value
obtained to that produced for the company. The perception of these
customers – although superficial and naı̈ve – is that their loyalty has a
positive impact on the profitability of the company: loyalty thus generates
an extra value. Therefore, the focus shifts to terms of trade, which is a
comparative value definable as the dyadic value. Perception of dyadic value
can give rise to evaluations of the equitableness and fairness of the
relationship, and possible attitudes and behaviors based on reciprocity. The

perception in question depends on the company’s ability to credit loyal
customers with a part of the extra value generated.
A high perception of dyadic value (and therefore of equitableness)
generates conviction of the fairness of the values underlying the entrepre-
neurial conduct besides the existing conviction concerning the company’s
dynamic capacity. These evaluation processes sanction the passage to the full
loyalty phase, which, all conditions being equal, places the highest value on
customer relations.
Loyal customers are stable and cooperative: their behavior tends towards
maintenance of the relationship in a spirit of collaboration, even when
situational or competitive variables provide an incentive to dissolve the
relationship (proactive loyalty; Oliver, 1997).
A company that places value for the customer at the center of its strategy
pursues the development of the relationship in all its phases. Such a
company also adopts a dynamic management model, which is definable as
having a CBV.
1.2.5. Value for the Customer Depends on the Firm’s Stock of Resources,
Competences, and Capabilities
The fifth proposition subordinates firms’ ability to create value for the
customer to the endowment of intangible resources. The value proposition
offered to the market must correspond to the value drivers that customers
recognize. Simultaneously, these customers’ dynamism is the cause and
consequence of the company’s strategic dimensions evolution. The com-
pany’s intangible resources, the routine governing its functioning, and the
range of possibilities (development paths) accessed, represent this strategic
dimensions evolution (Teece, Pisano, & Shuen, 1997). In this perspective,
value proposition’s enhancement and scope may depend on the following
features:
the knowledge-based assets (in terms of technology, organization,

marketing) that a company requires to improve and innovate its offer
systematically;
the trust that customers have in the company’s ability to create value and
to transfer this value through nonopportunistic behavior;
the effectiveness and efficiency in the organization and management of the
corporate processes; and
the company’s potential ability to focus on customer value chains as

development paths that the company can access autonomously and
through business networks.
With regard to the first two bulleted points, the literature stream on the
resource-based view has been devoted to demonstrating that firms’
behaviors originate from the intangible resource stock developed over time.
In other words, the possibilities to develop value for the customer depend
primarily on the knowledge and trust on which the company can rely.
The third bullet point emphasizes the importance of corporate routines,
particularly that of market-driving capabilities. These capabilities are the
various competences that originate from corporate learning and enable the
company to activate the market and its components (suppliers/providers,
distributors, dealers, consumers, competitors). These competences thus
drive the evolution of the market towards choices that best meet its aims.
Market-driving capabilities enable the firm to govern corporate processes,
which lead to the creation of value for the customer and for other types of
stakeholders through:
focusing on service and support, as well as on attention to operational and
management details (essential for governing quality);
customized supply systems, comprehensive product lines, and flexibility in
response to final and intermediate customers and competitors (crucial for
governing variety);
rapid response to market demands and promptness in identifying and
developing innovative opportunities (fundamental for governing time-to-
market);
developing specific knowledge about the needs of target customer
segments, developing design capabilities, abilities to use specific technol-
ogy and handle IT systems, and alliance detection and management
expertise (essential for governing organizational learning).
Finally, the creation of value for the customer is a function of
development paths that the company can access (as in the fourth bulleted
point), as the selection of these paths could activate the conditions that form
the backbone of organizational learning, thereby guaranteeing the devel-
opment of knowledge-based assets. The exploiting of accessible develop-
ment paths specifically allows the firm to expand its knowledge repertoire by
adding new categories, cognitive maps, scripts, or interactions that will
provide the basic platform for the innovative description of a company’s
reference environment. A typical example is a firm that enters new
competitive fields and develops its market knowledge by increasing its

information about distribution channels, customers, and competitors.
1.2.6. Companies must Continually Enhance Resources and Competences

through Investments Aimed at Improving Customer Value Management
Capabilities
The final proposition states that one of the basic determinants of the long-
term development of a company’s resources, processes, and potentials is
shareholders and other investors’ strategic commitment to guarantee proper
investment with which to generate and transfer value to customers through
self-financing and new capital contributions.
As the new economy’s evolutionary dynamics demonstrate, customers are
increasingly value-oriented. The offer of an effective and efficient value
proposition for the customer increases customer satisfaction. This satisfac-
tion is, in turn, likely to stabilize the relationship with current customers in
the end, and facilitates the creation of new relationships. This leads to
customer equity growth and, consequently, to shareholder value generation.
The higher value generated by the company in comparison to its
competitors is therefore also a source of satisfaction for shareholders and
confirms their return on investment expectations. In turn, shareholders
satisfaction consolidates trust in the firm’s management, encouraging the
investment of an increasingly larger portion of the value generated in the
development of the company’s resources and competences. Kotter (1992)
investigated the link between investment in customer, employee, and
shareholder satisfaction on one hand and the market value of shares on the
other by means of a survey of three companies. In the company with
the highest increase (þ 45.5%), the shareholder investment was not only the
highest in absolute terms, but also the most balanced in relative terms.
The modern theory of corporate finance, which acknowledges that a
company holds a stock of resources and competences, suggests one should
invest that part of the cash flows that production factors generate to create
new factors, or improve existing ones. The aim should be to generate new
incremental cash flows in future. These considerations once again highlight
the close link between the company value concept developed in the theory of
corporate finance and the value concept supported by the CBV. In the latter,
the investment made possible by transferring a satisfactory value proposi-
tion to the customer-base backs and activates a company’s strategic
dimensions (resources, processes, and potentials).
In short, shareholder satisfaction, which has an association with the
increase in company value and which consolidation and development of
customer relationships offer, promotes higher investment in competence

leveraging and competence building processes.
Through the first process (competence building), a firm radically changes
the composition and nature of its resource stock, acquiring new
competences necessary for generating innovative value propositions for its
customers. The firm consequently creates new opportunities for develop-
ment. The competence leveraging process allows a firm to activate,
coordinate, and integrate existing competences and resources. An intelligent
and creative integration of existing competences, which enhances synergies
and cogeneration effects resulting from their deployment, as well as a
continuous improvement policy and an incremental improvement of
competence performance, provides this advantage.
Value obtainable from customer relationships that build on trust
originating from the fulfilment of customer satisfaction expectations is
therefore a strategic tool to foster a virtuous CBV cycle. In response to such
value, investors are increasingly motivated and ready to allocate greater
resources to the competence leveraging process, to enhance value proposi-
tions offered to current and potential customers, and to the competence
building process to regenerate and innovate value propositions. Their final
aim is to satisfy the future priorities of targeted customer segments. This will
take place in a virtuous cycle that constantly renovates and regenerates.
In recent years, there has been a surge of interest in the concept of
customer asset-based management, customer lifetime value analysis, and in
the examination of the link between customer satisfaction/loyalty and
profitability/shareholder value. Many papers in both research-based journals
and management reviews have demonstrated the above-mentioned links
(Anderson et al., 2004; Berger et al., 2006; Gupta et al., 2004; Gustafsson et
al., 2005; Kooil & Keiningham, 2007; Reinartz et al., 2005; Schoder, 2007;
Stahl et al., 2003; Venkatesan & Kumar, 2005; Zeithaml et al., 2001).
2. UNDERSTANDING VALUE FOR THE CUSTOMER:

A CONCEPTUAL FRAMEWORK
Managing customer value can only be effective after completion of an

appropriate measurement process. Moreover, no attempt to measure
customer value can be effective if it lacks a preliminary introduction to
customer value’s qualitative dimensions.
Understanding drivers of customer perceptions and behaviors is the
main goal of customer value analysis. Consequently, the starting point to
understanding the customer value definition of benefits and costs lies within
the definition’s conceptual domain. Knowing which of the various
components are directly observable and measurable and which require
indirect analysis and approximations is fundamental for identifying value
components (attribution approach – Bagozzi, 1984). Subsequently, hierar-
chies or relationships between construct components (structural approach)
should be identifiable, and their validity assessable in advance by identifying
associations and relations with other constructs (dispositional approach).
Several studies focus on the value for the customer concept (Woodhall,
2003; Woodruff, 1997; Zeithaml, 1988), and although they differ in terms of
method and analytical context, some common concept and methodological
issues emerge.
The literature unanimously considers value for the customer as a
construct based on customers’ simultaneous evaluation of the different
product components that they usually compare to those of one or more
competing products. As a rule, and with consideration of all the risks and
advantages inherent in conceptual abstraction processes, the components of
value for the customer consist of the expected benefits and the costs (both
monetary and nonmonetary, such as efforts and risks) implicit in the
acquisition and enjoyment of these benefits.
The simultaneous evaluation implies awareness that the customer’s
cognitive system profoundly intertwines the benefits and sacrifices.
Furthermore, the value perceived in a given product and the related benefits
always include customers’ subjective evaluation of the company’s/brand’s
ability to produce a certain performance level and, hence, to offer these
benefits with a given intensity. The customer makes a similar evaluation
with respect to the costs to obtain the expected benefits.
A customer’s value perception is not anonymous, but always refers to
specific brands or products or, at least, to specific brand or product
concepts. Thus, the customer value is a relative concept worthy of
consideration only inside a specific market context. Finally, like all
individual cognitive processes, value perception is dynamic and therefore
changes over time under the influence of variables that are external
(technological innovation, as well as economic, social, and cultural changes)
and internal to the consumer (learning effect).
To synthesize the preliminary descriptive framework of the components
of the VC construct, one should note that by nature the framework is
intrinsically:
relative to the competitors in the customer perspective;

multidimensional, since the customer evaluates several benefits and costs

simultaneously;
subjective, since all customers follow a different mental process that their
individual cognitive repertoires affect;
dynamic – dependent on several variables (mainly technological, social,
and economic), which are often beyond the control of a single company,
as well as being dependent on individual customer learning.
Since Monroe (1979), seminal contribution marketing literature tends to
define value as a benefit/cost ratio:
B
V¼ (5)
C
where ‘‘B’’ and ‘‘C’’ generically represent the benefits and costs that the
customer may associate with a given product.
By disregarding this generic formulation, and considering an operational
formulation, the value for the customer becomes a ratio between benefit
through perceived benefit-related performance and cost through perceived
cost-related expensiveness – including price. In the light of such considera-
tions, structuring the value formulation as follows is possible:
B Px
Vx ¼ (6)
C Ex
where Vx is the value perceived in the brand ‘‘x,’’ P the perceived

performance of brand ‘‘x’’ related to the various benefits, and E the
perceived expensiveness of brand ‘‘x’’ related to each cost component.
Such a formulation takes into account the real world consumer behavior,
where no value is apparent without a specific reference to some product or
brand or store. Consequently, ‘‘P’’ and ‘‘O’’ are the ‘‘brand specific’’
dimension of value perception.
Thanks to the definition of the construct domain, a structural analysis can
follow by identifying single components of the numerator and denominator.
Numerator components refer to the classification of benefits resulting from
purchase and consumption processes, while denominator components refer
the sacrifices that the customer made in the main stages of the mentioned
processes.
To summarize, understanding the value for the customer implies a careful
analysis of the decision-making process governing product purchase and use.
Costs and benefits determining value perceptions may not only vary from
customer to customer, but also for each customer in the different stages of
Experiential
Functional Symbolic
Perceived Benefits
VALUE FOR
THE
CUSTOMER Perceived Costs to Obtain Benefits
Need Information Pre-purchase Post-purchase Re-

search Evaluation Purchase Usage purchase
Arousal Evaluation
• Search • Elaboration • Supplying • Operating • Elaboration • Switching

Costs Costs Costs Costs Costs Costs
• Psychological • Maintenance • Psychological • Dismissing
costs Costs costs costs
• Price and • Learning
Financial Costs
costs • Obsolescence
costs
Fig. 4. Value for the Customer.
the process. On the other hand, the process may undergo structural changes
in keeping with the degree of differentiation and the purchaser involvement
level. The next section will deal extensively with this topic (Fig. 4).
2.1. Customer Value Chain: A Qualitative Approach to Customer

Value Analysis
In order to identify the main value components of the customer value chain,
one should carry out a qualitative analysis. The means-end chain theory is
one of the best-known techniques for planning such an analysis (Reynolds &
Olson, 2001). This theory allows one to interpret purchase and consumption
drivers and behaviors according to a conceptual structure of customers’
mental connections, which is similar to a hierarchical chain. According to this
theory, the products (or brands) and the values driving individual behavior lie
at either end of the chain. The theory states that one can interpret the
purchase and use of each product as an instrumental event, a means, for the
achievement of one or more abstract ends, which are coincident or at least
consistent with the end-states of an individual customer.
The values of individuals thus drive purchase and use processes by
suggesting the immediate goals (consumption goals and instrumental
values) and acting as a point of reference from which to assess the

consistency and value – in a broad sense – of the purchased or used goods or
services.
Between the chains ends product/brand and underlying values, a network
of associations involving product technical or symbolic attributes emerges,
while the purchase and consumption of the means products fulfill the
goal. In turn, the attributes become means with which to achieve higher-
rank ends – in abstract terms – represented by functional or psychosocial
benefits. Finally, benefits themselves become means for the achievement of
values. Ultimately, these values divide into instrumental – more concretely
connected with consumption and using styles, objectives, and behavior –
and terminal – concerned with preferred end-states. The model has to be
slightly adapted in the B2B context, since these instrumental and terminal
values that drive customer perceptions and choices are company strategies,
missions and, therefore, values. Fig. 5 presents the means-end chain as a
reference model to identify the components of value for the customer.
The nature of attributes and benefits differs. Attributes may be tangible or
intangible, as they have a prevalent influence on functional or psychological
benefits due to their technical or symbolic nature. Benefits can likewise have
a prevalent functional or psychological nature, and be more explicit or
mainly implicit.
Fig. 6 presents the different natures of the benefits that customers derive
from a cellular phone.
A close link between functional benefits and the product’s technical
performance is detectable, while psychological benefits relate mainly to the
Terminal Values Company Mission and Values
Instrumental Values Competitive strategies
Benefits Benefits
Attributes Attributes
Products/Brands Products/Brands
Fig. 5. Customer Value Chain.
EXPLICIT IMPLICIT
FUNCTIONAL
Sound quality Obsolescence
Customer service Resistance
PSYCHOLOGICAL Brand value Self-esteem

associations Social networking
Fig. 6. Benefit Matrix.
symbolic and emotional meanings that originate from the supplier image
and solutions that the supplier offers.
This dichotomy therefore affects the relative importance of product
features in the evaluation process. As pointed out in several studies (Berger,
1986; Claeys, Swinnen, & Van den Abeele, 1995; Park & Young, 1983;
Ratchford, 1987; Rossiter & Percy, 1987, Rossiter, Percy & Donovan, 1991;
Vaughn, 1980, 1986) focusing on functional benefits, customers’ selection
criteria tend to favor technical features directly related to the intrinsic
product quality (e.g., a Smartphone’s storage capacity and speed). However,
when seeking psychological benefits, customers focus on less tangible
attributes (e.g., design, holistic solutions, user profile, usage occasions).
The second dimension clarifies the distinction between implicit and
explicit benefits. The latter have an association with conscious motivations,
which firms can easily identify and they therefore rarely imply opportunities
to translate into long-term competitive advantages. Nevertheless, fulfiling
explicit benefits often means matching competitive points of parity in the
category to enter the set of competing alternatives that the customer
considers – one should therefore not neglect these benefits. In contrast,
implicit benefits are associated with advantages of which the customers
themselves are not fully aware and with needs that they perceive clearly but
do not express for psychological reasons (lack of self-confidence,
conformism, fear of disclosing hidden aspects of their personality, etc.), or
because they do not comply with social conventions, role expectations, or
shared codes of behavior. Furthermore, this dichotomy not only influences
customer cognitive systems’ methods of analysis strongly, but also the link
between competitive potential and the company’s ability to provide a proper
response to customer expectations. Only qualitative, in-depth analyses can
identify the implicit benefits that the customer expects. Consequently, the
company should implicitly communicate that it can provide such benefits by

linking its products to macro and micro symbols (Baudrillard, 1968). The
decisive competitive outcomes, which originate from the fulfilment of these
benefits, amply offset such difficulties.
Finally, instrumental values and their links with benefits can have an
achieving or confirmatory nature, which depends on the link between the
customer competitive strategy and the product or provider image.
Consequently, product and provider values have to be consistent with the
customer mission and values to confirm the customer positioning, or to
assist this positioning to achieve its mission and desired value system.
Analysis of the customer value chain should focus on both the customer
as an organizational unit and on the individual members of the decision-
making unit – the initiators, influencers, deciders, buyers, users, and
gatekeepers. The relevance of this double focus grows with the increase in
customer involvement.
Identification of the roles and members of the decision-making unit is a
prerequisite for understanding customer selection processes, which very
often originate from a political mediation of the ends pursued by the DMU
members.
The means-end chain is a useful theory for analyzing not only the value
customers perceive, but also by industrial buyers. In the latter case, business
purposes represent terminal values, with the institutional set-up and
corporate governance influencing business purposes. Likewise, competitive
strategies and strategic goals (corporate, functional, and individual) that
have an association with a specific product’s purchase respectively influence
instrumental values and benefits.
Extensive studies on the means-end chain refer to attributes, benefits, and
values. One may infer, however, that the cognitive processes that the theory
describes and interprets are similar to cost components that customers
associate with the purchase and use of the product. One can also make a
distinction between monetary and nonmonetary costs and between
immediate and long-term costs in respect of the ratio denominator that
describes the value for the customer. Fig. 4, building on the most common
buying behavior process, is very useful for integrating the outcome of a
means-ends chain analysis.
By applying the means-end chain theory to the qualitative analysis of the
value for the customer, benefit and cost components relating with a given
product are identifiable. The most suitable survey tools in a business-to-
business context are individual interviews and, sometimes, focus groups,
both in the real and virtual worlds. The most effective technique to use
when conducting personal interviews or focus groups is the laddering

interview.
2.1.1. Qualitative Research Techniques for Mapping the Customer

Value Chain
The laddering interview is a cluster of research techniques that is useful for
elicitation of and interaction with consumers. Researchers subject customers
to question stimuli to map the chain of links between products or brands,
features and attributes, benefits and values, and thus obtain a better
understanding of customers’ motivations and preferences.
Interviewers carry out laddering interviews in an unstructured manner to
limit possible distortions of customers’ cognitive maps. In practice,
interviewers question interviewees regarding the reasons for their prefer-
ences and behaviors, either directly or by specific indirect questions and
elicitation techniques. The type of laddering technique version used will
depend on the nature of the surveyed product and the specific buying
behavior. The main types of laddering are:
Direct laddering. This laddering technique version involves directly
asking interviewees what brand or product they use and buy, and why
they do so. A chain of questions follows that researchers have designed
to reveal the attributes that drive the interviewees’ preference and choice,
the benefits that they believe they obtain through these attributes and,
finally, the strategies, missions and/or values that drive their search and
behavior.
Comparative laddering. This process is similar to the previous one, but
starts with a triad of products or brands shown to customers, who have to
rank their personal preferences and list the main differences between the
products or brands, as they perceive them. Subsequently, the interviewers
ask the interviewees a set of why questions to obtain a more
discriminating detection of attributes, benefits, and values between the
brands and products.
Projective laddering. This method differs from the previous two in that it
adopts projective techniques. In practice, product choice, elicitation of
preferences, and functional explanations of attributes, benefits, and values
do not concern interviewees. They concern more with the third person or
a different company (a colleague or competitor) onto whom customers
project representations and self-representations of markets, their iden-
tities, and their means-end chains. This method is particularly suitable for
products characterized by high emotional involvement and the prevalence
of symbolic value components. The more these two components feature in

the purchasing process (emotional involvement and symbolic value), the
harder direct and immediate elicitation of customer cognitive maps is.
Negative laddering. This technique aims at highlighting cost components,
both monetary and nonmonetary, that discourage the purchase of
products and brands. The negative laddering technique is applied by
means of the same methods as those described above (direct, comparative,
projective), but focusing attention – and thus the answers required – on
the reasons for the nonchoice or limited preference for some products.
Before laying out a map of the value for the customer, however,
researchers will, at their discretion, codify answers and categorize the
attributes, benefits, and values. Reynolds and Olson (2001) propose that
during the categorization process, one should make a distinction between
concrete and abstract attributes, functional and psychological consequences,
individual and organizational goals, and company missions and values.
The researcher must also codify interviewees’ answers in respect of costs
and classify these answers into specific categories relative to monetary or
nonmonetary components, such as efforts (physical or cognitive) and risks.
The different costs are traceable by adopting the total cost of ownership
(TCO) model, including all the stages of the buying behavior process. The
most frequent kinds of costs when following such a model are informa-
tional, searching, psychological (associated with perceived risk), purchasing,
installation, learning, operational, obsolescence, and replacement. The
researcher therefore also needs to formulate interviews (codification and
categorization of answers) in respect of costs to prevent duplication or
omission.
Qualitative research allows a shift from a generic formulation of the
concept of value for the customer to a specific description. Once this
research stage is completed, formal descriptions of customer value emerge in
the following form:
B1 ; B2 ; B3 ; . . . ; Bn
V¼ (7)
C1 ; C2 ; C3 ; . . . ; Cn
with B1, . . . , Bn and C1, . . . , Cn identifying the benefits and costs that
customers expect and as the laddering interviews highlight. Benefits and
costs can be further analyzed with reference to the product attributes and,
therefore, with B1 ¼ f(A1, A2, A3, . . . , An). A similar splitting is possible with
reference to cost components and product attributes that customers perceive
as cost drivers. Consequently, the qualitative analysis of value undertaken
on product attributes makes it possible to elicit these attributes’ components

with formulas such as the following:
A1 ; A2 ; A3 ; . . . An
V¼ (8)
C1 ; C2 ; C3 ; . . . ; Cn ; P
where A1, . . . , An and C1, . . . , Cn represent product attributes associated
with benefits or costs, and P represents the price component.
Qualitative research on value therefore allows the generation of one or
more lists of items related to product attributes and costs on which the
quantitative phase focuses for measurement purposes. Measurement must
enable the researcher to determine the relative weight of every single item
(whether attributes, costs or benefits), as well as the customers’ perceived
performance on the same items, and the economic value of the different
items.
2.1.2. Laddering Applications

Researchers conduct laddering interviews for any kind of product and with
any kind of customer, consumer or organization. However, interviewing
methods (i.e., laddering versions) and qualitative research organization may
require adaptation. Individual interviews are suitable when the product has
strong symbolic or emotional value content, while focus groups are better
when the technical features of products’ functional benefits prevail. In
business-to-business contexts, interviewers should conduct laddering inter-
views by means of individual interviews to avoid organizational problems
(e.g., to coordinate a large number of professionals) and to protect the
privacy of the interviewees.
Fig. 7 presents a simplified cognitive map of the means-end chain of an
overnight express courier. This kind of map, which is a hierarchical map
(hierarchical value map – HVM), represents the elements detected during
qualitative research in an increasingly abstract order – hence, hierarchical.
The first elements are the intrinsic product qualities, and the most tangible
and visible product features.
On studying the map, mainly tangible or, at least, visible attributes
emerge at the lowest level, while laddering the means-end chain from lower
to upper level, symbolic attributes and functional benefits appear. On the
highest level of the chain, finally, symbolic and emotional benefits link
observable choices and explicit preferences with personal or company
visions and values.
As an overnight express courier is a service product for businesses,
corporate and individual values could coexist for some of the members of
Instrumental
Final Value Benefits Attributes
Value
Save Time
Speed
Professional
Self-esteem Success
Decreasing Convenience
costs
Punctuality
Activity Decreasing
Peacefulness
control responsibility
Satellite
control
Fig. 7. The Customer Value Chain for a B2B Service Market.
the decision-making unit while converging at other times. The satellite and
web-based monitoring service has a specific association with individual
benefits, such as serenity and security, as well as with organizational benefits
such as the control and effectiveness of activities.
Quantitative surveys become possible by building on the outcomes of
laddering interviews. These surveys aim at measuring the intensity and
centrality of the connected attributes, as well as the benefits and values that
the customer associates with each product or brand. Two simple and
immediate indicators can provide interesting insights into the magnitude
and intensity of the potential impact of each attribute. These insights result
from the various connections with other attributes or benefits and from the
frequency of the connections in the individual cognitive maps. A network
can undergo many other conventional measurements before using the
qualitative output as input to identify the network value for the customer
measurement process.
2.2. From Customer Value Chain to Customer Behavior: Models of the

Buying Decision Process
Understanding value for the customer implies a careful analysis of the

decision-making process that drives product purchase and consumption.
The benefits and costs that determine a customer’s value perceptions may
actually vary in the different steps of this process. Consequently, in turn, the
customer value perception may change as the process complexity changes.
For a comprehensive understanding of this process, customer value chain

requires a definition, as well as an analysis including the following factors:
customer involvement;
information selection and organization;
hierarchy of effects underlying product evaluation;
decision strategies applied in comparison activities.
2.2.1. Customer Involvement

This field of analysis is of paramount importance since customers’ cognitive
investment during their purchase and consumption process varies according
to their psychological involvement level. Starting with Krugman (1965,
1966–1967), several studies have clearly underlined the positive relationship
between the customers’ involvement level and the complexity of customers’
decision-making process. These studies reveal that with an increased
customer involvement:
the role that situational factors play in choice processes decreases;

customer beliefs become stronger, thereby strengthening the attitudes
toward existing brands;
a triggering of cognitive mechanisms (selective attention, perceptual
distortion, etc.) that focus on avoiding discrepancies between information
flows and preexisting attitudes emerges;
attention to the differential, functional, and/or symbolic features of
product alternatives increases.
In brief, in high-involvement condition, customers tend to base their

evaluation on intentional (active) learning, while in low-involvement
condition they use direct experience with the products as the main information
source. Customers thus avoid prepurchase information collection and
elaboration. For customers with little involvement, interpersonal influence
plays a secondary role in driving product preferences, as these originate more
from mediation between the outcomes of prior, direct experience and beliefs
resulting from passive exposure to marketing communications.
The main factors influencing customer involvement are: (a) the importance
conferred on a product; (b) the perceived risk level; (c) the use context.
(a) In business-to-business markets, the importance that customers assign
to a product depends on several elements:
the role that a product/service may play in the production processes and/
or competitive strategies of the purchasing company;
the problems associated with product use (Lehmann & O’Shaughnessy,

1974);
the novelty associated with the purchase (Robinson, Faris, & Wind, 1972).
Regarding the first element (role of the product), involvement is higher

when the product is of strategic and tactical importance, and therefore
fundamental for the company’s mission or for a specific firm department.
For example, purchasing a statistics software program is of strategic
importance for a company specializing in market research, as is oil for a
petrochemical company or textiles for a firm operating in the fashion
industry. On the other hand, special packaging material may be of tactical
importance – and thus considered essential – for the marketing function.
With reference to problems associated with product use, involvement
increases when, in consumption activities, customers have to face:
procedural problems, such as the need to train the staff who will use the
product or the need to alter organizational routines;
performance problems that usually require a progressive adjustment of
purchasers’ production processes (which may lead to lower performance
than expected in the short term);
political problems that originate from the product’s impact on work organi-
zation and personnel (e.g., automated design and production systems).
The third element (novelty of the purchase), allows the identification of
two different situations: new purchases and modified repurchases. In the
first situation, involvement is higher, since the absence of information and
choice criteria derived from prior direct experience forces the customers to
seek an extensive solution to their decision-making problem (Howard &
Sheth, 1969; Howard, 1977, 1989). This implies active research of other,
external data that are suitable for detecting existing alternatives (awareness
set) and, more specifically, for defining the brands group (evoked set) within
which the final choice will fall. In situations of modified repurchases,
customers face a degree of uncertainty although they do have sufficient
knowledge of the considered product category. This uncertainty originates
from the change in certain variables that are important for the decision-
making process. For instance, the number of brands on the market and the
average price and/or technological specifications of the product may have
changed. Consequently, supplementary information is necessary, although
to a lesser extent than with new purchases.
The perceived risk level connects directly to the uncertainty of the
purchase decision and to the relevance of possible negative consequences
derived from this decision regarding customers’ physical, financial,

psychological, and social integrity (Bauer, 1960; Cox, 1962, 1967; Cox &
Rich, 1964; Cunningham, 1965, 1966).
The intensity of the perceived risk clearly varies, depending on individual
and organizational factors (above all, experience with the product), as well
as environmental factors (the usage situation) and has a direct effect on
evaluation criteria. The literature on the topic distinguishes different risk
typologies:
functional risk related to the fear that the product will not perform as
expected;
physical risk associated with the potentially unsafe consequences of
product use;
economic and financial risks usually associated with the possibility that a
product price will be much higher than its value;
psychosocial risk originating from the product’s potential negative impact
on customers’ self-esteem and/or on their social accountability.
Such typologies significantly influence the search, processing, and use of

signals coming from the market environment and, consequently, the efficacy
of the different information sources that drive customer preferences. The
importance of interpersonal communication is, for example, much greater
when customers purchase products with a higher psychosocial risk, while
institutional sources play a crucial role when functional risks are
predominant.
The context in which the customer uses the product ultimately influences
the level of psychological involvement. Customers’ motivations, percep-
tions, and evaluations vary considerably with usage situations (Belk, 1974,
1975, 1979), as well as the importance of the product category and/or
specific brands. Thus, associating the product with specific use contexts may
affect customers’ psychological involvement, their choice criteria and,
therefore, substitution relationships between product alternatives.
2.2.2. Information Selection and Organization

The benefits that customers look for in products and the resulting choice
criteria trigger a number of cognitive activities aimed at the production of
information that is useful for steering the comparison process. In brief, such
activities consist of: (a) data selection; (b) information production, which is
the attribution of a specific meaning to the data collected; and (c) the
organization of information in cognitive structures.
Analyzing the above-mentioned activities is of key importance, since action

aimed at increasing product value can attain this goal only if customers
perceive the benefits deriving from the differential features and regard them as
important.
In analyzing the information selection and organization process, the most
important aspects refer to the comprehension of:
mechanisms regulating a product data search;
typologies of beliefs underlying product evaluation;
interrelationships between these beliefs, which define the cognitive structures
through which customers represent competing products in their minds.
Selection of Information. According to the theorists of the attitudes system

(Krech, Crutchfield, & Ballachey, 1962; Festinger, 1957; Heider, 1958; Katz,
1960) and information processing (Bettman, 1970, 1971, 1979; McGuire,
1969, 1976; Ray, 1973) selective mechanisms regulate customers’ information
processing. The most important are the following:
selective attention and selective exposure, through which customers avoid
potentially destabilizing information;
selective comprehension and perceptual distortion, respectively aimed at
removing and modifying the content of communication that conflicts with
the consolidated system of values, beliefs, and attitudes;
selective retention, which enables memorization of collected data.
Selective attention and exposure regulate the perception of data relevant

to products that, once codified, customers store in their short-term memory.
Selective comprehension and perceptual distortion govern data interpreta-
tion and translation into information, which is stored in the long-term
memory through selective retention mechanisms.
Beliefs. Customers’ beliefs refer to a product’s expected or perceived

performance, and originate from individual knowledge (specifically derived
from prior consumption experiences) and from the organization of new
information. Such information, which the previously described selective
mechanisms filter and process, results from data collected from four basic
types of sources (Engel, Kollat, & Blackwell, 1968):
Commercial sources, which the company directly controls (e.g. advertis-
ing, sales force);
Institutional sources, whose distinctive features are impartiality and

competence (e.g. mass media, consumer associations);
Interpersonal sources, consisting of reference groups or individuals,
previous users of a given product/service and, more generally, friends,
relatives, and colleagues;
Empirical sources, related to products trial.
Customers organize these different information sources according to an

information hierarchy, in order to fulfill their knowledge needs with
minimum effort. They adopt a type of sequential search process, extending it
until the incremental advantages originating from further data collection
equal the additional costs of such data collection.
In product comparisons, the information resulting from collected data
influences the formation of beliefs. From an analytical point of view, one
can divide these beliefs into: (a) informational and (b) evaluative (Assael,
1987) beliefs. Informational beliefs relate to product attributes and
evaluative beliefs to the resulting benefits. In the choice process, both types
of beliefs play a key role, but identifying the connections between attribute
and benefits may be far from simple, either because customers often do not
have the necessary knowledge to exactly define the attribute that may
generate the benefit they require, or because, in many cases, different
attributes may provide the same benefit.
A further classification proposes the distinction between descriptive and
inferential beliefs (Huber & McCann, 1982; Olson, 1978). Descriptive beliefs
result from the functional connections between products’ attributes that, if
known to the customers, drive them to trigger a process of generalization.
For instance, information on the number of discs in a car braking system, or
on the presence of an antilocking system, directly influences beliefs
concerning product safety.
Inferential beliefs, on the other hand, originate from the cognitive links
between attributes without functional correlations. The customer establishes
these cognitive links through prejudices, prior experience, stereotypes or
simple suppositions. For example, knowing the country that manufactures a
particular product could generate a customer belief in the product’s high
quality (made-in effect), therefore influencing expectations and evaluations
concerning product performance.
Interrelations between Beliefs. Customers integrate and organize the

mental representations concerning competing products in cognitive
structures. These structures are networks of beliefs relating to specific
products’ attributes and benefits that customers store hierarchically

according to their specific level of abstraction (Cohen, 1979; Myers &
Shocker, 1981; Olson & Reynolds, 1983; Young & Feigin, 1975).
Following Nicosia (1978), a cognitive structure’s beliefs can be regarded
according to (a) central and (b) peripheral beliefs. A central belief is at the
core of complex networks, involving a relatively high number of connections
in respect of beliefs concerning other product attributes (or benefits).
Peripheral beliefs, on the other hand, occupy a decentralized position within
the cognitive structure and are substantially isolated from the vast majority
of remaining beliefs. The centrality of a given belief relates (Nicosia, 1978):
(a) negatively to the belief’s perceptual elasticity, which conveys its
sensitivity to external stimuli that touch this belief; (b) positively to its
perceptual leverage, which is the influence that its change might exert to
alter the global cognitive structure.
Central beliefs respond less to external stimuli because they have more ties
to other beliefs in the cognitive structure. However, due to these
connections, their change exerts a stronger impact on the entire structure.
Thus, the wider the network of connections relating to a particular belief,
the greater the perceptual leverage of this belief and the lower its perceptual
elasticity.
The analysis of belief elasticity and leverage is fundamental for the
improvement of product value through effective communication strategies.
On the one hand, in order to change the overall picture that a customer has
of an offer, a firm has to concentrate its advertising effort on beliefs that are
central in the organization of the cognitive structure related to this offer. On
the other hand, in order to strengthen the resistance to competitors’ actions,
a firm should reinforce the tightness of the mental representation of its
product by increasing the links between the beliefs that define the cognitive
structure. In fact, a tightly organized structure is more difficult to change.
2.2.3. Hierarchy of Effects Underlying Product Evaluation

The analytical framework outlined so far builds on the implicit hypothesis
that customer choice depend on the existence of active beliefs concerning the
product’s ability to fulfill the functional and symbolic needs that activate the
decision-making process.
This hypothesis is not necessarily true, since the hierarchy of the effect
underlying product evaluation may alter under the influence of multiple
elements. Among these, the customer’s psychological involvement level and
the perceived differentiation level between compared products play a key
role (Assael, 1987).
Customers with low involvement tend to minimize prepurchase compara-

tive activities. These customers only verify a product’s compliance with their
preferences after purchase. They are therefore more sensitive to situational
factors. This has quite significant effects on the sequence of the evaluative
process.
The level of perceived differentiation between competing products also
has important effects. In respect of a high level of differentiation, evaluative
and comparative processes are simpler, since customers can easily identify
the product that better meets their needs. In the opposing case, the process
of preference formation is very difficult due to the alternatives’ substantial
homogeneity. This difficulty may lead customers to make intrinsically
unstable choices that require a constant reassurance process.
Joint consideration of the elements indicated above (Assael, 1987) allows
the identification of four typical hierarchies of effects in product evaluation:
beliefs - choice - postpurchase evaluation;
beliefs - prepurchase evaluation - choice - postpurchase evaluation;
choice - beliefs - postpurchase evaluation;
beliefs - choice.
(a) The hierarchy ‘‘beliefs - choice - postpurchase evaluation’’ con-

ceptualizes the evaluative process’s sequence in situations of high-
perceived differentiation and low psychological involvement. The low
effort that the customer is willing to make during the purchase process
turns into incidental (passive) learning processes, while the limited
perceived risk and the high-perceived differentiation lead customers to
adopt variety-seeking behaviors. Thus, in the examined situation,
achieving actual customer loyalty is very difficult.
(b) The hierarchy ‘‘beliefs - prepurchase evaluation - choice -
postpurchase evaluation’’ refers to situations of high-perceived differ-
entiation and high psychological involvement. This hierarchy represents
the core of an evaluative process aimed at searching for an extensive
solution to the purchase problem. Brand preferences actually originate
from a careful evaluation of the products on the market, while the high
level of differentiation that characterizes these products supports brand
preferences. Customers, who are satisfied with their choice, will thus
develop a brand loyalty behavior.
(c) The third hierarchy that builds on the sequence ‘‘choice - beliefs -
postpurchase evaluation’’ refers to situations with a high level of
involvement and a limited product differentiation level. In spite of the
attention that a customer is willing to devote to the evaluation stage, in

such circumstances the lack of differentiation makes it difficult to
formulate grounded judgments regarding competing products. In other
words, the minimal differentiation perceived does not provide a sound
basis for preferences. In the light of the importance conferred on the
purchase, after choice, cognitive dissonance phenomena may occur
(Festinger, 1957). Customers tend to solve this psychological tension
through the production of beliefs and evaluations that are consistent
with the adopted behavior.
(d) The last hierarchy builds on the sequence ‘‘beliefs - choice’’ and
corresponds to purchase situations with low psychological involvement
and substantial product homogeneity. The low levels of differentiation,
as well as the low interest in the product, frustrate both prepurchase and
postpurchase evaluation, thereby justifying the lack of postpurchase
attitude formation. Thus, customer behavior depends on passively
developed beliefs and on the influence of situational factors (e.g., the
availability of products at points of sale, and promotional initiatives by
manufacturers or dealers) that may lead to a random choice process. In
the case under consideration, purchase trivialization (typical of routine
repurchases) may lead the customer to adopt inertial behavior patterns.
However, these aim at simplifying the decision-making process rather
than fulfiling consolidated brand preferences, and are therefore very
different from those based on a real customer loyalty.
2.2.4. Decision Strategies in Comparison Activities

Another important analytical step is the examination of customers’ decision
strategies during comparison activities. Working from several theoretical
and empirical analyses, scholars distinguish between within-attribute
strategies (Tversky, 1969, 1972) and across-attribute strategies (Einhorn,
1970). The former imply a feature-by-feature comparison of alternatives by
using one selection criterion (attribute) at a time, and repeating, if necessary,
the comparative process in respect of all the attributes deemed relevant.
Conversely, across-attribute strategies imply the separate evaluation of each
alternative: the assessments of the attributes of each product combine in an
overall evaluation, upon which the choice builds (Johnson, 1984).
Another classification, partly overlapping with the previous one, proposes
a distinction between compensatory or noncompensatory evaluation
strategies. In the case of compensatory strategies, which include multi-
attribute models that build on the conceptualization proposed by Fishbein
(1967), weaknesses perceived in an attribute can be compensated for with a

positive evaluation of another attribute. In noncompensatory strategies,
such possibility does not exist.
In the light of this distinction, and for the purposes of measuring the value
for the customer, four basic models of comparative strategies are identifiable
(Bruno & Wildt, 1975; Green & Wind, 1972; Wilkie & Pessemier, 1983):
conjunctive model, disjunctive model, lexicographic model, ideal profile
model.
The conjunctive model is based on customer’s evaluation of a relatively
high number of product features and on the identification, for each of them,
of a threshold level below (or above) which the product is rejected. The
customer usually adopts this strategy when facing a variety of products and
has difficulty with estimating their attributes’ ideal level. Conjunctive
evaluation strategies usually aim at dropping out of inadequate product
profiles rather than at selecting alternatives that are more in line with
customers’ preferences. The adoption of conjunctive strategies leads to
noncompensatory evaluations, since a given feature’s failure to overreach
the acceptability threshold will compromise the assessment that the
customer formulates with regard to the considered alternative, irrespective
of the extent to which other attributes are present.
The same observation applies to the disjunctive model, whose scope of
application is similar to the conjunctive model. The only important
difference relates to the number of attributes that the customer takes into
account. In fact, a product is acceptable when at least one of its attributes
overreaches the preestablished threshold level (Peter & Olson, 1990). This
allows a substantial simplification of the choice process, which is very
important for customers who are less involved.
The lexicographic model implies the ranking of product characteristics
and the comparison of the alternatives in terms of the most important
attribute. In other words, customers first define the importance of products
attributes and then evaluate brands in terms of the top-ranked attribute.
The brand that performs better with regard to this attribute is the brand
the customer selects. Only when two or more brands score equally on the
top-ranked attribute do customers (separately) examine other attributes
according to their priority ranking and repeat the comparison procedure
until arriving at a solution to the decision-making problem. The use of the
lexicographic model is subordinate to a specific product attribute’s clear
prevalence in the evaluation process.
In the ideal profile model, customers consider the set of product attributes
and specify their relative importance according to their needs. Then, for
each attribute, they verify the distance between the ideal and perceived levels
of performance. The brand closest to the ideal product profile is the one
preferred. In analytical terms:
X
n
Dj ¼ W i ðBij I i Þ (9)
i¼1
where Dj is the utility loss associated with choice of product j; Wi the

relative importance given to the i-th product attribute; Bij the level of the
i-th attribute perceived by the customer in product j; Ii the level of the i-th
attribute considered ideal by the customer; n the number of product
attributes.
The ideal profile model leads to the same result as that obtained through
the model by Fishbein (1967) – as discussed Section 3 – because the decision
strategy is compensatory.
Obviously, the proposed classification should not lead to the assumption
that the customer uses a specific strategy exclusively. Customers often adopt
noncompensatory strategies to eliminate inadequate products, or the ideal
product profile model to choose the best alternative (Lussier & Olshavsky,
1979; Vyas & Woodside, 1984).
Table 1 presents a numeric example of the application of the four
decision-making strategies dealt with in this section. The first column
contains the product attributes that customers considered when choosing an
air conditioner brand, the second column indicates their relative impor-
tance, while the third and the fourth respectively indicate their minimum
acceptable and ideal levels of performance. The remaining columns indicate
the customer perceptions of the four competing products.
Table 1. An Example of Adoption of Decision-Making Strategies.

Attributes Importance Minimum Ideal Judgments Judgments Judgments Judgments
% Levels Levels on A on B on C on D
User- 40 6 9 8 8 7 8
friendliness
Design 25 6 9 5 7 9 9
Brand 20 6 9 4 6 5 4
reputation
Size of product 10 5 9 7 6 9 7
range
After-sale 5 5 9 6 6 9 7
service
If customers adopt a conjunctive strategy, they would choose brand B. If,

on the contrary, customers adopt the lexicographic strategy, the decision
model would lead to the choice of brand D, while, if they adopt the ideal
product profile strategy, brand C would be the favorite brand. The example
underlines that the selected alternative may vary according to the models
that customers adopt in comparison activities. This suggests the opportunity
to use decision strategies as a variable for market segmentation.
3. MEASURING VALUE FOR THE CUSTOMER: KEY

METHODOLOGICAL APPROACHES
Following the analysis of the value the customer makes and, specifically, the
identification of its main components (from the benefits/attributes and
sacrifice/cost point of view), the measuring stage can start. The methods to
translate value into economic or monetary terms vary as a function of the
measuring approaches and techniques. In some cases, a monetary meter –
the EVC method (economic value for the customer) or, strictly speaking, the
TCO (see Section 3.1) – measures value. In other cases, value is measured
first, followed by the benchmarking of the value differential and the
translation of this value into monetary terms – a typical composition
approach process – or Fishbein measurement (see Section 3.2). Monetary
and nonmonetary measures can also measure value, for example, conjoint
analysis (see Section 3.2). Value measurements can then be converted into
monetary terms without any methodological extension. Lastly, when
sophisticated measurement is crucial for managerial purposes, a hybrid
measurement is carried out (see Section 3.2).
Theoretically, two methodological approaches are available to measure
the EVC: a management-based approach, building on the knowledge and
business sensitivity of the organization’s top management and a customer-
based approach, building on customers’ perceptions and attitudes. The
development of these two methodological approaches is possible by using
similar measurement tools and techniques, although – as can easily be
inferred – some techniques are consistent with customer-based measuring
processes (e.g., conjoint analysis). Fig. 8 illustrates the range of approaches
and techniques used to measure the economic value from the customer point
of view, making a distinction between those used for a management-based
application and those that are more suitable when following a customer-
based approach.
Management-based EVC (Economic Value

perspective for the Customer)
According to Fishbein
Customer-based
perspective Conjoint based
Fig. 8. Customer Value Measurement Techniques.
In management-based approaches, the measuring process is mainly a desk

process builds upon the company managers’ evaluations of the products,
brands, consumers, and economic dimensions of the trading processes.
Consequently, the most suitable techniques for this approach are the
traditional value-analysis systems based on observable product variables
(attributes and technical specifications). As far as possible, the measurement
of these variables occurs by means of widely shared criteria. The
measurement is then converted into monetary measures without any
distortion (e.g., the per hour productivity of a manufacturing plant and
the resultant potential economic saving for a business client). However, in
the management-based approach, the various attributes of the supply,
which, managers perceive as substantially contributing to the customer’s
value perception, have to be broken down. This process also includes
measuring the product performance through relatively objective techniques
and measurement scales, and converting competitors’ partial and global
performance differential into economic terms. For this type of measure-
ment, quality function deployment processes is usable with regard to
technical specifications of the observed product. In a management-based
approach, researchers can also apply techniques such as the weighted
measurement (in order of importance) of the performance perceived with
respect to the product’s various attributes or the main benefits for the
customer. To make these measurements, the Fishbein technique, which is
the best-known one, is as effective when applied in a survey directly focused
on the product clients, as a customer-based approach.
Customer-based approaches do include field surveys that apply both
qualitative and extensive quantitative measurement methods. The aim of
these approaches is to break down values, benefits, and attributes related to
a product or brand’s overall value perception, as illustrated in the previous
section. In a following stage, these approaches can be used for the
measurement of the economic value in monetary terms through univariate
measurement techniques or multivariate measurement techniques (conjoint

analysis), which is a combination of the two types of techniques.
These approaches, schematized in Fig. 8, introduce increasing complexity
from the economic and organizational point of view, and, finally, an
increasing need for time to produce relevant outcomes in respect of pricing
decisions. The degree of validity and reliability of the measures attained
through the various approaches increases as well. The choice of the
approach and method (tools and techniques) with which to measure the
EVC is the result of a trade-off between the effectiveness of the expected
outcomes and the deployment of the resources required to carry out the
measurement process.
3.1. Desk Approaches to Measuring EVC and the Total Cost of Ownership
Forbis and Metha (1981) define the EVC as the measurable value provided to
the customer by comparing the costs/benefits provided and alternative
options. EVC is thus a measure relating to the client or cluster of clients
under investigation, as well as to the reference competitor or competitors
considering alternative products that generate the same benefits for the client.
EVC measurement is management-based and rests on technical attributes
The approach to EVC measurement is the easiest and most widespread
approach in managerial practice. Its measurement process is fast, easy to
apply, and cost effective.
EVC analysis (if the management-based approach is adopted) includes the
analysis and enhancement of the technical characteristics of the product and
organizational processes – based upon the knowledge and business
sensitivity of the company’s management – that mostly affect current and
potential customers’ choice attitudes. The selection of characteristics that
generate value for the customer usually occurs through a simplification
process aiming to reduce the set of crucial attributes to those that mostly
differentiate the company’s product from that of competitors and that are
expressible directly or easily in monetary terms.
EVC analysis for pricing purposes is the extension of the traditional value
analysis process and originated from the inverted engineering techniques
aiming at identifying the crucial technical characteristics of a product,
starting with its functions of use (Miles, 1961; Shilito & De Marle, 1992).
EVC is a family of engineering techniques that evolved over time up
to the development of the quality function deployment – house of quality
(Daetz, Barnard, & Norman, 1995; Hauser & Clausing, 1988; Mizuno &
Akao, 1978).
From a method point of view, EVC analysis involves identifying the
benefits and costs that seem to be most important to the client. Thereafter,
the analysis identifies and measures the technical attributes or attributes
generating the benefits and costs mentioned above, focusing on those
attributes measurable through observation and well-known scales. These
attributes are therefore relatively objective.
However, analysis of the value for the customer clearly focuses on one or
more of the product’s attributes, disregarding the complex composition of
the value for the customer concept and measuring attributes that can be
easily measured, all the more so if they are already expressed in monetary or
easily convertible terms. However, this criterion does not guarantee the
identification of the product’s attributes and characteristics that can express
the composite nature of value for the customer.
The Fishbein approach, which the following section illustrates, is a
further evolution of this method. By extending the value analysis to
attributes and benefits not related to technical attributes, the limits of EVC
analysis in respect of pricing are overcome. Well-known scales include
observing or measuring these nontechnical attributes, even if they are crucial
benefits and attributes in the client’s value perception.
An extension of management-based measurements of value for the
customer allows a dynamic approach. Concepts such as the value analysis of
the product’s life cycle or the TCO are examples of a managerial practice
aimed at determining value and price. Such a practice only allows the
highlighting of the benefits and costs after prolonged use. These analyses are
suitable for business-to-business markets and semidurables or durables, or
even investment goods.
Within these contexts, an EVC analysis is possible by applying, and if
necessary extending, the following formula:
EVC ¼ P R þ M þ S þ G (10)
where P denotes the initial investment (synthesized by the prices), R the
current residual value, M the current value of the maintenance costs, S the
current value of the replacement costs, and G the value of the operating
costs.
Although all management-based methods (specifically those founded on
the EVC analysis) are quite simple to apply, they have a number of crucial
limitations. These are the reductionism-based approach in interpreting
the value components for the customer and managers’ subjectivity
(i.e., perception distortions) when assessing their hierarchy of importance.

These are well-known limitations; even in the development processes of new
products, customer field surveys aimed at identifying the various value
components and their relative importance increasingly supplement the
house of quality.
3.2. Field Approaches: Compositional and Decomposition Methods
The main univariate measuring technique builds on the studies by Martin

Fishbein (Fishbein, 1963, 1967) on the measurement of attitudes (Fishbein
measurement). The technique’s rationale is of a compensatory type and
interprets the value for the customer as the result of the summation of the
relative importance of the various product attributes (identified in the
qualitative survey phase) weighted according to the relevant performance
perceptions. The following formula expresses the Fishbein value measurement:
X
n
Va ¼ I i Pia (11)
I¼1
where Ii denotes the relative importance of the i-th attribute and Pia the
performance perceived in the supply of the product or brand ‘‘a’’ with respect
to the i-th attribute. The result is then equal to a measurement of the value
perceived in product or brand ‘‘a.’’ In other words, an index that synthesizes
the performance perception of a specific brand weighted according to the
importance attached to the product or brand attributes determines the value
perceived in a product or brand.
However, by applying this formula, only a partial measurement of the
value is possible. From an operational point of view, the formula should not
only allow for the performance attributes related to the benefits, but also for
those that the client associates with the costs required to purchase and enjoy
the specific benefits.
Therefore, the same formula is extendable to include the components of
the value denominator, measuring – more or less simultaneously – their
perceived importance, the importance of the attributes generating value, and
the expensiveness of the brand or product investigated. The exhaustive
formula then becomes:
SnI¼1 I i Pia
Va ¼ (12)
Sn1¼1 Ii E ia
where Eia denotes the expensiveness perceived by customers with respect to

both the i-th attribute (associated with the cost to be paid and sacrifice to be
made to enjoy the expected benefits) and the brand or product ‘‘a.’’
The whole set of data necessary for building the index therefore consists
of measurements of the relative importance of the attributes – measured
with constant summation rating systems if possible (Bagozzi, 1994) – and
measurements of the perceived performance and expensiveness with respect
to two or more competing products or brands. Any rating system or Likert-
like scales or rating systems supplemented with semantic links can measure
the perceived performance (Bagozzi, 1994; Churchill & Iacobucci, 2002).
Measurements that exclude the weight and perceived expensiveness
related to prices make it possible to benchmark the price level that a given
brand can set against that of competitors, which allows the value as
perceived by customers to be identified. Pricing requires the identification of
the competitors’ price and the application of the following formula.
VðaÞ
Price a ¼ (13)
VðbÞ PðbÞ
The economic value produced by applying the algorithm is a price that is

consistent with the value differential (either positive or negative) as
perceived by the customers. Consequently, economic value is essentially a
value calculation building on a proportion whose unknown value the price
of the product analyzed provides. To price a product in respect of
competitor ‘‘b,’’ the following proportion is applicable:
VðaÞ VðbÞ
¼ (14)
PðaÞ PðbÞ
with the solution being:
VðaÞ PðbÞ
PðaÞ ¼ (15)
VðbÞ
However, theoretically this value does not represent the price that is
actually chargeable, as consistency implies the full absorption of the
differential value that the product provides to the client. If a higher price
were to counter-balance the differential advantage provided to the
customer, the product would generate indifference in customers, which
would be to the detriment of the offer with a higher nominal price. The price
to be charged should thus be lower than the one resulting from the Fishbein
measurement.
Multivariate analysis techniques are useful for estimating customer-based

pricing. Conjoint analysis is the most widespread and effective of these
techniques (Green & Rao, 1971; Green & Wind, 1973; Green & Srinivasan,
1978, 1990). In conjoint analysis, the measurement of value uses a stricter
method than the Fishbein technique uses, although the research and
measuring process is less cost effective and more complex.
Conjoint analysis merit is typical of all experimental methods: this
technique allows the measurement of behaviors and underlying attitudes
that not only build on customers’ statements, but also on the causality
relationships that can be observed in the real market place (trials in the field)
or under simulated conditions of trading (laboratory trials).
As already mentioned, when applying conjoint analysis, the means-end
chain has to be elicited. The value of a product can thus be broken down
into a set of partial values, which link to the individual attributes of the
offer. In this context, partial values are both those associated with the
performances that generate benefits, as well as those producing costs or
sacrifices (in the broadest sense).
Conjoint analysis is the most suitable technique for measuring value in
pricing processes. This technique enables reliable identification of the
relative importance of the various product attributes, as well as of the partial
value that the customer assigned to each performance level that the
company and its competitors actually or virtually provide.
From the application point of view, value measurement through
conjoint analysis is a simulation of the customers’ evaluation and selection
process. The simulation context is definable by an entire set of products
with characteristics for which customers express their preferred purchase
intention. As already mentioned, one of the strong points of a research
work conducted by applying this technique is the possibility to identify
customers’ perceptions under conditions that are relatively similar
to the real purchasing processes. Under real conditions, customers are
not forced (as happens with the Fishbein technique) to express their
opinion on the product’s individual attributes, but rather on alternative
products (sometimes not even explicitly), or through simple choice
behaviors.
Conjoint analysis therefore allows starting from the declarations of
intent or from choice behaviors to identify the evaluations implicitly
expressed by the clients regarding the different products suggested as an
alternative to the product provided. The evaluations of the individual
attributes’ importance, as well as the importance of those attributes related
to each product or brand’s performance level on the market are the result
of the statistical/quantitative processing of the customers’ opinions or

purchasing intentions. All this takes place without any sustained
rationalization and verbalization of the specific motivations that generate
attitudes and behaviors.
From the operational point of view, the application of the conjoint
analysis first requires an extension of the qualitative survey. In addition to
reconstructing the means-end chain and – as in research works to measure
value – the conjoint analysis forces identification of the performance levels
linked to each attribute to be measured in the quantitative part of the
analysis. Following the survey aimed at describing the means-end chain, or
during the qualitative phase following the selection of the crucial attributes
of the chain itself, interviewers should ask the respondents to give a clear
example of the minimum (acceptable) and optimal (ideal) performance
levels with respect to each attribute. Performance therefore relates to both
the attributes linked to benefits, as well as those more directly associated
with the costs to purchase or use the product investigated.
Upon finalization of the qualitative survey – including the identification
of the performance levels to be measured – the value for customers and their
sensitivity to price must be analyzed through extensive quantitative
research. Fig. 9 illustrates the application phases of the conjoint analysis
for pricing.
Identification of benefits, attributes and minimum-expected-optimal performance levels
Combination of levels and selection of simulated products (product profiles or cards) to be

submitted for evaluation
Identification of choice preferences or priorities related to alternative products
Measurement of the contribution of each performance level to create the overall value perceived in
the product
Measurement of the unit monetary level of the utility (partial value) as a function of the relationship
between the price gap and the utility/disutility gap linked to the price.
Fig. 9. The Methodological Process of a Conjoint Analysis.

Conjoint analysis (according to the full profile technique) includes the

following stages:
reconstructing the means-end chain, benefits, attributes, and performance
levels (minimum, expected, optimal levels). The division of attributes into
separate levels that are consistent with the technical and economic
feasibility that the company tested. With respect to price (but also to other
attributes), it would specifically be better to choose a wider range of levels
than the market one (to have a more accurate estimation of the utility
connected to the attributes); however such a range should not be so wide
as to have a negative impact on the likelihood of the evaluation process;
defining a set of product profiles – hypothetical product configurations
(also defined as cards) – identified by combining the levels of the
previously selected attributes. Specific attention should be paid to the
definition of the experimental design and to the reduction of the number
of profiles by means of proper statistical techniques;
gathering of preference evaluations expressed by customers regarding the
product profiles submitted to them. The suggested process is to rotate
profiles and divide them into three clusters; thereafter the collection of
evaluations should occur via a semantic link scale, which is at least equal
to 1–7, to better identify variance in the evaluations.
data processing by applying a specific algorithm to the evaluations made
by each individual customer regarding his or her preference or purchasing
intention. There should also be a system of multiple regressions for each
respondent. The regressions should consist of as many equations as the
product profiles evaluated, where the dependent variable is the opinion of
each profile, while the independent variables are the n levels of the
attributes described in each card (i.e. in each profile submitted). The
coefficients denoting the utility, which corresponds to each of the
attribute levels, provides the solution to the system.
analyzing the data and determining the:
– utility coefficients (or partial utility), which are the expression of the
weight that each respondent assigns to each of the attribute levels in the
selection process;
– relative importance of each attribute given by relating the partial utility
deviation of the maximum and minimum levels associated with this
attribute to the total utility deviations.
The greater the importance of an attribute within the purchasing process
(i.e. the consumer’s sensitivity to this attribute), the wider the utility
differentials producing the different levels considered.
calculating the monetary value of the unit utility: the monetary value of
the unit utility denotes the price of each utility unit and is calculated as the
ratio between the maximum deviation of the price levels and the relevant
utility:
Monetary Value of Utility ¼ ðPmax Pmin Þ ðU max U min Þ (16)
where: Pmax and Pmin are the maximum and minimum price levels; Umax
and Umin are the corresponding utility coefficients (maximum and
minimum).
Multiplying the Monetary Value of the Unit Utility by the differential of
partial utility that customers perceive in association with a better or worse
product level provides the quantification of the monetary value of a given
attribute.
To determine the utility of competitors’ products for customers the
following formula is used:
X
k
U i ¼ b0 þ U j W ji (17)
j¼1
where:
Ui ¼ the value/utility of the product profile that characterizes the brand i;
b0 ¼ constant;
k ¼ total number of attributes/benefit and attributes/cost;
Wji ¼ level of the j-th attribute of the i-th product profile;
UjWji ¼ utility associated to Wji
The delta price that customers are willing to pay for different product
profiles can be easily measured by calculating the utility differential of the
two product profiles and by multiplying this differential for the monetary
value of the utility itself.
Price sensitivity analysis is an additional output of conjoint analysis.
Owing to the conjoint analysis outcomes, a real demand curve – a response
function measured in terms of preference shares – can be constructed base
on price variations.
The outcomes of conjoint analysis are utility values relating to specific
performance values (they are therefore partial values). Based upon the
analysis outputs, the level of total utility that a performance set produced
for customers can be defined. This performance set, which relates to all the
analyzed attributes, is actually a simulated product. The total utility for
several simulated as well as real products is also easy to define. A scenario
can be built with characteristics that are similar to the market investigated:
the profile of the simulated products are thus fully in line with the real and
new or modified products for which the relationship between the differential
benefits provided to the market, the accessible prices, and achievable
preference levels needs to be analyzed.
With these data, researchers can estimate the customers’ preference
shares. By comparing the value indexes of the different products measured,
their competitive performance is estimable. The literature suggests the
following three different techniques for this estimation process:
the first is the first choice technique. This technique assumes that
customers’ preference is always oriented towards the product with the
maximum total utility. The share estimated for a given product profile is
represented by the proportion of the sample for which that specific profile
attains the highest utility scoring. The first choice model, although quite
simple, is a deterministic model;
the second, defined BTL (from Bradley, Terry and Luce, the three
authors) technique adopts a probabilistic and nondeterministic approach.
This technique assumes that once the n products defining the market
scenario have been identified, the total utility of each complete product
profile is summed and the preference share of a given x product is defined
as the ratio between the x total utility and the summation of the total
utilities of all products defining the scenario;
the third technique uses logit models to mediate the approaches of the first
two techniques. With the logit model, the preference shares of the product
profiles can be calculated by means of the following formula:
eU ij
Pij ¼ (18)
P
n
eU ij
j¼1
where:
Uij ¼ value/utility of the j-th product profile calculated with respect to
the i-th customer
h ¼ number of simulated product profiles;
e ¼ Neperian constant.
The preference shares attained with one of the three techniques –
researchers agree that the third one enables a better model of customer
behavior to be developed – are proximity measures of market shares.
By afterwards changing the price under the linearity constraint of the
price/utility ratio (i.e. disutility), the preference share’s (market) degree of

variation can be determined when the price level changes. With the
different price levels in the what if algorithm on the X-axis and the
relevant preference shares on the axis of ordinates, an estimation of
customer sensitivity to the different price levels and, graphically, a real
demand curve are determined.
While conjoint analysis is one of the most frequently used techniques in
marketing decision-making, this technique has a number of limitations:
from the experimental point of view, all possible combinations of the
attributes’ performance levels can not be tested. Therefore, proper
reductions have to be made of the product profiles. Additionally, in the
conjoint analysis cards, it is easier to describe tangible and functional
attributes than those linked to symbolic benefits. Accordingly, this
technique is less effective for products with a high symbolic content.
Lastly, the major point of weakness of conjoint analysis is that brand-
related trust resources are not measured, as this type of analysis cannot be
used to assess the interactions of the product’s functional characteristics
with the brand.
3.2.1. Hybrid Approaches

To overcome the limit of the conjoint analysis mentioned above and
related to the nonmeasurement of trust resources, researchers can
determine the value perceived by the customer by combining the Fishbein
measuring method with the conjoint analysis in the hybrid approach of
Christopher (1982). The main strength of this approach is its potential for
estimating the value of trust that can be inferred from the differential
evaluations associated with a given brand or firm, and not with other
brands or firms.
The methodological steps are as follows:
(a) conversion of the scale used to measure Fishbein perceptions into values
of equivalent utility in the conjoint measurement by means of the
formula:
U max U min
Ue ¼ (19)
Max scale value Min scale value
where Ue denotes the equivalent utility
(b) weighting of the perception differential with the values of equivalent
utility.
The following weighting is then relevant
U e Evaluation X i
where
Ue denotes the equivalent utility and
Xi evaluation denotes the evaluation of the n attributes;
(c) transformation of the value differential attained in the previous stage
into a monetary differential by multiplying the value of the unit utility.
Using the traditional procedure of conjoint analysis as a ratio between
the price deviation and the utility deviation enables calculation of the
monetary value of the utility (Table 2).
Table 3 presents a measurement of the value perceived with respect

to a financial information web site. In this case the equivalent utility is
equal to the utility deviation related to the size of the Fishbein scale
(equal to 4 ¼ 51); for the attribute duration of the subscription, the
equivalent is equal to 0.125 (0.5/4), for the attribute real time data, is
equal to 1.25 (5/4). The weighting of the equivalent utilities with the
evaluation differentials of the Fishbein scale leads to a value for the
attribute duration of the subscription, which is equal to 0.325 (0.125 2.6),
and a value for the attribute real time data, which is equal to 4 (1.25 3.2).
As the value of the unit utility is equal to EUR 94.33, by multiplying the
summation of the utility differentials by the equivalent utility, the price
Table 2. Measurement of the Value Perceived with Respect to a

Financial Information Web Site.
Attributes Levels Partial Utility Utility Fishbein Fishbein Perception
Conjoint Deviation Evaluations Evaluations Differential
Analysis Brand A Brand B
(Scale 1–5) (Scale 1–5)
Subscription A. 6 months 0.25 0.5 5 2.4 2.6

Duration B. 12 months 0.25
Real time A. Yes 2.5 5 1,8 5 3.2
data B. No 2.5
Annual A. 450 4.77 3.71 2 2 0
subscription B. 600 6.36
fee C. 800 8.48
9.21
Table 3. Measuring of the Value Perceived for a Financial Information

Web Site.
Attributes Conjoint Partial Utility Deviation Fishbein Utility
Utilities (Evaluation Scale Evaluation Differential
Deviation Equivalent Differential
Utility)
Subscription 0.25 0.5/4 ¼ 0.125 2.6 2.6 0.125 ¼ 0.325

duration 0.25
Real time data 2.5 5/4 ¼ 1.25 3.2 3.2 1.25=4
2.5
Annual fee 4.77 4.77 (4.48) 0 0
¼ 3.71
6.36
8.48
3.675
differential of A can be determined in relation to B for the specific values

(see Table 3).
The price differential is then equal to EUR (3.675 94.33), which is
EUR 346.66. Given a price of B equal to EUR 600, the value-oriented
price of A will be less than or equal to EUR 600EUR 347.
4. CONCLUDING REMARKS
Customer value management is the fuel of the powerful engine linking value
for the customer, satisfaction, loyalty, profitability, and firm value. The
introduction to this paper includes a review covering studies that
theoretically and empirically demonstrate these critical links. In order to
prescribe and design proper customer value management strategies, scholars
and managers benefit from a full understanding of customer value analysis
and customer value measurement. With regard to point one, the first part of
this paper’s contribution highlights the critical issues in customer value
analysis by referring to the most important contributions in marketing and
consumer behavior literature. The paper presents some technicalities
relevant to deploying customer value analysis.
With regard to point two, the second part of this contribution refers to
marketing literature by presenting the wide range of techniques available for
measuring customer value effectively and efficiently. This paper covers desk
techniques like TCO and EVC, as well as field techniques like composition
and decomposition approaches (and their possible hybrid combination).
Although prescriptive and direct managerial implications lie outside the
scope of this contribution, the more careful the value analysis and
measurement process, the better the customer value management process
and, consequently, the more positive its effect on profitability, growth, and
firm value. In terms of further research, the link between rigorous customer
value analysis and measurement and rigorous customer value management
are open to new contributions.
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VALUE DELIVERY AND
VALUE-BASED PRICING IN
INDUSTRIAL MARKETS
Andreas Hinterhuber
ABSTRACT
After pioneering, but insular, work on the conceptualization and

measurement of customer value in business markets undertaken in the
80s and 90s, interest in this topic is substantial since the beginning of this
decade. Despite this recent interest, marketing scholars concur that value
in business markets is still an under-researched subject. This contribution
to the debate is threefold. The paper first proposes an own model of
customer value conceptualization in business markets; based on several
rounds of testing this theoretically grounded model in managerial practice
indications exist to conclude that this model may offer benefits over
current models.
Secondly, the paper provides a comprehensive survey of pricing
approaches in industrial markets. The paper integrates this literature
overview with own empirical findings. Concurrently the paper summarizes
extant research on the link between pricing approach and profitability in
industrial markets. The paper thirdly proposes a framework for value
delivery and value-based pricing strategies in industrial markets.
Proposing such a framework is both useful as well as necessary. Useful,
since this framework guides new product development and pricing

ISSN: 1069-0964/doi:10.1016/S1069-0964(08)14011-X
381
382 ANDREAS HINTERHUBER
decisions and assists in the implementation of price-repositioning

strategies for existing products; necessary, since the theoretical and
practical adoption of value-based delivery and pricing strategies may have
suffered from the lack of a unifying conceptual framework. Two case
studies, one involving the pricing decision for a major product launch at
a global chemical company, the other involving value delivery at an
industrial equipment manufacturer, illustrate the practical applicability of
the proposed framework.
1. VALUE DELIVERY AND VALUE-BASED PRICING

IN INDUSTRIAL MARKETS – HOW ARE THEY
DIFFERENT?
Value creation and value delivery in industrial markets face their own
challenges and particularities which differ markedly from similar challenges
in consumer goods markets. Despite the fact that industrial marketing is by
now an established discipline with dedicated journals, interest groups, and
university curricula, widespread misunderstandings subsists regarding
the areas where consumer goods and industrial marketing overlap and
where they intersect. On this topic Narayndas (2005, p. 131) provides the
following view:
Business markets are very different from consumer markets. In consumer markets, large
numbers of buyers have similar wants, transactions are typically small in value, products
can be mass-produced, consumers’ perceptions determine products’ value, and
companies focus on managing brands. In addition, the selling process is brief, retailing
strategies play a vital role, and sales efforts are focused on end users. A business market,
by contract, has fewer customers and transactions tend to be larger. Customers often
need a customized product or price, the usage of the product or service determines its
value, and brands mean very little to customers. Moreover, selling is a long and complex
process, retailing isn’t a factor and the target of the sales pitch may not be the product’s
end user.
A critical analysis of such statements allows one important conclusion:

most of these statements are incorrect and useless for understanding the
specific challenges of industrial marketing management. The statement that
industrial markets are characterized by virtue of having fewer customers
with larger transactions is, first of all, incorrect. The statement is, secondly,
incorrect to state that brands do not play a role in industrial markets. In
fact, GE, Microsoft, Intel, FedEx, or Goldman Sachs – all companies selling
Value Delivery and Value-Based Pricing in Industrial Markets 383
primarily in industrial markets – own some of the world’s most valuable

brands (Webster & Keller, 2004). Thirdly, the fact that the sales process is
long or that retailing is not important is certainly not at all a characterizing
feature of industrial markets. The final statement is correct – the sales pitch
does not target the product’s end user: in fact, industrial marketing and
selling involves addressing the needs of a variety of addressees in customer
organizations.
Still today and even in prominent publication outlets misunderstandings
exist on the nature of industrial marketing. So how is industrial marketing
different? The main misunderstanding, which also lies behind the statements
quoted above, is that industrial markets are characterized by their products.
They certainly are not. Industrial markets differ from consumer markets
exclusively by virtue of the type of customers served. Corey (1996, p. 1):
‘‘Industrial marketing or B2B marketing is the marketing of goods and
services to producers, resellers, governments, and other nonprofit institu-
tions for use in the goods and services that they, in turn, produce for resale
to other customers. In industrial (B2B) marketing goods are normally
bought for their further incorporation into other goods and services or their
subsequent resale, whereas in consumer markets goods are bought for their
final consumption and use.’’
Which other factors distinguish industrial marketing? The necessity of
dealing with a buying center is an exclusive feature of industrial marketing
(Bonoma, 1982). Buying centers are comprised of the following roles, which
a varying number of persons occupy:
an initiator who recognizes the need to purchase a particular good or
service,
a user who consumes the product or service,
a buyer who physically purchases the product or service,
an influencer who has a say in the purchase decision (e.g. right to veto),
a gatekeeper who determines which vendors have right to submit quote
by, for example, maintaining lists of approved vendors, and, finally,
a decider who has the final say over whether or not purchase is made.
Industrial marketing and selling thus require a sound understanding of
the roles which different members of the buying center occupy and a
commitment to meet each member’s different needs and requirements better
than competitors.
A further distinctive feature of industrial buyer behavior occurs that sets
industrial marketing radically apart from consumer goods marketing: the
presence of purchasing norms and regulations (see Corey, 1989). Customers
in industrial markets are organizations. They do not only have their

own buying center and professional purchasing organization, but these
organizations have sets of rules and administrative requirements which
typically fall into one of the following five categories (modified and
expanded from Corey, 1989):
Rules for dealing with conflicts of interest: need to signal any conflict
of interest to higher ranking decision makers, regulations on gifts,
disciplinary sanctions against bribes and bribing.
Assurance of competition: requirement to obtain competitive bids from at
least three independent suppliers.
Required documentation: requirement to document all steps of the
purchasing process, to keep complete files for a given number of years,
and to substantiate how a purchasing manager selects one particular
supplier over a number of competing firms.
Conformance to corporate policies: these policies vary from company to
company and from industry to industry. Typical elements cover areas
such as the role of quality, service, delivery reliability versus price, or
regulations covering relationships with associated companies and inter-
company business.
Option for strategic partnerships: depending on the nature of the product,
many organizations will grant a restricted number of suppliers a special
status – the status of strategic partner. This usually entails an evolution of
a transactional relationship to a consultative and even collaborative
relationship (see: DeVincentis & Rackham, 1998), which leads to sharing
of personnel, know how, competencies, and other assets to jointly develop
and produce new products or services.
Industrial marketing thus has the following exclusive traits. First, a
distinct customer basis (producers, resellers, governments, and other
nonprofit institutions) – which usually is either profit or budget constrained;
secondly, the presence of a buying center with differing needs of its
members. Thirdly, the presence of purchasing norms and regulations which
sellers must comply with. These three factors lead quite naturally to a final
distinctive feature: Fourthly, customers in industrial markets are usually
more knowledgeable about their products than customers in consumer good
markets (Barback, 1979; Forman & Lancioni, 2002).
Keeping these distinctive features in mind is useful. The presence of these
features – and not the length of the purchasing cycle, or the average size
of transactions, or the role of brands and not a sometimes hypothesized
lower price sensitivity of industrial buyers (as in: Forman & Lancioni,
2002) – influence the particular organizational contexts where industrial

suppliers can deliver and add value. Value creation, delivery, and
communication in industrial markets take places in a context characterized
by the presence of these four distinctive features.
2. CUSTOMER VALUE IN BUSINESS MARKETS – A

STOCK-TAKE OF CURRENT RESEARCH
How do you define value? Can it be measured? . . . . Remarkably few suppliers in
business markets are able to answer those questions. And yet the ability to pinpoint the
value of a product or service for one’s customer has never been more important.
(Anderson & Narus, 1998)
Recent times witness a surge of interest in the concept and application of

customer value, especially in understanding the definition and measurement
of customer value in industrial settings (see, for example, Anderson,
Thomson, & Wynstra, 2000; Flint, Woodruff, & Gardial, 2002; Homburg,
Küster, Beutin, & Menon, 2005; Lindgreen & Wynstra, 2005; Ulaga, 2003;
Ulaga & Eggert, 2006).
Marketing scholars (Anderson & Narus, 1998; Ulaga & Eggert, 2006) as
well as researchers in strategic management (Lepak, Smith, & Taylor, 2007)
recognize, however, that this field is still an open field, where the concept of
value itself is ill-defined, where antecedents and consequences of value
creation are not well understood and where predicative models are still
scarce. Lepak et al. (2007, p. 180): ‘‘ . . . while one would be hard pressed to
find a management scholar who would disagree that value creation is
important, one also would find it equally difficult to find agreement among
such scholars regarding (1) what value creation is, (2) the process by which
value is created, and (3) the mechanisms that allow the creator of value to
capture the value.’’ Disagreements of this sort are not untypical for a
research field which still is relatively young.
The interest in the topics of value and value creation is explainable by the
recognition that providing value to customers is a key factor to win
customer loyalty and to increase the firm’s overall retention rates (Webster,
1994). Empirically, Chang and Wildt (1994) test the relationships between
quality, value, and loyalty and report a positive link between value and
loyalty, proposing that value mediates the link between quality and loyalty
(Chang & Wildt, 1994). Kumar and Grisaffe (2004) examine whether buyer
perceptions of quality and value influence behavioral intentions, such as
loyalty, in business markets. In extensive empirical tests they report a

positive, albeit indirect effect of value on loyalty.
Across a variety of industries, an increase of 5% in retention rates leads to
an increase in customer profitability of 25 to 85% (Reichheld & Sasser,
1990). Reichheld and Sasser base their claims of the benefits of increasing
retention rates on an analysis of both consumer good industries as well as
industrial businesses. Reichheld concludes that ‘‘ . . . the only way a business
can retain customer and employee loyalty is by delivering superior value’’
(Reichheld, 1996, p. 30).
Industrial marketing practice makes heavy reference to the concept of
customer value, sometimes without precise definition or quantification. HP,
for example, states that one of its key objectives is to ‘‘continually improve
the value of the products and services offered to customers.’’ Similarly,
Procter and Gamble’s statement of purpose lists value as one key element:
‘‘We will provide products of superior quality and value that improve the
lives of the world’s consumers.’’
However, while many companies have capabilities in place to design
and launch superior products, most of them have severe difficulties in
quantifying the value of these products to actual or potential customers.
Creating customer value by innovative products and services is at least as
important as quantifying and communicating the value of these products to
customers through pricing and marketing activities.
Most researchers conceptualize value as a function of the benefits that
the buyer receives which researchers then compare with the costs incurred
to obtain these benefits. Researchers, however, disagree both on which
elements to include in the benefits component of value and on how
to treat the cost component – more specifically, the acquisition costs (i.e.,
the price) – in the customer value function. Table 1 provides an overview
about ways to conceptualize value to the customer from a buyer’s
perspective.
On the benefit component: some researchers confine benefits strictly to
quality (e.g., Sivakumar & Raj, 1997), whilst others take a much broader
view (e.g., Anderson & Narus, 1998). In an exploratory study investigating
the relationship between price, quality, and value Zeithaml (1988) proposes
four definitions of value: value is low price; value is whatever I want in a
product; value is the quality I get for the price I pay; finally, value is what I
get for what I give. According to Zeithaml, intrinsic product attributes not
strictly linked to product quality (e.g., certain colors of soft drinks) can well
be benefits and thus components of value. Furthermore, even extrinsic
product attributes, such as convenience or even higher-level abstractions
Table 1. Alternative Conceptualizations of the Construct Customer Value

from a Buyer Perspective (Customer Value From a Buyer Perspective).
Acquisition Costs
Included Excluded
Customer value
Broad (e.g. also non Zeithaml (1988); Anderson and Nagle and Hogan (2006);
financial aspects) Narus (1998); Ulaga and Hinterhuber (2004); Nagle
Chacour (2001); Golfetto and and Holden (2002)
Gibbert (2006);
Narrow (e.g. quality) Sivakumar and Raj (1997) Forbis and Mehta (1983),
Golub and Henry (2000)
(such as psychological benefits perceived by consumers) are components of a

consumer’s overall assessment of value.
Anderson and Narus (1998) also support this wider conceptualization
of value in industrial settings. They consider value not only in terms of
economic benefits received, but as the sum of all benefits, including
social, service, and other benefits, received by the customer from a firm’s
offering. Clearly, risk reduction is one of these intangible benefits. Various
studies (e.g., Jackson, Niedell, & Lunsford, 1995) find that one of the
issues industrial buyers face is the risk of evaluating given and new products/
services. For the evaluation of services the aspect of risk is even more
pronounced. Sellers thus create value for their customers by reducing
the uncertainty and risks of product/service performance. Thus the
reputation of the seller is a source of value for customers, although
reputation is not strictly an economic benefit. In this context the proverbial
saying, ‘‘Nobody ever got fired for purchasing IBM’’ is an anecdotal
proof that purchasing managers attach value to the reputation of IBM
since this reputation strongly reduces the risk of performance deficits.
In this context a quote by the American philosopher and economist
John Ruskin (1819–1900) illustrates the concept of customer risk (emphasis
ours):
It is unwise to pay too much, but it is worse to pay too little. When you pay too much,
you lose a little money – that is all. When you pay too little, you sometimes lose
everything, because the thing you bought was incapable of doing the thing it was bought
to do! The common law of business prohibits paying a little and getting a lot – it can’t be
done. If you deal with the lowest bidder, it is well to add something for the risks you run,
and if you do that, you will have enough to pay for something better.
Golfetto and Gibbert (2006) extend this expansive view of customer value.
In analyzing the supply side and taking the perspective of a supplier,
Golfetto and Gibbert find that supplier competencies themselves become a
source of value for industrial customers, in that customers see competencies
as supplier’s ability to add value not only in the short term, but especially
over the long-term, where customers themselves may not even know the
exact product specifications. In addition to competencies, relationships with
suppliers are also a potential source of value for customers (e.g., Walter,
Ritter, & Gemünden, 2001).
On the cost component: Conceptually, researchers interpret the role of
costs and its impact on customer value in two different ways. According to
Flint, Woodruff, and Gardial (1997), Simpson, Siguaw, and Baker (2001),
Ulaga and Chacour (2001), Walter et al. (2001), and Zeithaml (1988),
customer value is the net difference between perceived benefits and
sacrifices. Flint et al. (1997, p. 171), for example, define a customer’s value
judgment as ‘‘the customer’s assessment that has been created for them by a
supplier given the trade-offs between all relevant benefits and sacrifices in a
specific use situation.’’ In microeconomic terms, customer value here is the
difference between the consumer’s willingness to pay and the actual price
paid, that is customer value is equal to the consumer surplus or the excess
value retained by the consumer.
A second line of thought defines customer value in a broad way: Forbis
and Mehta (1983, 2000), Golub and Henry (2000), Nagle and Holden
(2002), Nagle and Hogan (2006), and Priem (2000) define value to the
customer as the customer’s value threshold, as the sum of the combined
benefits that accrue to the customer as a result of purchasing a given
offering. Nagle and Holden (2002, p. 74): ‘‘A product’s economic value is
the price of the customer’s best alternative – reference value – plus the value
of whatever differentiates the offering from the alternative – differentiation
value.’’ Priem (2007, p. 219) refers to this conceptualization as ‘‘consumer
benefit experienced’’ and illustrates the application of this concept also in
business-to-business relationships (Priem, 2007).
This broad conceptualization excludes the acquisition costs of the product
or service from the computation of value. Customer value in this sense is
equal to the microeconomic concept of a customer’s reservation price or the
use value of goods. More precisely, the reservation price is the price at which
the consumer is indifferent between buying and not buying (Moorthy,
Ratchford, & Taludkar, 1997). Recent research (Wang, Venkatesh, &
Chatterjee, 2007) suggests that reservation price is not a single price point,
but a range of values, where the lower bound indicates the price at which the
consumer certainly buys the product, the mid point the price at which the
consumer is indifferent, and the high end the price at which the consumer
would no longer buy the product (Wang et al., 2007). To narrow the range
down to the price at which the consumer is indifferent, which, empirically, is
close to the average value between the extreme ends (Wang et al. 2007).
Customer value here is thus equal to the maximum amount a customer
would pay to obtain a given product, i.e. the price that would leave the
customer indifferent between the purchase and foregoing the purchase.
Although in this conceptualization of value the focus is on benefits, trade-
offs still play a role: The differentiation value, as the net difference between
the positive and negative differentiation values, is able to incorporate also
customers’ negative utilities (e.g., risks, switching costs, negative value
created) – other than price. This conceptualization of customer value
considers two out of the three relationship costs identified by Cannon and
Homburg (2001), namely acquisition and operation costs, while treating the
third component – direct product costs or actual price paid – as a separate
construct, independent from customer value. The next paragraph below
elaborates on this point.
The difficulty of the former approach of defining economic value lies in
the fact that price is part of the definition: each time researchers consider
alternative approaches to value delivery and pricing strategy, value to the
customer will necessarily change. As the objective of this paper is the
conceptual exploration of value creation, delivery and pricing strategies, a
definition of value is required which is independent from price. Regarding
the benefit side of customer value, the author follows the current line of
thinking (e.g., Anderson & Narus, 1998; Zeithaml, 1988) and takes a broad
view.
3. CUSTOMER VALUE IN BUSINESS MARKETS – A

PROPOSED MODEL
Specifically, this paper expands on two topics concerning the construct of

customer value in business markets. First, properties of customer value and,
secondly, dimensions of value. Regarding its properties, Ulaga (2003,
p. 678) provides a summary of the current state of the art: The construct of
customer value is: (1) a subjective concept, (2) a trade-off between benefits
and sacrifices, (3) multidimensional, since benefits and sacrifices can be
‘‘multifaceted’’; (4) value perceptions are relative to competition. Ulaga and
Chacour (2001, p. 530) note that value is relative to customer segments and
specific use situations.
The concept of value in business market has one additional, fundamental
trait which these characterizations do not capture. Value in business
markets is future-oriented (see also Hogan, 2001; Jackson, 1985). Value
in business markets is necessarily and unconditionally a future-oriented
construct: Two parties exchange resources (e.g., money, goods, services,
rights, or intellectual property) in the expectation of certain future benefits
resulting from consuming these resources. Being a future-oriented concept,
the concept of value in business markets thus necessarily and uncondition-
ally shares the properties of a probabilistic utility function: outcomes have a
certain expected value, a distribution around an expected value, a skewness,
and they are, above all, uncertain. This uncertainty is due to the inherent
uncertainty of the future, and possible opportunism on the part of the
supplier compounds uncertainty (Hogan, 2001), adverse selection, and the
circumstance that value in business relationships is jointly built and may
thus be substantially bigger than initially assessed by mutual will and design
of both the customer and the supplier. This trait of uncertainty and future
orientation could lead to the representation of customer value as a range of
expected values, rather than representing customer value as a single (certain)
number.
Taking Ulaga’s (2003) and Ulaga and Chacour’s (2001) summaries as a
basis and adding the element of uncertainty, the present paper thus
summarize the characteristics of value in business markets as follows: value
is (1) a subjective concept, value is (2) a trade-off between benefits and
sacrifices, value is (3) multidimensional, value is (4) defined relative to
competitors, value is (5) segment specific, and value is (6) future-oriented.
On the dimensions of customer value in business markets Ulaga and
Eggert (2006, p. 120) reiterate that ‘‘research on customer value in business
markets is still in an early stage’’; this paper sees shares this view and sees
this as incentive to further advance current theory.
In a qualitative study with ten purchasing managers of US-based
industrial companies Ulaga (2003) and Ulaga and Eggert (2006) identify
six dimensions along which suppliers create benefits and three dimensions
along which suppliers reduce costs for their customers.
The six benefit dimensions include: (1) product quality, (2) delivery
performance, (3) service support, (4) personal interaction, (5) supplier know
how, and (6) time to market. Costs are subdivided in to (1) direct costs,
(2) acquisition costs, and (3) operation costs (as in: Cannon & Homburg,
2001).
The six benefit and three cost components provide a useful, theoretically
rigorous conceptualization of value in business markets. From the
standpoint of the supplier, this framework allows to assess value delivered
along the nine dimensions. From the standpoint of the customer, the
framework allows to compare value delivered by a set of alternative
suppliers.
The present paper reports a test of this framework in workshops
conducted with 35 marketing managers, general managers, and sales
managers working in four different industrial businesses: the chemical
industry, food/food processing industry, energy delivery, and mechanical
engineering in Germany, Austria, and China. The framework is useful
but not exhaustive: the framework does not capture the full variety of
possibilities for suppliers to add customer value.
In particular, discussions with executives participating in these workshops
spur further efforts to investigate the question whether additional
possibilities for suppliers to add customer value exist. In addition, the
author undertakes an exhaustive literature survey to explore sources of
customer value, both in consumer goods as well as industrial businesses. In a
subsequent round of discussions, practicing executives comment on these
findings.
One construct stands out: the construct ‘‘easy to do business with.’’
Bolton and Drew (1992) examine the impact of this construct on customer
value. They refer to this construct as the customer’s overall assessment of its
supplier’s policies and practices on whether these policies and practices
make the service encounter easy and pleasant. Bolton and Drew (1992) find
that this construct has an important impact on customer perceived value
and is as important as quality in predicting value. More recently, Hammer
(2001, p. 16), one father of the reengineering movement, presents ‘‘a set of
nine emerging business concepts that underlie how the best companies
around are mastering today’s turbulent environment.’’ One of these
concepts is ‘‘easy to do business with’’ or ‘‘ETBW.’’ Hammer (2001) argues
that ETBW will become one of the main competitive features distinguishing
leaders from laggards: ‘‘ETBW isn’t an option. It is a requisite for survival’’
(Hammer, 2001, p. 17).
In extensive empirical tests by telephone interviews with more than 1,000
industrial customers Kumar and Grisaffe (2004) find the impact of the
construct ‘‘easy to do business with’’ (or ‘‘customer focus’’ in their wording)
to have the overall highest impact on both perceived quality and customer
value in B2B purchasing contexts. They conclude: ‘‘This can explain why
it is quite common to see a firm whose quality and prices are comparable
(or even slightly lower priced) losing out to competitors perceived as being
easy to do business with’’ (Kumar & Grisaffe, 2004, p. 65).
In addition to order handling procedures, the construct ‘‘easy to do
business with’’ also captures complaint-handling procedures. In an
empirical survey involving more than 2,000 respondents in industrial
companies Homburg and Rudolph (2001) find that satisfaction with
complaint-handling procedures has a strong impact on the overall
satisfaction of industrial customers which exceeds the impact of the
satisfaction with product related items. The construct ‘‘easy to do business
with’’ (i.e., order and complaint-handling procedures) merits to be treated as
a separate source of customer value in business relationships.
Discussions with participating managers lead to the exploration of the
construct self-enhancement, the idea that suppliers can confer to their
customers intangible benefits such as prestige, social status, or other
aspiration benefits. In consumer goods industries this concept is, in contrast
to industrial industries, already well established: BBDO, a leading
advertising agency, uses the terms ‘‘identity-building brands’’ and ‘‘mytho-
logical brands’’ to refer to a product’s ability to allow customers to express
themselves via the brand and to provide social orientation (BBDO, 2001,
p. 18).
Identity-building brands contribute to define the consumer’s perceptions
and self-awareness. This ‘‘identity is the product of interplay between
producer and consumer to create a suitable brand environment. Interactive
communication provides the framework for this, a process which
necessitates active involvement on the part of the consumer. The brand is
integrated into the consumer’s personality (self share), i.e. the brand exhibits
an overlap with the consumer’s own self-image. . . . At this level of brand
leadership, consumers define themselves via the brand (and the brand via its
loyal customers), relying on it for self-expression and identity formation’’
(BBDO, 2001, p. 18). Mythological brands go one step further and assume
‘‘the function of a guide or mentor offering insight into the meaning of life.’’
Coca-Cola, Marlboro, Rolex, and Harley-Davidson and Ferrari are
examples of identity-building and mythological brands, respectively
(BBDO, 2001, p. 19).
Purchase and consumption in industrial contexts are less intertwined with
the customer’s personality and individual values than in consumer goods
industries. However, in industrial businesses also suppliers have the
opportunity to provide intangible benefits to customers such as prestige,
social status, or other aspiration benefits. Ward, Light, and Goldstine (1999,
p. 85) state, ‘‘It is true that most of our knowledge about brand strategies
come from the accumulated experience of consumer-packaged-goods-

companies like Procter and Gamble, Nabisco, and Nestle – and a wealth
of enduring and highly profitable brands. But just because a concept evolved
in consumer good markets is no reason to reject it in business-to-business
markets.’’ Ward et al. (1999) document which psychological and emotional
benefits brands such as Intel, IBM, EMC, and Microsoft create in high-tech
and industrial businesses. They demonstrate that in industrial contexts
also well-managed brands make industrial customers ‘‘feel better’’ about
themselves.
Ingredient brands are a further case in point. Stainmaster, a brand by
DuPont, stands for a special plastic fiber used in industrial carpets which
need a strong protection against stains. DuPont originally sells Stainmaster
as an ingredient brand to carpet manufacturers with the intent of allowing
carpet manufacturers to display their own brand name along its ingredient
brand. The intrinsic qualities and Stainmaster’s brand name are so strong
that many smaller carpet manufacturers today find an investment in
own brand building activities no longer worthwhile. Thus Stainmaster is
frequently the only brand name displayed on industrial carpets (see logos
below) (Fig. 1).
Similarly, industrial customer can perceive value to purchase products
from the industry leader, rather than an also ran. Kumar and Grisaffe
(2004) find a positive, albeit weak, positive relationship between buyers’
perception of supplier firms industry leadership and perceived overall value
in B2B relationships.
If the relationship between the supplier and the customer allows the
customer or the supplier to gain social status or prestige in a network of
companies – for example by advertising its status as key supplier or key
customer to other companies – then this relationship creates value for the
supplier and customer which goes beyond intrinsic product attributes and
refer to intangible benefits which are not completely dissimilar to the
intangible benefits consumer perceive from purchasing leading brands.
Fig. 1. Ingredient Branding in Industrial Markets – the Example of DuPont.

The construct self-enhancement – which summarizes the potential of a

supplier to enhance the social status, prestige, or provide aspiration benefits
to its customers, especially when these customers are part of a wider
network of industrial companies – merits to be treated as a separate source
of customer value in business relationships.
Based on these considerations and Ulaga’s (2003) typology of benefits this
paper includes model that expands customer value creation in industrial
markets with six dimensions: this paper proposes to collapse Ulaga’s (2003)
six benefit categories into four and to add two new benefit dimensions:
product quality: compromising elements such as conformance to
specifications, reliability, durability, environmental profile, safety, etc.
delivery capabilities: delivery speed, delivery reliability, ability to deliver
in small lot sizes, delivery flexibility.
services: installation, application support, information, customization,
maintenance, repair, performance guarantees, warranties, capabilities to
operate plants on behalf of customers, financial services (capabilities to
extend credit services, to offer leasing or buy-back option after product
use).
ease of doing business: ease of ordering, ordering costs and time,
responsiveness to order-related enquiries, flexibility in accepting customer
orders via alternative channels, reachability to accept customer orders,
complaint-handling procedures.
vendor: vendor know how, vendor competencies, new product develop-
ment capabilities, vendor personnel, capability to offer solutions in
addition to product offerings (Penttinen & Palmer, 2007).
Self-enhancement: social status, prestige, aspiration benefits.
Graphically, a chart of the type shown below visualizes the value added
by different suppliers. This chart allows comparing the abilities to add value
of different suppliers; this way of graphically representing customer value
furthermore allows tracking supplier value creation over time (Fig. 2).
The author has tested this model of value creation in business markets in
a series of workshops with 35 executives working in four separate industrial
marketing environments. This model is better able to capture the variety of
ways in which suppliers can add value to customers in business-to-business
relationships. Here are comments received after presenting and further
developing this model in these workshops.
This is a really useful way to look at differentiation and value-addition. It focuses the
attention away from providing an ever only marginally better product to other
Product Value creation today

100 Target
Self
Delivery capabilities
enhancement 50
Vendor Services
Ease of doing
business
Fig. 2. Customer Value in Industrial Markets – Six Dimensions of Benefits.
dimensions which we have not systematically investigated before. (Mark, CEO, food/
food processing industry)
The commodity mindset is really in our DNA and for years we have tried, fruitlessly, to
overcome it. I am excited about this model! It helps your operational managers to
understand how we could add value, instead of just looking how to kick out a few cents
of our production costs. (Tom, CEO, energy delivery industry)
From some of our customers we hear that purchasing from competitor X satisfies some
emotional or irrational needs since it confers an aura of prestige. I am glad this
dimension is modelled also here – since this gives us now the opportunity to think
creatively about which factors drive this purchase decision and about what we have to do
to get there as well. (James, VP, engineering industry)
Building on insights from these studies the model includes the following
definition of customer value in business markets. Value to the customer of
a company’s product, service, relationship, competency, or intellectual
property offering is equal to price of the customer’s best alternative plus the
expected (positive or negative) value along the six dimensions – product,
delivery capabilities, services, easy to do business, vendor, self-enhancement –
along which this offering is differentiated from the alternative.
This definition references received value of customers – the value

customer actually experience through specific product–customer interac-
tions – and not customers’ desired value – the value customers want from
products and services and their providers (Flint & Woodruff, 2001).
The definition proposal further satisfies key elements which are relevant
for customer value measurement approaches (Ulaga & Chacour, 2001;
Ulaga, 2003), namely the requirement of (1) subjectivity (customer
specificity), (2) identification of benefits and sacrifices, (3) multidimension-
ality, (4) relativity of value to competitive standards, (5) segment/use
situation specificity, and (6) future orientation.
Customer value in this definition refers to the maximum amount a
customer would pay to obtain a given offering, that is, the price that
leaves the customer indifferent between the purchase and foregoing the
purchase (i.e., the ‘‘reservation price’’). Customer value includes the full
set of customer benefits and sacrifices – except the purchase price. The
advantage of excluding price from the definition of customer value is that
this leads to a conceptualization of customer value which is independent
from a company’s pricing strategy. This approach thus allows exploring
alternative value delivery and pricing strategies without affecting the
conceptualization of value. In other words, in this conceptualization
customer value is completely independent from price – and this
independence is a distinct advantage.
4. PRICING IN BUSINESS MARKETS – A REVIEW

OF THE STATE OF THE ART
Pricing receives little attention from practicing managers. Despite all
laments of intensified price competition and the perceived difficulty of
raising prices, empirical research by McKinsey & Company shows that less
than 15% of companies do any systematic research on pricing (Clancy &
Shulman, 1993).
Pricing receives little academic investigation. Not only managers, but also
academics show little interest in the subject of pricing: Publications on this
subject are not anywhere as numerous as publications on other classical
marketing instruments such as product, promotion, and distribution. Even
marketing scholars devote only little effort to pricing theory or practice: An
empirical study reveals that less than 2% of all articles published in major
marketing journals cover the subject of pricing (Malhorta, 1996). Solberg,
Stöttinger, and Yaprak (2006, p. 23) state that ‘‘ . . . pricing remains an

understudied dimension of the field [of marketing] in both its conceptual
dimensions and its managerial practice.’’
Consumers show little interest in prices of goods purchased. Managers
have a general tendency to believe that price is an important issue for
customers. Research, however, shows that customers are frequently
unaware of prices paid and that price is one of the least important purchase
criteria for them.
Impact of price on profitability is high. Finally, the impact of even small
increases in price on profitability by far exceeds the impact of other levers of
operational management. Consider the following table (based on a sample
of Fortune 500 companies): (Fig. 3).
A percent increase in average selling price increases EBIT (Earnings
Before Interest and Taxes) by 22% on average – compared to an increase of
12 and 10% for a corresponding increase in turnover or reduction in costs of
goods sold, respectively. Given the high impact of pricing on profitability,
why does management practice devote comparatively little interest to this
subject?
Managers frequently fall victim to two erroneous beliefs. First, managers
assume that nowhere else conflict is as strong as in the field of pricing: the
dominant assumption is that what is gained by the firm is lost by the
customer and vice versa and that pricing is, in the end, a zero-sum game.
Second, managers generally do not believe in their ability to significantly
Price (+5%) 22%
Revenues (+5%) 12%
Impact on EBIT
COGS (-5%) 10%
SG&A costs (-5%) 5%
R&D costs (-5%) 2%
0% 5% 10% 15% 20% 25%

Fig. 3. Pricing and its Impact on Profitability.
influence their industry’s pricing structure. A common managerial lament is

the following: ‘‘In our industry, prices are mostly dictated by the market.
Therefore, we focus on costs and volumes.’’ Executives seem to prefer
stripping the product of some features, cutting advertising budgets, reducing
costs rather than implementing and communicating price increases.
These assumptions and their underlying logic are incorrect and harmful to
a company’s profitability. Managers suffer from systematic misconceptions
when making pricing decisions. This paper analyzes two of the most
common misconceptions; before that, the next paragraph reviews the state
of the art in pricing theory and practice in industrial markets.
Three main approaches to pricing exist in industrial markets: cost-based,
competition-based and customer value-based approaches (see also Shapiro &
Jackson, 1978); this paper does not discuss in detail approaches such as
product line pricing, price bundling, tie-ins, etc. since these approaches
typically relate to the pricing of a product portfolio or of complementary
products. Particular focus of this analysis is the pricing decision for
individual offerings. The table gives an overview of the three main
approaches to (single product) pricing and lists typical variants of each
approach (Table 2).
While extant literature extensively discusses the merits of the cost-, the
competition-, and the customer value-based approach to pricing, extant
research remains relatively silent on the degree to which industrial
marketing practice adopts each of these approaches. This paper covers this
gap by providing an extensive review of literature and available data.
Table 2. An Overview of Industrial Pricing Approaches.

Cost-based pricing approaches
Cost-plus method
Target ROI/ROS (return on investment, return on sales) pricing
Breakeven-based pricing
Target contribution margin pricing
Competition-based pricing approaches
Penetration pricing
Price skimming
Pricing according to average market prices
Price follower behavior
Customer-based pricing approaches
Perceived-value pricing
Performance pricing
Pricing according to customer’s assessed willingness to pay
So far, little is known on the adoption rates of alternative pricing

approaches in industrial markets. Isolated studies exploring the adoption of
different pricing approaches in industrial markets certainly exist, no single
paper summarizes all available extant empirical research. In other words, no
comprehensive summary exists of the adoption rates of alternative pricing
approaches in industrial markets.
Such a summary has value. Such a summary will allow to state, for example
to which degree the implementation of advanced pricing approaches – such as
customer value-based pricing – are the exception, and thus have the potential
to act as a differentiator and potential source of above average earnings, or
whether, on the other hand, similar approaches are already so widely
adopted that they do not even deserve to be called ‘‘advanced’’ approaches to
pricing.
This paper provides a broad and comprehensive literature review of all
main studies, presentations, and research projects covering the topic of
pricing approaches in industrial markets. This summary covers pricing
approaches in industrial environments in Asia, Europe, and the US; in total
the results of close to two dozen surveys carried out between 1983 and 2006
are summarized, involving responses from more than 3,000 interviewees.
Several words of caution are worth stating. While current marketing
literature widely accepts the categorization of the universe of pricing
approaches into cost, competition, and customer value approaches (see,
for example: Armstrong & Kotler, 2006; Avlonitis & Indounas, 2006;
Ingenbleek, Debruyne, Frambach, & Verhallen, 2003), not all papers use
this categorization in their research design. The author undertakes best
efforts to go back to the original data of the research papers to reclassify the
approaches into one or more of the three approaches; in cases where
classification is difficult, where companies use hybrid approaches or
multiproduct pricing strategies, the summary below classifies the respective
approaches under a new category, ‘‘other approaches’’ and provides
additional explanations in the section ‘‘comments.’’ In addition, the
research design of surveys differs to the extent that survey participants
name a single, dominant pricing approach or that they list a number of
approaches adopted under different circumstances. In the first case, the split
of pricing approaches into the four categories will add up to 100%; in the
second case not – in this case a linear transformation is used to scale the
totals back to 100% to make results comparable with each other.
Table 3 has two parts. The table first summarizes surveys seeking a single,
dominant approach to pricing and then lists surveys allowing multiple
answers. In a presentation at an industry event, Strategic Pricing Group
400
Table 3. Empirical Research on Industrial Pricing Approaches – a Summary.
Pricing Approaches Used in Industrial Markets – an Overview of Empirical Studies
Cost-based Competition- Customer- Other Type of study, Industry, region Year Authors Comments
pricing based pricing value based approaches sample size
approach approach pricing
approach
Surveys seeking to determine a single, dominant pricing approach

50% 38% 12% – Survey among Technology, US 2005 Strategic Pricing Sample size not
product/ Group indicated
marketing
managers
single answer
77% 16% 7% Survey among B2B, partly B2C; 2006 Erdönme, Original survey answer
marketing Germany, Nützenadel, (‘‘77% usage of
managers of Switzerland, University of traditional insurance
European Austria; Sample St. Gallen tariffs’’) is classified
vehicle size not indicated as ‘‘cost-based’’
insurance but ‘‘good’’ pricing approach
companies (in coverage of main
D, A, CH); insurance
ANDREAS HINTERHUBER
Single answers companies in the
(first choice 3 countries
method)
15% 73% 12% Survey among 61 Industrial & service 2001 Büschken 12% of companies are
marketing and companies, ‘‘active’’ pricers
general Germany where reference is
managers in made to demand and
German customer related
industrial and factors taken into
service consideration
companies
(85% B2B
business);
single answer
14% 85% 1% Survey among 91 US, construction 2001 Mochtar and Arditi
Value Delivery and Value-Based Pricing in Industrial Markets

CEO’s of US- (engineering)
based
construction
companies;
single answer
31% 35% 20% 13% Survey among Industrial 2002 Forman, Lancioni Customer value based
172 marketing companies US pricing may be
executives in with overestimated.
US-based international ‘‘Other’’ refers to
industrial operations (60% transfer pricing and
companies of the sample are countertrade
(SIC codes 35); companies with
single answer salesoUSD
25 mill)
Surveys allowing multiple answers
42% 29% 29% Survey among Industrial 1996 Morris, Avila, and
207 marketing companies, US Pitt
managers of
US-based
industrial
firms; multiple
answers
68% 74% 11% 22% Survey among Durable goods in 1999 Noble, Gruca ‘‘Others’’ refers to
270 product/ B2B markets, US product-line pricing
marketing and complementary
managers in product pricing
B2B, durable
goods, multiple
answers
51% 104% 8% 23% Survey among 75 Durable B2B goods 1999 Chia, Noble ‘‘Others’’ refers to
marketing and (machine tools, product-line pricing
general electronics) and complementary
managers in Singapore product pricing
Singapore;
401
multiple
answers
402
Pricing Approaches Used in Industrial Markets – an Overview of Empirical Studies
Cost-based Competition- Customer- Other Type of study, Industry, region Year Authors Comments
pricing based pricing value based approaches sample size
approach approach pricing
approach
109% 85% 49% Survey among 178 Industrial goods 2000 Hart, Argouslidis
export (chemicals, and Saren
marketing metals, plastics)
directors of in the UK
industrial
manufacturers
in the UK;
multiple answers
29% 34% 37% Survey among 77 Belgium, industrial 2003 Ingenbleek,
marketing companies Debruyne,
managers of Frambach, &
Belgian Verhallen
electronics and
engineering
ANDREAS HINTERHUBER
companies;
multiple
answers
32 39 29 – Survey among B2B process 2006 Own survey Managers are asked to
160 product industry, distribute 100 points
and marketing worldwide on approach used to
managers of a determine new
global product pricing
industrial policies depending
company; on importance of
multiple method used
answers
(2005) summarize their research on pricing practices based on a poll with

marketing managers of a sample of US-based technology companies:
according to this survey, 50% of companies adopt a cost-driven, 38% a
competition driven, and 12% a customer value-driven approach to pricing.
The authors do not indicate the sample size.
Erdönmez and Nützenadel (2006) examine the pricing practices of leading
Swiss, German, and Austrian vehicle insurance companies, i.e. of companies
operating predominantly in industrial markets (fleet, truck insurance), but
with a component of private customers. Also here the authors do not
provide information on the sample size, but claim a ‘‘good’’ coverage of
companies operating in the Swiss, German, and Austrian vehicle insurance
market. They find that insurance companies operating in German speaking
countries have a clear preference for traditional insurance tariffs (77%
share) – an approach which this paper classifies as cost-oriented approach
(since this involves an analysis of costs and risks before quoting prices).
A total of 16% of companies employ competition-driven pricing and only
7% of companies base their pricing decisions on considerations of
customers and customer value.
Büschken (2001) analyzes industrial pricing approaches in Germany, by
polling 61 marketing executives of industrial equipment and service
companies. Objective, also here, is to identify the single, dominant approach
to pricing: over 70% of companies use competition-based approaches
followed by cost-based approaches (15%) and, finally, customer-value based
approaches (12%).
Mochtar and Arditi (2001) analyze pricing practices in engineering
companies, in an environment where competitive bidding is the norm. In a
survey of 91 CEOs and presidents of US-based construction companies,
they find a strong prevalence of competition-based (or market-based) and
mixed competition-based/cost-based pricing approaches (85%), a lower
reliance on pure cost-based approaches (14%), with approaches taking into
account owners (i.e. customer) needs/the company’s unique strengths to
satisfy these needs lagging behind (1%).
Forman and Lancioni (2002) survey 172 marketing executives of US-
based industrial manufacturers with international operations. Competi-
tion-based pricing approaches are the most widely adopted (35% of
companies), followed by the cost-plus method (31%). Their survey makes
no explicit reference to customer value-based pricing approaches, but the
category ‘‘premium pricing’’ has the intent to refer to demand/customer-
based pricing approaches. Twenty percent of companies adopt this
approach.
Morris, Avila, and Pitt (1996) survey 207 marketing managers of

US-based industrial firms. To capture the influence of various factors on
pricing decisions they use 1–5 scales where higher scores indicate greater
agreement with items in question. Cost-based considerations play a
dominant role (average score: 2.9; yielding a relative influence of 42% after
linear transformation to a 0–100% scale). However, customer-value based
considerations come in second (average score: 2.30; 29% after linear
transformation), with competition-based considerations not far behind
(average score: 2.3, 29% influence after linear transformation). This is one
of the rare surveys where agreement to certain customer-related questions
such as ‘‘price reflects the amount of value a given customer receives’’ is
higher than the agreement to cost some related questions such as, ‘‘we add a
standard mark-up to the unit price.’’
In a survey where multiple answers are possible, Noble and Gruca (1999)
interview 120 product and marketing managers in American, B2B, durable
goods industries (computers, electronic equipment, construction,
vehicles, and other sectors). On average, each company uses slightly less
than two approaches to pricing. Here, dominant approaches to pricing are
competition-based approaches (parity, penetration, skim, pricing; price
leader; low price supplier), with a full 74% of companies using this type.
Sixty-eight percent of companies, in contract, adopt a cost-driven pricing
approach (cost-plus, experience curve), while 11% adopt a customer-value
based pricing approach.
Noble subsequently replicates this study in an Asian context (Chia &
Noble, 1999). Even more than in the US, competition-based approaches by
far dominate (being employed, on average, by every company in the sample);
companies in Asia use cost-based pricing approaches, somewhat surprisingly,
to a lesser extent than companies in the US: Finally, the diffusion of
customer-value based approaches is limited to 8% of companies.
Tsokas, Hart, Argouslidis, and Saren. (2000) survey 178 export marketing
directors of industrial manufacturers in three sectors (chemicals, metals,
plastics) in the UK to understand export pricing practices. Among other
insights, the authors obtain information on pricing methods used in export
pricing decisions. Tsokas et al. find that export pricing approaches are still
driven primarily by cost-based approaches (highest relative importance on
a 1–5 scale), followed by competition-based pricing approaches, in turn
followed by perceived value-based pricing.
Ingenbleek et al. (2003) survey 77 industrial marketing managers in the
Belgian electronics and engineering industry. They use a 1–10 scale to
capture the influence of costs, competition, and customer value on new
product pricing decisions. The influence of customer value-related items

(e.g., perceived competitive advantage of the product/service; perceived
customer value; relationship between product advantage and price) is higher
(average rating: 7.7) than the influence of both competition-related factors
(average rating: 7.2) and cost-related items (average rating: 6.21). This is the
only survey where customer value-related factors have an overall higher
impact on pricing decisions than both cost and competition-related factors:
The industry setting may explain in part this rather unusual result. The
electronic and engineering industries are contexts where customer perceived
value pricing strategies are easier to implement than in other industries,
since value to the customer can be quantified by linking new product prices
to increases in profit/turnover or achieved cost reductions (Anderson &
Narus, 1999).
Avlonitis and Indounas (2006) poll 170 industrial service companies
(insurance, banking, airlines, banks) in Greece. The survey, allowing
multiple answers, shows that cost-based pricing approaches clearly
dominate, followed closely by competition-driven approaches. A full 58%
of companies use the cost-plus method, one variant of cost-based pricing
approaches, 53% of companies set pricing according to market average
prices, a variant of competition-based pricing. Clearly lagging behind are
approaches where customer value is taken into account.
Finally, this paper reports the results of an own empirical research on
industrial pricing practices. In conjunction with a joint research project with
a global industrial company in the process industry the author surveys 160
product managers, marketing executives, account managers, heads of sales,
business unit heads, and general managers. Objective of these face-to-face
interviews is to understand antecedents and consequences of pricing
decisions for the company’s best selling products (i.e. identification of
factors impacting the process of setting prices as well as analysis of the
consequences of different pricing decisions). In semi-structured interviews
respondents report on information used to decide on new product prices, on
the frequency and methodology to decide on price adjustments for existing
products, on internal and external stakeholders yielding an influence on the
pricing process, on discount policies, etc. Survey participants are also asked
to explain in detail the factors leading to specific new product prices: they
are asked to allocate 100 points to costs, competitors, and customers
according to the relative importance of each of these factors for new product
pricing decisions. The results are as follows: Close to 40% of points are
allocated to competition-driven pricing policies, 32% to cost-driven pricing
and, lastly, 29% to customer value-driven pricing.
For the sake of completeness the summaries of four other published

surveys on pricing practices appear in this section. The author does not
integrate the results of these surveys in the summary statistics below, since
the data are either incomplete, qualitative or unreliable due to small sample
size. Solberg et al. (2006) classify export pricing decisions in Austria,
Norway, and the US based on a taxonomy of globality and internationa-
lization (see Solberg, 1997); since this taxonomy does not allow to infer the
degree of cost-, competitor-, or customer value-orientation, the results of
this survey are not usable for the summary discussion here. In any event, the
sample size in this survey is unusually small (n=24 firms).
Govindarajan and Anthony (1983) examine which costs data influence
pricing decisions. Since the focus of this paper is on costs, no inference
on competitor-oriented or customer value-oriented pricing strategies is
possible. They obtain answers from 501 of Fortune’s 1000 companies and
find that a full 83% use full costs and the remaining 17% use variable costs
as their relevant cost parameter for pricing decisions.
Mills (1988) reports the result of a survey on pricing practices among UK-
based industrial goods and service companies. He finds the vast majority
(W70%) to use cost-based pricing approaches, with an unspecified percentage
of companies taking ‘‘factors other than cost into account’’ when making
pricing decisions with reference to the general level of competitors’ pricing
being the most important consideration’’ (Mills, 1988, p. 39). Mills mentions
that again an unspecified number of companies take the anticipated effect of
prices on consumer demand into account before pricing decisions. Also here
costs still play the dominant role for pricing purposes, and among cost-based
pricing approaches the full cost method is the dominant one.
Finally, Cunningham and Hornby (1993) examine pricing practices of
small companies in the UK. Their focus are exclusively small companies,
and also their sample size is small – consisting of just 12 companies, mostly
industrial manufacturing and services companies based in the UK. The
predominant approach to pricing is cost-based pricing (75%), with 3
companies (25%) using customer value-driven pricing approaches. Not a
single company in this survey uses a competition-driven pricing approach.
Due to the small sample size this survey is excluded from the summary
analysis of industrial pricing practices below.
In conclusion, competition-based pricing approaches still play the
dominant role in industrial pricing practice. Their average influence is
44% (i.e., 44% is the average adoption rate in single answer surveys and,
in multiple answer surveys, the average influence of competition-based
considerations on product pricing).
Cost, based pricing approaches, despite being universally acknowledged

as overall weakest approach to set prices (Nagle & Holden, 2002) trail
competition-based approaches closely with an average influence across all
surveys of 37% (i.e., 37% is their average adoption rate in single answer
surveys and, in multiple answer surveys, the average influence of cost-based
considerations on product pricing). Perhaps the competitive intensity of
recent times, the hypercompetitive environment most firms operate in
(D’Aveni, 2006) is forcing companies to shift attention away from the
purchasers of their goods and services towards competitors vigorously
battling for market share. This may even be beneficial: recent empirical
research finds a positive correlation between a cost-oriented pricing
approach and new product success under conditions of intense competitive
rivalry (Ingenbleek et al., 2003).
Customer value-oriented approaches still play a relatively minor role,
with an average influence of 17% across all surveys (i.e., 17% is their
average adoption rate in single answer surveys and, in multiple answer
surveys, the average influence of customer value-based considerations on
product pricing). The influence of other pricing approaches (e.g., product
line pricing, price bundling) is 3%.
The low adoption of customer value-based pricing approaches (17%) is
surprising since marketing scholars as well as marketing practitioners nearly
universally regard customer-value based approaches as superior approaches
to set new product prices or to adjust prices for existing products (e.g.,
Anderson & Narus, 1998; Anderson, Narus, & Rossum, 2006; Cressman,
1999; Shapiro, 1987; Simon, Butscher, & Sebastian, 2003).
Fig. 4 summarizes the relative influence of customer value-based pricing
approaches over time (i.e. publication of the respective survey).
Fig. 5 summarizes the relative importance of the three approaches to
industrial pricing as a summary of all published surveys to date.
5. THE VALUE OF VALUE-BASED PRICING
Marketing scholars generally agree that value-based pricing is a superior

approach to set prices. Monroe (2002, p. 24): ‘‘ . . . the profit potential for
having a value-oriented pricing strategy that works is far greater than with
any other pricing approach’’ (Monroe, 2002). Cannon and Morgan (1990)
recommend perceived value pricing if profit maximization is the objective:
‘‘Perceived value pricing enables a company to select an optimal price/
volume combination’’ (Cannon & Morgan, 1990, p. 25). Similarly,
PERCENTAGE OF COMPANIES SETTING PRICES PRIMARILY IN

FUNCTION OF CUSTOMER VALUE
SUMMARY OF ALL EXISTING SURVEYS: VALUE-BASED APPROACHES
Relative weight of customer value-based

approaches on pricing strategy
37%
29% 29%
25%
20% 20%
12%
6% 8% 7%
4% 1%
1996 1999 1999 2000 2001 2001 2002 2003 2005 2006 2006 2006
Across all surveys, the relative weight of customer-related items on

pricing decisions is 17%.
Fig. 4. Influence of Customer Value-Related Elements on Pricing Decisions Over Time.
RELATIVE IMPORTANCE OF DIFFERENT PRICING

APPROACHES IN SETTING NEW PRODUCT PRICES
SUMMARY OF MAIN PUBLISHED SURVEYS (1983-2006)ON
THE ADOPTION OF DIFFERENT PRICING APPROACHES
Customer value-based Other: 3% Competition-based

pricing approaches: 17% pricing approaches: 44%
Cost-based pricing
approaches: 37%
Across all surveys, pricing decisions are influenced only 17% by

customer-related elements.
Fig. 5. Adoption of Different Pricing Approaches in Industrial Markets – a

Summary of Published Research.
Docters, Roepel, Sun, & Tanny (2004) refer to value-based pricing as ‘‘one
of the best pricing methods’’ (Docters et al., 2004, p. 16).
On the other hand, as early as in the 1950s Backman (1953, p. 168) notes
that ‘‘the graveyard of business is filled with the skeletons of companies
that attempted to base their prices solely on costs’’. More recent, Myers,
Cavusgil, and Diamantopoulos (2002) assert that cost-based pricing
approaches lead to substandard profitability. Simon et al. (2003) also state
that cost-based pricing approaches lead to lower than average profitability.
Despite these claims, extant research provides little, if not to say no,
empirical evidence to substantiate the claim that value-based pricing
increases or that cost-based pricing decreases firm profitability. Marketing
scholars recognize the lack of empirical evidence. Noble and Gruca (1999,
p. 457) state that ‘‘research on successful pricing process should be a major
priority for future research’’. Also other researchers (see: Cressman, 1999;
Ingenbleek et al., 2003) lament a lack of understanding on the link between
pricing practices adopted and firm success.
Ingenbleek et al. (2003) conduct the first and only study to date to
examine the relationship between pricing practices and new product success.
This study has largely gone unnoticed in extant marketing literature so far:
not a single marketing textbook in which this paper is cited exists. Also the
ISI web of science (Social Citation Index) does not report a single citation of
this paper (website accessed: 1 August 2007).
A summary of this study here adds value to, first of all, provide an
empirical basis to any claims – which so far rely more on speculation than
on data – about performance implications of alternative pricing approaches.
And, second, to spur further research in this area where little is known, in
spite of the fact that the number of papers pretending to know is large.
Ingenbleek et al. (2003) survey 77 marketing managers in two B2B
industries (electronics and engineering industry) in Belgium. Objective of
their research is to explore the link between pricing approach and new
product success. Multi-item measures operationalize pricing practices:
Participants indicate their agreement to questions capturing the influence
of cost-, competition-, and customer-related factors on a 1–10 scale.
Participants self report on new product success: they are asked to indicate,
again on a 1–10 scale, whether new product performance is in line with the
objectives originally set out at product launch.
Customer value-based pricing approaches relate positively to new
product success, while no correlation exists between new product success
and the adoption of cost-based and competition-based pricing approaches.
(Fig. 6)
PRICING APPROACH AND NEW PRODUCT SUCCESS:

WHAT DO WE KNOW?
SURVEY ON FACTORS CONTRIBUTING TO NEW PRODUCT SUCCESS
0,39 Regression analysis: correlation between pricing

approach and new product success
-0,03
-0,09
Value-informed Competition-informed Cost-informed
pricing pricing pricing
Fig. 6. The Link between Pricing Approach and New Product Success.
Source: Ingenbleek, Successful New Product Pricing Practices: A Contingency
Approach, Marketing Letters, December 2003.
The authors further find that pricing practices are contingent to relative
product advantage and competitive intensity: Under conditions of intense
competition, cost-based pricing approaches are ‘‘best practice’’; they are
‘‘bad practice’’ under conditions of low competitive intensity.
Competition-informed pricing is ‘‘bad practice’’ if relative product advantage
is high. Customer value-based pricing is ‘‘best practice’’ when relative product
advantage is high. Unlike for cost- or competition-based pricing approaches,
the authors do not find circumstances when customer value-based pricing is
‘‘bad practice’’: its influence on new product success is at worst neutral.
Ingenbleek et al. (2003, p. 301) conclude that customer value-based pricing
approaches are the overall best approaches to new product pricing decisions.
Empirical work is necessary in the area of examining the consequences of
pricing approaches on company and product performance. The research by
Ingenbleek et al. (2003), although a pioneering work, has limitations:
A small sample size, the fact that new product success is measured on
a self-reported basis and the lack of profitability measures warrant
further research in this area. Of particular interest are performance
implications – measured with objective criteria such as profitability, revenue

growth or other objectively verifiable indicators – of alternative pricing
approaches.
6. EXPLORING COMMON MYTHS ABOUT PRICING

IN INDUSTRIAL MARKETS
6.1. A Myth: Premium Prices and High Market Share are Incompatible
Implicitly most managers take to heart one of marketing’s first, apparently

obvious, lessons: The traditional advice of marketing literature is to set
prices low at the introduction stage of new products if the objective is to
gain market share rapidly (Lamb, Hair, & McDaniel, 2000): Lamb et al.
(2000) recommend penetration pricing – that is, low prices – if the objective
is to build market share, whereas they recommend price skimming – that is,
high prices – if the objective is to increase profits.
Marketing executives are reluctant to price new products significantly
above current price levels, fearing that this puts them at a competitive
disadvantage in the quest for market leadership.
The implicit assumption that high prices and high market share are
incompatible is incorrect. In a variety of industries, from software to
pharmaceuticals, specialty chemicals to cars, aircraft to apparel, premium
price brands frequently are also market share leaders. Let us analyze the US
pharmaceutical industry for this purpose.
The pharmaceutical industry is an interesting research setting, where a
high drive for innovation and a high pressure on cost containment coexist.
Pharmaceutical marketing is – in its essence – industrial marketing:
Managed care – a HMO (Health Maintenance Organization), a preferred
provider organization, or a point-of-service plan – now covers almost 80%
of employed Americans. About 90% of HMOs now use formularies
(PhRMA, 2001). A formulary is a list of prescription drugs approved
for insurance coverage. Since managed care organizations select drugs
principally on the bases of therapeutic value, side effects, and cost,
pharmaceutical marketing consists to a large degree of convincing these
organizations to put a specific drug on formularies, i.e. on the list of drugs
eligible for reimbursement. Doctors typically chose a specific drug only
among a list of drugs on this formulary.
The US pharmaceutical industry consists of 30 market segments, such as
antibiotics, diabetes drugs, cholesterol-lowering drugs (NIHCM, 2001).
PRICE AND MARKET SHARE

MARKET LEADERSHIP AND PREMIUM PRICES IN THE US PHARMACEUTICAL INDUSTRY
Nr of segments Segment value
Value of market segments (US $ billion) (US $billion)
10 Number of categories/market segments 50
9
8
6 Total number of
segments = 30
4
3
0 0
Most Second most Third most Cheapest Other
expensive expensive expensive product
product product product
Fig. 7. High Price and Large Market Share – not as Incompatible as Commonly
Believed. Source: NIHCM Foundation (2001).
This paper analyzes the absolute price level and market share of all main
drugs in each of these 30 market segments. Contrary to expectations, in 9
segments (30% of segments) the most expensive drug is at the same time
also the drug with the largest market share. The second most expensive
product is market share leader in eight segments (27% of segments).
By contrast, the cheapest product has the largest market share in six
segments (20% of segments).
Fig. 7 illustrates the relationship between absolute price and market share
for a number of the 30 market segments analyzed: in practice high prices
and high market share coexist.
Traditionally, most managers hesitate to associate market share leader-
ship with a high-price strategy; the belief is that a premium price strategy is
best suited for small, niche markets.
High market share and high prices can be achieved if prices truly reflect
high customer value. The next section further discusses this point. Before
doing so, one key question warrants further attention: Are customers
really as price sensitive as most managers believe? This question is particularly
relevant given that in empirical surveys marketing managers frequently
mention intensified price competition as the main challenge – ahead of issues
such as product differentiation or new product launches (Simon, 1999).
6.2. Are Customers Really as Price Sensitive as Commonly Believed?
A second misconception concerns the price knowledge and sensitivity of

customers. Numerous studies test these factors. This section summarizes the
most salient results.
Avila, Dodds, Chapman, Mann, and Wahlers (1993) investigate the
importance of price for industrial goods in a survey involving purchasing
and sales managers of two hundred companies. They find that purchasing
managers rank product attributes as the most important criteria, then service
attributes, and finally, price as the least important criterion. Sales managers,
by contrast, rank price much higher in what they perceive to be the most
important purchasing criteria of their customers, indicating how weak their
understanding of the critical purchasing criteria of their customers is?
Sudarshan (1998) surveys 151 purchasing decision makers (purchasing
managers, technicians, R&D personnel) of industrial companies on the
criteria used in selecting vendors. The importance of different criteria is
captured on a scale from 1–5 (maximum). The three most important factors
are product consistency over time (mean importance: 4.6), delivery
reliability (4.1), and price (3.7). Also here, price is thus only one among
other, more important factors, in influencing which vendors will be selected.
In a quantitative survey involving 400 US-based purchasing managers
Ulaga and Eggert (2006) examine which factors account for customers’
decisions to award key account supplier status to one given supplier over a
set of alternative candidates. They report that costs have the weakest
potential to differentiate suppliers from each other (explained variance:
20%); conversely, they find that benefits created have a much larger impact
on customer decisions to select a potential supplier as key supplier
(explained variance: approximately 80%). This can be seen as further
support for the hypothesis that customers in industrial markets are far more
sensitive to benefits than they are to costs.
The consumer goods industry is rich in data on the price awareness
of customers: given that industrial companies frequently have companies in
the consumer goods industry as their direct customers, the price sensitivity
in consumer goods markets is at least of indirect relevance also for industrial
companies. Dickson and Sawyer (1990) examine the extent to which US
supermarket shoppers are aware of prices paid. They find that 50% of
shoppers can not correctly name the price of the item they have just placed
in their shopping cart and that more than half of the shoppers who purchase
an item on sale are unaware that the price is reduced. Vanhuele and Dreze
(2002) confirm the low price awareness of end-customers in a European
context by surveying French customers. Evanschitzky, Kenning, and Vogel

(2004) also find low price awareness in Europe by specifically examining
customers’ long-term price memories.
Hoch, Dreze, and Purk (1994) examine the effects of category-wide price
increases in a chain of 86 supermarkets involving 5,000 products: a price
increase of 10% leads to a volume decrease of less than 3%, suggesting that
customers show little sensitivity to price increases.
The literature on the behavioral and psychological aspects of pricing is
rich in data providing further evidence that customers do not react to prices
in fully rational ways (e.g., Ofir & Winer, 2002).
In conclusion, managers as price setters have a general tendency to
overestimate the importance of price for actual or potential customers.
7. VALUE DELIVERY AND VALUE-BASED

PRICING – A FRAMEWORK
The following, five-step framework operationalizes value delivery and

value-based pricing strategies in industrial markets: Starting point is a
clear definition and communication of goals. Next is the creation and
communication of value along the six dimensions of benefits. Step three
involves communicating value to customers. The next step deals with the
four critical elements of all strategic decisions – that is, the company
perspective, the customer perspective, the competitive perspective, and the
channel perspective. One specific tool addresses each of the four perspectives
to capture the implications for value delivery and pricing purposes. The last
step deals with implementation of value delivery and pricing strategies.
Shipley and Jobber (2001) suggest viewing pricing as a continuous
process: changes in environmental conditions, in marketing strategy or in
customer needs can require changing selected elements of the process, which
in turn can lead to a modification of the prices or value delivery options
adopted (Fig. 8).
7.1. Clearly Define and Communicate Goals
The first step is a clear definition of goals. Company may pursue a variety
of, sometimes mutually exclusive, goals, such as market share, market share
growth, revenue growth, profitability growth, growth in absolute profits,
share price growth, growth relative to competitors, dividend growth, etc.
A FRAMEWORK FOR VALUE-DELIVERY AND VALUE-BASED

PRICING IN INDUSTRIAL MARKETS
CLEARLY DEFINE AND COMMUNICATE GOALS
CREATE AND DELIVER VALUE
COMMUNICATE VALUE
SET PRICE LEVEL
ECONOMIC VALUE ANALYSIS
THE CUSTOMER
COMPETITIVE ANALYSIS
COST VOLUME PROFIT (CVP) ANALYSIS
THE COMPANY THE COMPETITION
CHANNEL ANALYSIS
THE CHANNEL
IMPLEMENT VALUE DELIVERY AND PRICING STRATEGY
Fig. 8. Framework for Value Delivery and Value-Based Pricing in Industrial

Markets.
These goals are naturally the result of the company’s business or corporate
level strategy.
First of all, good and less good goals exist: In the context of this research
project the author undertakes a study to examine the relationship between
market share and profitability (operating profit margin) in a variety of
industry contexts. For a large number of industries (air transport, chemicals,
automotive parts, automotive) the correlation is not significantly different
from zero, in a few other settings (pharmaceuticals) the correlation is
positive. Researchers generally agree that market share and profitability are
unrelated (Jackson, 2007). Buzzell, one of the cofounders of PIMS –
probably once the most vocal supporter of a positive link between market
share and profitability – declares the program to be effectively ‘‘out of
business’’ in North America (Buzzell, 2004, p. 478). Even more, Anterasian,
Graham, and Money (1996, p. 74) regard market share-oriented goals as
inferior, even ‘‘misleading’’ goals for long-term profitability. Armstrong and

Collopy (1996) conclude their research about the impact of competition-
oriented goals on profitability and survival with the following recommenda-
tions. ‘‘Our results suggest that the use of competitor-oriented objectives is
detrimental to profitability. We recommend the following: Do not use
market share as an objective. Avoid using sports and military analogies,
because they foster a competitor orientation. If you use benchmarking,
ensure that it does not influence objective setting. Do not use management
science techniques that are oriented to maximizing market share, such
as portfolio planning matrices and the experience curve’’ (Armstrong &
Collopy, 1996, p. 197).
Choosing goals that enhance the chances of long-term value creation,
such as goals linked to long term growth in absolute profitability, is thus an
important step.
Secondly, internal consistency is vital to ensure implementation of targeted
pricing strategies. Lancioni, Schau, and Smith (2005) document the difficulties
pricing managers face in implementing their strategies vis-à-vis different
internal departments. According to our own experience, this is to a large
extent due to different goals which these department pursue. Sales managers
are commonly motivated by and rewarded for achieving market share goals,
while their colleagues in marketing frequently have goals linked to absolute
profitability or long-term (budgeted) sales growth, whereas their colleagues in
finance in turn have goals linked to measures of relative profitability (such as
EBIT, EBITDA). In such an environment, pricing strategies face resistance,
since whatever goal a given department may follow at any moment in time,
this department will do so by at least in part causing difficulties to other
departments. To summarize: choosing ‘‘good’’ goals as well as ensuring
internal consistency are vital requirements for successful implementation of
value creation and value delivery strategies in industrial environments.
7.2. Create and Deliver Value
The framework (see Fig. 2) for value delivery is useful for examining additional
ways to delivery value to customers. Specifically the framework provides a
coherent and comprehensive tool to examine all options for value creation.
Thus, in this context the product dimension can be analyzed, as well
as delivery capabilities, services, ease of doing business, own capabilities,
and, finally, options to provide other intangible benefits to buyers
(self-enhancement).
7.3. Communicate Value
Value to the customer has a hard and a soft component: Value to the
customer is the sum of the price of a buyer’s best alternative – i.e. a
specifically identifiable product, service or process that the customer knows
well and for which a clearly identifiable market price exists – plus the
differentiation value – i.e. a subjective source of value of the product’s
differentiating attributes to the customer. In brief, economic value is not an
inherent component of a product, but rather a trait, which executives can
and should manage. The following considerations apply.
7.3.1. Increase the Value of the Product’s Perceived Substitutes

Substitution Effect. Buyers are more price sensitive the higher the
product’s price relative to the prices of the buyers’ perceived substitutes
(Nagle & Holden, 2002). Perception varies widely among customers and
across purchase situations. In addition, creative marketing can influence
customer perceptions.
Effective marketing can position an expensive product as good value by
selecting a high reference as comparison. Take the example of Loctite, an
industrial adhesive, which occupies the position of a substitute to nuts and
bolds. Reference price expectations have an impact also at the point of sale:
In stores where generic (no-name versions of off-patent products) and
branded products are physically close to each other for easy comparison,
sales of low-priced products are usually much greater.
7.3.2. Emphasize the Product’s Unique Value

Unique Value Effect. Buyers are less sensitive to a product’s price the more
they value any unique attributes that differentiate the product from
competing products (Nagle & Holden, 2002). For products or services
with short development cycles (industrial insurances) a key lever of value
creation lies in the development of new products meeting large, unmet
needs. For products with longer development cycles (specialty chemicals,
cars) product development is, of course, important. But, in light of the fact
that companies cannot change the most salient product characteristics for
years once the product is launched, a key leverage point for value creation in
this case is the identification of customer segments that attribute the highest
value to a given set of attributes. The goal is to offer something unique, a
differentiation that customers will pay for despite the existence of lower
priced alternatives.
A frequent mistake is to analyze competitive products and to derive

drivers of customer value from this analysis (Ohmae, 2000). Instead,
researchers and executives should analyze those factors that really matter
for customers, irrespectively of whether or not competitive products
currently meet those needs.
Lone Star Industries has launched an innovative concrete called
Pyrament, a strong, extremely resistant, fast drying cement. Regular cement
cures from 7 to 15 days and a thick bed of cement is required for highways.
Pyrament, by contrast, dries in a matter of hours and requires significantly
less concrete per meter of construction. When the company analyzes pricing
options for Pyrament, marketing managers consider and quantify its unique
benefits: highway operators do no longer need to shut down entire lanes of
a highway for weeks for routine repairs, being instead able to reopen lanes
just a few hours after repair works have ended. Since shutdown time is
expensive, the company builds the value proposition of Pyrament around
the unique property of reducing downtime. Pyrament’s prices are between
USD 150 and $200 per ton compared to USD 60 for traditional concrete.
7.3.3. Create Switching Costs Between Products

Switching Cost Effect. Buyers are less sensitive to the price of a product the
greater the added cost (both monetary and nonmonetary) of switching
suppliers. The greater the product-specific investments that a buyer must
make to switch suppliers, the less price sensitive a buyer is when choosing
between alternatives (Nagle & Holden, 2002).
Where the service component is important, personal relationships with
qualified sales personnel can represent a significant switching cost. Where a
long-term relationship between customers and suppliers is feasible, suppliers
can invest in infrastructure to fortify the bonds with customers. With the
implementation of automated parts ordering based on inventory levels,
suppliers in the automotive industry create strong links with present
customers thus increasing switching costs and entry barriers substantially.
B2B on-line retailers have created significant switching costs between their
brands and their competitors through in-depth customer knowledge: they
store information on customer preferences, tastes, and purchase histories
electronically and thus reduce the incentive to switch.
7.3.4. Render Comparisons Between Products Difficult or Impossible

Difficult Comparison Effect. Buyers are less sensitive to the price of a
known reputable supplier when they have difficulties comparing alternatives
(Nagle & Holden, 2002). The conceptualization of value outlined in
paragraph 3 above is a useful tool to differentiate a company’s offering from

competitive offerings along six dimensions of value creation.
The capacity to create a differentiated product is confined by the limits
of imagination: Even producers of commodities – such as gasoline –
differentiate themselves from competitors by their delivery capabilities and
the services they provide to customers. Value creation and differentiation
for commodities recently takes place along the dimension of the physical
product itself and along the dimension of self-enhancement: in this light
at least the author interprets the successful introduction of high-octane
gasoline (‘‘V-Power’’) by Shell, which – according to car companies – does
not offer any tangible performance benefits over standard gasoline.
A business newspaper quotes a spokesperson of DaimlerChrysler as follows:
‘‘The new gasoline does definitely not enhance the performance of our
engines’’ (Beukert, 2003, p. 19). Despite this, the category of premium fuels
is the fastest growing fuel category and Shell is the market share leader in
this segment (Shell, 2005). In this case the product makes drivers (and also
industrial purchasers) feel better about themselves and creates value along
the dimension self-enhancement.
Services are a key component of the strategies of all manufacturing
companies. Look at GE, a company that transfers its unique knowledge
of Six Sigma and M&A expertise to the businesses of its customers, where
GE personnel implement the traditional GE practices at the customers’
premises.
7.3.5. Increase Prices

Price-Quality Effect. Buyers are less sensitive to a product’s price to the
extent that a higher price signals better quality (Brucks, Zeithaml, & Naylor,
2000).
Price carries two connotations (Leavitt, 1954). Price is not only the
monetary sacrifice necessary to obtain a product, but – in its positive
connotation – price can signal the quality of the product and it can confer to
its owner an aura of prestige (Dodds, Monroe, & Grewal, 1991).
When product quality is difficult to assess and when provided with a
brand name, potential buyers will rely on price to infer quality. In this case,
a higher price signals a higher quality. Although empirical studies do not
find a general relationship between price and quality (Zeithaml, 1988),
consumers do rely on price when they have little experience with the product
or when they cannot readily evaluate intrinsic product attributes.
For products perceived to be superior along a critical performance
dimension, this effect strongly suggests the opportunity of building a brand
name. Building a brand with a substandard product damages company

credibility. If, however, the product is superior, a brand name creates value
for customers. Similar to insurance, a brand name offers a guarantee for
consistent reliability and performance. Higher prices for brands versus no-
name competitors add value for both the customer and the company.
Empirical research shows that brands create customer value through
enhanced information efficiency (reduction of search costs), through risk
reduction, and through provision of intangible benefits such as self-
representation or prestige (Schroeder & Perry, 2002).
The value creating effect of prestige is also present in industrial markets.
Consider the case of an industrial chemicals company, which faces
competition from a no-name brand from China in one of its core markets.
The two products are similar, and the price differential is 4 to 1. In what
appears like a lost war, the company positions its product as ‘‘the product
for the country’s most progressive farmers.’’ Development activities are
directed to move the product away from its competitor through innovative
formulations, and the product is able to increase its market share despite
subsequent price cuts by its Chinese competitor.
7.3.6. Relate the Product to an Important End Benefit

End-Benefit Effect. Customers are less price sensitive whenever the
purchase price accounts for a smaller share of the total cost of the end
benefit (Nagle & Holden, 2002). The higher the end-benefit to which to
product is related, the lower the price sensitivity of customer is expected to
be. This effect shows the opportunity of very high prices for products related
to an important end-benefit or sold to complement much larger purchases.
Antitrust lawyers, for example, successfully sell exorbitant hourly rates
for legal advice in mergers and acquisitions as an insurance against the
devastating effects and heavy fines of antitrust lawsuits by the European
Commission or the Federal Trade Commission.
Marketers can use this strategy also when the risk of failure is very high
or when they can persuade customers to perceive the risk as high. Car
manufacturers have largely succeeded in this approach in the market of
original versus no-name spare parts.
7.3.7. Be Fair (or, at Least, Create the Impression of Being So)

The perceived fairness of the transaction plays a key role in determining the
willingness to buy.
Prospect theory (Kahnemann & Tversky, 1979) argues that indivi-
duals evaluate expected decision outcomes in terms of gains or loses from
a reference point, where losses have larger negative utility than gains of the
same amount, thus proposing a utility function that is steeper for losses than
for gains. Decision makers judge a loss as more painful as they judge a gain
of equal amount as pleasurable.
Marketers use these findings to suggest that products should be
positioned in such a way to offer potential customers a gain rather than
merely preventing a loss. Insurance companies, security agencies, and IT
companies, for example, follow this advice: Remote data backup companies
offer peace of mind and tranquility rather than preventing theft or loss of
valuable data. Similarly, fleet management companies advertise their
services nearly exclusively as mean to gain control and visibility over
expenses rather than as mean to prevent problems, something customers are
more likely to resent to having to pay for.
Prospect theory is also useful when marketers are confronted with the
problem of having to justify steep price increases. They can obscure the
reference price, by selling in unusual packages, formats, or quantities. They
can also implement the price increase in two steps: in a first step, a discount is
offered on an increased price for a certain period of time. Subsequently, the
discount is eliminated. In this way, consumers will experience a gain from
benefiting from the initial price reduction, rather than being confronted at once
with a steep increase (Smith & Nagle, 1995; Mazumdar, Raj, & Sinha, 2005).
7.4. Set Price Level
The author suggests viewing pricing decisions in light of the strategic

triangle originally developed by Ohmae (1982). This triangle is expanded to
include an additional dimension: channel partners.
For each of the four dimensions – company, customers, competition, and
channel partners – this paper suggests to use specific tools to guide profitable
value delivery and pricing decisions. Cost volume profit (CVP) analysis
should be used to capture the company-internal perspective, competitive
analysis to gain insight on trends in competitive strategies, customer value
analysis to understand sources of value for customers, and channel analysis
to incorporate the channel perspective in pricing and value delivery
decisions. The next sections discuss each of these instruments in turn.
This framework suggests questions such as, ‘‘How do prices affect
volumes and profits?’’ ‘‘How will competitors react to different pricing
strategies?’’ ‘‘What is needed to obtain channel support for a given strategy’’
‘‘How can I design a cost-effective and customer friendly channel mix to
delivery value to customers?’’ and finally, ‘‘What is the value of the product
or service in question to different customer segments?’’ Once executives have
answered these questions, value delivery and pricing decisions can be built
on a well-founded basis rather than being the result of the accountant’s cry
for a minimum margin or the sales manager’s desire for competitive price
levels. Consider the case of Schering-Plough’s Claritin in the oral-cold drug
market. The product carries a price premium of over 200% over existing
drugs, yet is the category leader just 2 years after launch. This is possible
only after having gained a profound understanding of the sources of value
of the product to customers.
Traditionally, marketing executives are reluctant to price a new product
significantly above existing price levels – especially if the goal is to gain
market leadership. A profound understanding of the sources of value for
customers helps to avoid one common error in pricing decisions: pricing
truly innovative products too low.
This section discusses tools that will guide both the implementation of
profitable pricing policies as well as the design of effective value delivery
strategies.
customer value analysis: the understanding of the sources of economic
value of a product to different clusters of customers
CVP analysis: the understanding of the implications of price and volume
changes on company profitability
competitive analysis: the understanding of trends in competitive pricing,
product offerings, and strategies
channel analysis: the understanding of channel options, channel
functions, channel perceptions, and the design of instruments to win
channel support.
7.4.1. Customer Value Analysis

In order to quantify economic value correctly, performing the following six
steps is necessary.
Step 1: Identify the cost of the competitive product or process that
consumer views as best alternative. The first crucial step is to put oneself in
the eyes and in the shoes of customers and to ask what they view as best
alternative to the purchase of the product being analyzed. This need not be a
physically similar product; in the end, most products are used to perform a
certain function or to attain certain goals. Any product, process, or activity
the customer could alternatively use can serve as reference product. As in
most cases several products or activities will be able to perform at least part
of the functions examined, the economic value of a given product will have
to be calculated against at least the principal two or three best alternatives.
The set of products used for comparison depends on the customer’s,
not the company’s, assessment of available alternatives. For example, a
company in the agrochemical industry is inclined to think that customers
use a competing product as their alternative upon which other products are
judged and is surprised to learn – after field value in use assessments – that
for a certain customer segment hand weeding is actually the preferred
alternative.
Step 2: Segment the market. The first step of the process immediately
leads to the second step of segmenting the market. Significant differences in
economic value arise from the way in which customers use and value the
product and from how they value their respective reference products. These
differences result from differences in incremental value, which in turn
usually result from distinctive characteristics of the customer, the usage of
the product, or environmental factors.
Already in the 1960s Weir comments on market segmentation: ‘‘It is
assumed that countless individuals comprising ‘‘the market’’ will be waiting
and ready – like the ideal bride – to respond to the appeal and have
consummation result. However, . . . , ‘‘the market’’ is not a single, cohesive
unit; it is a seething, disparate, pullulating, antagonistic, infinitely varied sea
of human beings – every one of them as distinct from every other one as
fingerprints; every one of them living in circumstances different in countless
ways from those in which every other of those is living. How can the most
self-intoxicated writer, realizing this, assume that without genuine commu-
nication, he can ‘‘get through’’, he can convince another human being
(whom he does not physically confront) that he is speaking to him?
If he writes to an unreality like a ‘‘market’’ he is bound to sound unreal’’
(Weir, in: Yankelovich, 1964, p. 90).
A company with a broad, fragmented product line, limited physical space
for inventory, and rapid response times will assign a higher value to just-in-
time delivery than a company with only one product line and ample space
for inventories. This explains why those companies most adept at
implementing value-based pricing decisions – such as software or
pharmaceutical companies – know that no other way of gaining insight
into sources of customer value exists than through observation and intense
field-research into customer habits and requirements. Microsoft, for
example, is known for handing out beta-versions of its latest enterprise
software products to particularly knowledgeable companies and customer
segments. This form of free customer feedback is used to determine which
features add most value and to gain a deep understanding on how different
customer segments use and value the product.
Step 3: Identify all factors that differentiate the product from the
competitive offering. The conceptualization of customer value (paragraph 3)
is a useful tool for identifying the set of features differentiating a given value
proposition from competitive offers: product quality, delivery capabilities,
services, ease of doing business, the vendor itself, and self-enhancement can
thus be assessed.
The notion of these differentiating factors is closely related to the concept
of competitive advantage: Duncan, Ginter, and Swayne (1998, p. 7) define
competitive advantage as ‘‘the result of an enduring value differential
between the products and services of one organization and those of its
competitors in the minds of customers’’. The customer, not the company, is
the judge deciding on whether or not the differentiating factors are actually
relevant to better satisfy his needs and ambitions. For companies, this
means nothing less than to define quality the way the customer does.
Step 4: Determine the value to the customer of these differentiating factors.
Once tangible sources of differentiation have been identified, monetary values
are assigned to these factors for each identified segment of the market. The
paragraph below discusses respective methodologies in detail.
This process is straightforward for high-priced industrial equipment,
where expert sales personnel know how to quantify reduced failure rates,
start-up costs, or life cycle costs in monetary terms in order to demonstrate
the value of a certain product to actual or potential customers.
Conjoint analysis is a simple tool which aims to capture trade-offs in
product features in a systematic way and to assign monetary values to
specific attributes (Auty, 1995). Company personnel presents customers
with a set of two similar products differing in price and along other
dimensions and captures customer preferences for different combinations of
product features and price levels.
By presenting options such as (a) a lower price and no technical support
and (b) a higher price coupled with support and guarantees, conjoint
analysis is able to quantify the value of specific product or service attributes
for a group of customers.
Step 5: Sum the reference value and the differentiation value to determine
the total economic value. The product’s value is the sum of the price of
the reference product plus its differentiation value. As the price of the
reference product and the value of differentiating attributes are likely to
vary across customer segments, the result of this process in not likely to be
one monetary value for any given product, but rather a ‘‘value pool’’
reflecting the fact that different customer segments assign different values to
the product or service examined.
Step 6: Use the value pool to estimate future sales at specific price points.
Researchers represent customer value of different market segments via the
value pool or customer value profile. This allows estimating sales at different
value creation and price points. For each price point, sales are expected to
comprise a share of all market segments which value the product higher than
the specific price examined.
To assign a precise number to value, Anderson, Jain, and Chintagunta
(1993) propose one of the following nine quantification tools:
internal engineering assessment (‘‘expert interviews’’): company experts

estimate customer value of new offerings in laboratory tests.
Field value-in-use assessment: company personnel observe and interview
customers during the process of actually using new offerings to obtain
estimates of customer value.
Focus group value assessment: company personnel ask customers in
groups of 5–15 to evaluate the importance and impact of new product
concepts to themselves or the operations of their company.
Indirect survey questions: company personnel ask customers to evaluate
small changes to existing products to indirectly infer customer value from
their comments.
Direct survey question: company personnel ask customers to evaluate
new product concepts to directly infer customer value from their
reactions.
Importance ratings: following conceptual work by Kano (see: Matzler,
Hinterhuber, Bailom, & Sauerwein, 1996) company personnel ask
customers to indicate the importance of and satisfaction with a set of
existing and new product attributes in a questionnaire. Answers to these
questions allow to estimate customer value of existing and new product
offerings: Customer value is highest for those products and product
concepts where perceived customer importance is high and, at the same
time, satisfaction with current product offerings is low.
Benchmarks: company personnel present customers a ‘‘benchmark,’’ or
current competitive standard, and ask customers on their willingness to
pay for certain additions of attributes or features to this standard.
Conjoint or trade-off analysis: in a field research survey, company
personnel ask customers to evaluate a set of potential product offerings.
Each offering consists of an array of attributes or features, levels of
these attributes are systematically varied within the set of offerings.
Respondents provide a purchase preference rating (or ranking) for the

offerings. Statistical analysis is then used to ‘‘decompose’’ these ratings
into the value (‘‘part-worth’’) that the respondent places on each level of
each attribute. Each attribute then receives a value (Auty, 1995).
Compositional approach: in a field research, company personnel ask
participants to evaluate the single components of the offering separately
and individually. The sum of these individual ratings leads to the value of
the overall product offering.
In their empirical analysis they find that focus group value assessments
and importance ratings are the most widely used methods, while conjoint
analysis is reported to have the highest practical success rates.
The Drivers of Purchase Decisions. Rational purchase decisions do not rely

exclusively on economic value versus price – also the perceived fairness of
the transaction plays a role in deciding whether a product with a certain
perceived value is actually bought. The willingness to buy is the result of the
surplus value of the product and the perceived fairness of the transaction
(Thaler, 1985). The surplus value of products and services is the difference
between the value assigned to them and their price. The perceived fairness of
the transaction is influenced by the price paid compared to internal reference
prices (Thaler, 1985).
The internal reference price is the price or price level, which customers
expect and perceive as fair for the product category in question (Smith &
Nagle, 1995). Customers hold reference prices internally, where they form
over time and reflect standard, i.e. average, category prices. The underlying
premise is that consumers do not respond to prices absolutely, but rather
relatively to the reference price (Thaler, 1985). Customers evaluate actual
prices against reference prices in purchasing transactions and frame the
transaction as either ‘‘fair’’ or ‘‘unfair.’’ Take the example of the Japanese
industrial equipment manufacturer discussed in paragraph 9. Although the
company can charge industrial customers more than 250,000 USD for its
product while still offering them an attractive and financially interesting
value proposition, customers are probably reluctant to pay a price premium
of 600% over the best available alternative. Although fully convinced of the
economic value of the product, customers will perceive this transaction to be
‘‘unfair’’ in the sense that customers perceive the supplier to attempt to
capture the near totality of the benefits created via excessively high prices.
Pricing based on economic value analysis can lead to high relative price
levels. Industrial marketers should remember that the perceived fairness of
the transaction is an important part of the mechanism. This leads to the

natural caveat that the fairness of the transaction needs to be explained and
demonstrated when pricing based on economic value leads to relatively high
price levels.
7.4.2. CVP Analysis

The attention is now on the company itself and its cost structure. Few
executives are able to answer the following question: ‘‘If prices increase by
10%, how much turnover can the company afford to lose if overall profits
are at least to be maintained?’’
The answer to this question depends exclusively on a product’s profit-
ability, that is, on its contribution or gross margin (net sales revenues less
variable expenses). CVP analysis the tool designed to perform this analysis
(Guidry, Horrigan, & Craycraft, 1998). A look at the following figure
reveals the necessary sales increase/the maximum sales reduction for
contemplated price reductions/price increases for different levels of product
profitability (20–50–80% gross margin). (Fig. 9)
For products with 20% contribution margins, for example – which
manufacturing companies generally as low-margin products – a price reduction
of 10% would have to translate into a 100% increase in sales in order to be
profitable. On the other hand, for products with contribution margins of 70%,
a price increase of 10% is profitable if sales decline by 13% or less.
REQUIRED PRICE-VOLUME SENSITIVITIES & PRICE

CHANGES Infinite volume increase required
300
Low margin product (20% GM)
250 Average margin product (50% GM)
High margin product (80% GM)
200
Required
150 change
volume Base volume
(=100)
100
50
0
50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
Price Price change Price
increase decrease
Fig. 9. Cost Volume Profit (CVP) Analysis.

The formula for CVP calculations is the following (Smith & Nagle, 1994):
ð% Price changeÞ
Break even sales change ð%Þ ¼
% Contr: Margin þ ð% Price changeÞ
DP
¼
CM þ DP
CVP analysis is a simple, yet powerful tool to assess whether contemplated

price changes have any chance of being profitable for the company. Low-
margin products usually require fairly large volume increases for price
reductions to be profitable; profitability can be increased either by a price
increase or by dropping the product in question. For high margin products,
on the other hand, price increases can be quite profitable, if volumes are
expected to decline less than the amount indicated in the figure.
CVP analysis can also incorporate incremental fixed costs: if, for example,
a promotional campaign is associated with the planned price reductions or
price increases. The process consists of two steps:
(1) the necessary volume increase for fixed costs investments is the result of
the following formula:
D Fixed costs ðin currencyÞ

Break even-sales change ðin currencyÞ ¼
Contribution margin ðin %Þ
Assume investments for a promotional campaign or for hiring and

training additional sales reps amount to USD 50,000, and that the
product in question has a 50% contribution margin. In order for this
investment to be profitable, sales would have to increase by USD
100,000.
(2) In a next step, planned price changes can be analyzed together with
planned fixed costs investments:
DP
Break even-sales change ð%Þ ¼
CM þ DP
Change in Fixed Costs ð$=EuroÞ
þ
‘‘New’’ unit CM initial unit sales
Again, CM stands for contribution margin and ‘‘new’’ unit contribution

margin refers to the contrition margin after the planned price change. An
example will clarify the equation.
If a price reduction of 10% is planned and if USD 50,000 is needed to

communicate the special offer, how much additional sales are necessary in
order for the price reduction to be profitable?
If the initial unit price is 10, and if initial unit sales amount to 100,000 the
equation will give the following results:
Break-even sales change ð%Þ ¼ þ25% þ 13% ¼ þ38%
In other words, sales would have to increase by close to 40%. If the same
question is asked for a corresponding price increase, the answer would be:
Break-even sales change ð%Þ ¼ 17% þ 9% ¼ 8%
If sales decrease by 8% or less, a 10% price increase is profitable – even
with the substantial investments in promotional activity.
The exercise here confirms a common-sense assumption; however, also
seasoned executives often fail to understand the amount of additional
turnover required to aggressively promote and sell lower margin products.
7.4.3. Competitive Analysis

The third cornerstone of profitable pricing decisions is competitive analysis.
The following elements are important in this process.
Threat of New Entrants. Even before analyzing current competitors,

managers need to understand and evaluate the threat of new competitive
entry. Setting prices exclusively in function of value to the customer can lead
to relatively high prices, especially if products or services are truly unique or
highly differentiated. This in turn can attract new competitive entry.
Specifically, the threat of new entrants will depend on factors such as access
to distribution channels, access to raw materials, technical barriers to
entry, customer’s propensity to switch, and quality differentials between
incumbents and new entrants. Competitive analysis involves an examination
of all these factors.
A case study further illustrates this point (see: Drucker, 2005). Xerox
launches a commercial version of the fax machine in the USA in the mid
1970s. The company sets product prices at an amount closely matching the
full amount of customer value created. In other words, in the absence of
cheap airline travel, the internet and overnight parcel services, prices are
relatively high: Since customer value is high, customers are enthusiastic and
first year sales vastly surpass Xerox’s own internal revenue goals. In setting
prices, Xerox, however, does not take into consideration one key factor: the
risk of new competitive entry. Not long afterwards, the Japanese company
Matsushita enters the market with a fax machine priced 40% below its
American rival. Xerox loses its market share leadership almost overnight.
Xerox prices certainly optimize short-run profitability. Given that these
price levels make new competitive entry extremely profitable the pricing
decision of Xerox probably did not optimize long-term profitability in this
market segment. With hindsight, and in anticipation of new competitive
entry, the company would have been much better off, had the company’s
marketing managers set prices somewhat more conservatively, thus making
competitive entry more costly and/or more risky.
Price Trends in Existing Markets. Executives should monitor prices and

price trends in major market segments carefully in order to know where the
market is and where the market may be going in the future. Especially in
industrial markets customers may deliberately lie to sales personnel about
prices offered by competitors. In doing so, they hope to obtain larger
discounts or more favorable selling terms. Without a reliable database of
competitive information, sales personnel is frequently tempted to lower
prices in order to win the order, thus potentially destroying price levels in
the market and starting a price war which all competitors would have liked
to avoid. The only way out of this and similar dilemmas is to instruct sales
personnel to collect information about price levels, price trends, and
discounts offered on a regular basis. This step allows the spotting trends
quickly and to steer sales personnel and their pricing policies much more
effectively.
Competitive Strategies. Specific points worthwhile of further investigation

are strategies of competitors, estimated profitability across principal product
lines and market segments, future expansion plans, strengths and weak-
nesses in different segments, and anticipated future competitive behavior. As
a result, executives can answer with confidence questions such as: Which of
current market segments and/or customers are threatened most by strategies
of competitors? How can stability and profitability of industry be preserved?
How can the company avoid a price war legally?
Information About Distribution Channels. Relevant information here

includes: market share with key distributors, amount of products stored in
distribution channels, pricing and payment policies of distributors, incentive
schemes of principal competitors, sales forecast from selected distributors,
competitive activities with distributors (promotions, new product launch
initiatives), etc.
Reference Values for Customer Groups. Customer value analysis relies

heavily on the notion of reference value, i.e. the customer’s best alternative
to the product being acquired. Different clusters of customers invariably
take a different product as reference value for the purchase in question.
In addition, customer preferences change-over time. Obtaining reliable
information about different reference values and about the competitive
products behind them is critical in order to develop effective value delivery
and pricing strategies.
Likely Reactions to Price Changes. If economic value analysis and CVP

analysis suggest price increases on some products, marketing managers need
to anticipate likely reactions of competitors to these price changes.
7.4.4. Channel Analysis

Increasingly powerful distribution channels are a key stakeholder in
the value delivery and pricing process. For many industrial companies
addressing the specific needs and perceptions of distribution channels is
becoming as important as meeting end customer needs. In the end, if an
industrial company cannot get support for its value proposition or cannot
deliver its value proposition efficiently to customers, chances of meaningful
sales are slim: the best and even least expensive product will have no chance
of being successful if customers have no way to buy the product through a
sufficiently widely dispersed distribution network.
The fourth cornerstone of profitable pricing decisions is thus channel
analysis, the process of analyzing channels, channel functions, of allocating
tasks to channels, and of benchmarking the a company’s go-to-market
strategy with competitors and with customer needs.
Customer Segmentation. The process of economic value determination (see

Section 7.4.1 above) leads to the identification of distinct and separate
customer segments that value a given set of differentiated attributes
uniquely and differently than other customer segments. This segmentation is
useful for designing channel and value delivery strategies. Some customer
segments will prefer high-touch, high value-added channels, while other
customer segment will see little benefit in these, seeing channels essentially
just as low-cost delivery mechanisms. An understanding of value to the
customer thus not only helps to identify distinct market segments requiring
distinct product or service offerings, but also to design appropriate channel
strategies for each of these distinct customer segments.
Link Channel Functions with Customer Segments. Industrial channels

typically fulfill the following functions (Dolan, 2000; Rangan, 1994):
demand generation: attracting attention as supplier; generating category
and/or product demand
demand qualification: separating potential customers from customers
company wants/its able to profitably serve
demand fulfillment: providing product information, customizing pro-
ducts, assuring product quality, providing desired lot sizes and desired
assortment, ensuring product availability, providing credit services to
fulfill demand
after sales service: providing warranties, guarantees, repair, replacement
products in case of performance exceptions, providing spare parts and
performance upgrades
feedback to manufacturer for strategy improvement. Channels are touch
points to customers; they thus obtain information on customer desired
value changes (Flint et al., 2002), on new competitors, on competitive
strategies of incumbents, on customer reactions to a company’s value
proposition and on other relevant markets trends.
List available Channel Options. Typical options here include a company’s
own salesforce, third party sales forces, agents, distributors, value-added
resellers, wholesalers, retailers, telephone sales, and web-based direct sales.
Link Channels with Channel Functions. Moriarty and Moran (1990)

suggest using the hybrid grid to decide on how to assign specific tasks to
the universe of potentially available channels. The top line of this grid lists
channel functions as outlined above, the vertical side lists alternative
channels as captured in the previous step. This matrix is a useful tool to
separate channel functions from specific channel options, leading to a
clearer demarcation of tasks among (frequently competing) channel
members. The matrix thus can be used to align marketing mix functions
to the needs of specific customer segments and to highlight areas of overlap
and channel conflict.
List Required Resources to Obtain Channel Support. These resources will
include channel margins, but also other investments (infrastructure invest-
ments, advertising, training, product support, product samples).
Evaluate Benefits and Costs of Different Channel/Functional Combina-

tions. Different channels invariable have differing ability to reach specific
customers; each channel options will thus allow reaching a different set of
revenue, market share, gross margin, profit, and cash-flow targets. Different
channels also differ in their direct costs (margins) and fixed costs
(investments into infrastructure, training, advertising support). This step
compares costs and benefits of alternative channel and function
combinations.
Identify Mechanisms to Deal with Channel Conflict. Channel conflict arises

when one channel member perceives that another is engaged in behavior
that prevents or impedes the first company from achieving its goals (Webb &
Hogan, 2002). Invariably intra- and inter-channel conflict will result from
any of the resulting channel, function, customer segment combinations.
Channel conflict is not necessarily a problem, since at least this indicates the
company has achieved broad market coverage.
Based on a case study of four organizations Webb and Lambe (2007)
conclude that manufacturers may even have an interest to increase channel
conflict after new product introductions. This claim has broader empirical
support: In a survey of 65 channel managers from four industrial
organizations Webb and Hogan (2002) find that channel conflict intensity
does not have a negative effect on channel performance.
In conclusion, channel conflict is a fact of life, and as with competition,
empirically grounded signals exist which indicate that a certain amount of
conflict is beneficial for overall performance.
7.5. Implement Value Delivery and Pricing Strategy
The proposed model of customer value in business markets provides the

foundation of assessing and creating value in industrial markets: con-
ceptualizing value along the six dimensions allows measuring the value
currently created as well as exploring options to further increase value. Once
value has been assessed and created, a pricing strategy can be developed.
Value to the customer analysis, CVP calculations, competitive intelli-
gence, and channel analysis provide the cornerstones of effective pricing
strategies. With this information in mind, the justification, the magnitude,
and the impact of price increases can be estimated. If, for example, economic
value analysis suggests to reposition the product and to increase prices by
30%, CVP calculations can be used to determine the maximum amount of
affordable volume loss. For a product with a 70% margin, this price
increase is profitable, if volumes decline by the less than 30%.
Now researchers and executives gather feedback from sales managers,

marketing staff, distributors, other channel members and a sample of
customers to assess whether the actual volume loss is likely to be larger or
smaller than this number. If exploratory research suggests that the actual
customer price elasticity is lower and that the predicted volume loss is
15–20%, managers and researchers have a strong case for implementing the
contemplated price increase.
Once the magnitude of a price increase (or price reduction) is known, the
price change has to be implemented. The sales force has the key task of
justifying, communicating, and implementing these price changes – in
addition to the responsibility of proactively discussing with headquarters the
issue of any price alterations whenever necessary.
Executives with a sales background know that controlling sales personnel
in the field is challenging: whatever instructions on recommended product
use, positioning, and price headquarter staff may communicate to sales
personnel, managers in head-office cannot be 100% sure that these
instructions are actually followed: Sales personnel simply have too many
temptations to win sales in unorthodox ways. In informal discussions with
customers, sales managers might be tempted to suggest, for example,
nontraditional ways of using the product (think of the widespread and
illegal off-label usage of drugs in the pharmaceutical industry). In the worst
case, they might suggest to customers that the recently implemented price
increase is nothing else than headquarters’ version of attempting to increase
profits at the expense of customers and that, if several large accounts refuse
to sign any orders, the price change will be reversed in the next 3 months.
Sales personnel have the potential to fortify and to destroy any planned
price changes. Effective management of the sales force is important. Several
issues are relevant.
7.5.1. Involve Sales Executives in Pricing and Value Delivery Decisions

Nothing can be more frustrating for sales personnel than having to confront a
long-standing customer – and, therefore, potentially also a friend – with the
fait accompli of a significant and sudden price increase or the decision to
terminate a certain product offering. Before implementing any changes in
pricing or value delivery policy, marketing executives need to solicit input from
sales personnel. Rather than being given the impression of having to execute a
decision from headquarter, sales managers should truly feel that they are
acting on nothing else than their fullest conviction. They need to have a say in
pricing and other marketing issues. Otherwise the Roman proverb ‘‘Whoever
is not working with you, is working against you’’ might just come true.
7.5.2. Implement a Fixed-Price Policy

Stephenson, Cron, and Frazier (1979) investigate whether salespeople with
no authority to deviate from list prices, those with limited authority to
deviate from list prices or those with full discretion with regards to pricing
generate the highest gross margins for their companies. They find that firms
that give sales personnel the least pricing authority generate the highest
levels of gross margin.
Fixed-price policy encourages sales personnel to sell on value and not on
price. A fixed-price policy does not mean that all customers actually pay
uniform prices: Segmented pricing – by type of customer or distribution
channel – can complement a policy of fixed prices. In this way, sales
managers have the flexibility of adapting prices to different types of
customers or distribution channels, but the criteria of this segmentation are
out of their hands. Marketing and sales managers in headquarters make sure
that this segmentation is consistent across sales territories and reflects the
strategy of the company.
7.5.3. Identify and Reward High Performing Sales Personnel

In a survey of 2,500 sales representatives and 300 district managers in the
pharmaceutical industry Elling, Fogle, McKhann, and Simon (2002) do not
find any correlation between sales personnel performance and the amount of
bonus received. Top performers receive the same amount of bonus as sales
personnel classified in the bottom third of performance. Sales compensation
is a tool for achieving sales performance levels in line with overall marketing
and business unit strategy. Sales compensation schemes thus need to
differentiate between high and low performing sales personnel in order to
increase the likelihood of implementing value delivery strategies.
7.5.4. Reward Sales Personnel for Profits and not Sales

Current compensation schemes are severely biased towards selling volume.
In an in-depth survey of large manufacturers, the consulting company
McKinsey finds that 80% of companies base their compensation and
incentive scheme for sales managers exclusively on revenue (Alldredge,
Griffin, & Kotcher, 1999). Only a minority of companies link compensation
to any form of profitability. If executives feel that product margins should
not be fully shared with sales personnel, the compensation scheme can be
based on a simple point scheme: points then should reflect product or
account profitability.
7.5.5. Involve Sales Personnel in the Strategy Process

Besides soliciting proactive input from sales managers on pricing, executives
should attempt to involve the sales force in other aspects of strategy:
sales managers should be involved in the late stage of the new product
development process for feedback on product attributes and features; they
can also help headquarter to identify lead customers, i.e. those customers
particularly able to sense market trends, customer desired value changes
(see: Flint et al., 2002) and to help the company adapt its strategy to
changing environmental conditions.
7.5.6. Be creative with Marketing Strategies

Except for the packaged goods industry or apparel, where some of the most
creative and expensive advertising campaigns come from, creative marketing
strategies are still easy and cheap to implement. Chemicals, banking,
consulting, etc. still have much room for creative marketing practices.
Price or product bundling, for example, should be used wherever bundling
adds value for the customer and offers the potential to stimulate sales
(Stremersch & Tellis, 2002).
7.5.7. Make the Company Easily Accessible for Customers

Not only interned-based stock brokerages, but also car manufacturers,
pharmaceutical companies, insurance companies, and the like should
consider offering 24/7 hours call center to actual and potential customers.
Many companies still have a lot to learn in the way customer complaints
are handled. In many companies even ridiculously small amounts of products
offered in return to complaints have to be approved by headquarters. Also
here, sales managers need to be given far more discretion, informing their
supervisors only periodically, rather than having to explain customers the
complicated routes of refunds policies.
7.5.8. Commercial and Technical Personnel Should Converge

In many companies, commercial personnel have the responsibility to
facilitate transactions, while technical personnel have responsibilities linked
to new product launches, complaints, or difficult questions. In the end, sales
people sell and technical people, well, have a technical or R&D background.
This distinction can be outdated and wasteful. This leads to technical
personnel being comfortable in research labs, but only remotely familiar
with real customer issues and to sales personnel unwilling to keep up to date
with the leading edge of science in their field. By broadening the function
of sales personnel to include full accountability on all technical issues,

companies can both streamline their customer interface and reduce costs.
8. PRACTICAL APPLICATIONS OF THE

FRAMEWORK – ILLUSTRATIVE CASE STUDIES
A leading agrochemical company faces the challenge of finding an
appropriate price for the new, breakthrough insecticide Zenta used in the
citrus market. By using the tool of economic value analysis, the market is
divided in six segments: two segments comprising small-scale farmers and
four segments with mainly professional export farmers. For simplicity, the
author presents the analysis for two market segments. For one segment of
small-scale farmers, the reference product used is an off-patent product
imported from China. Despite the broad spectrum of innovative features of
Zenta – among others the extremely low dose rates and thus the low impact
on the environment – potential users in this segment value mainly the
excellent efficacy of the product and the fact that Zenta reduces the number
of sprays from about 4 to just 1 per season. Customers acknowledge the
other product features as positive, but are unwilling to pay for them.
Residue levels of their products, which can severely hamper the ability to
compete on international fruit markets, is a main concern of export farmers.
One key benefit of Zenta is the extremely low dose rate – in the order of
magnitude of 1/1,000 of a gram per kg of fruit –, which makes the product
ideally suited for low-environmental-impact treatments. In addition,
professional export farmers value the fact that Zenta has a scientific track
record of increasing the ‘‘pack-out ratio,’’ the percentage of oranges meeting
the strict quality criteria of export markets. They also value the fact, that –
instead of having to use their tractor to spay in their orchards – they can
apply the product by their drip-irrigation system, thus reducing mechanical
damage to citrus trees. Zenta also reduces the total number of sprays from
about 8 – in the case of professional farmers-per season to just 1 – which
represents a significant cost and time factor. On the negative side, the
product carries the risk that on occasion, and dependant upon insect
infestation, 1 additional spray is required later in the season. This particular
market segment values the economic benefits of Zenta at USD 140/ha,
compared to USD 50/ha for the segment of small-scale farmers.
If these steps are applied to all six market segments, the value pool of the
market can be determined. This indicates the total value created for each
CUSTOMER VALUE ANALYSIS –AN APPLICATION
Segment 2 Value (Euro/ha) Segment 1: small-scale farmer
Reference value: product Butox(25 Euro/ha)

Small scale Positive diff value:
farmer 2 -Reduced number of applications (25 Euro/ha)
(S-S F 2) -Slight quality improvements of fruits harvested (10 Euro/ha)
Negative diff value
--Old equipments needs partial replacement (10 Euro/ha)
Total customer value: 50 Euro/ha
Segment 4 Value (Euro/ha) Segment 2:export farmer
Reference value: product Cytox (50 Euro/ha)

Export Positive diff value:
Farmer 2 -1 application instead of 8 (20 Euro/ha)
(EF 2) -Revenues due to improved fruit quality (80 Euro/ha)
Negative diff value
--Risk of 1 additional spray (10 Euro/ha)
Total customer value: 140 Euro/ha
EF 4
Summary Value (Euro/ha) Economic Value Profile of the market (complete)
EF 3 Small scale farmer 2:

EF 2 Average value 50 Euro/ha, segment size 100,000 ha
EF1 Export farmer 2:
S-SF2 Average value 140 Euro/ha, segment size 80,000 ha
S-SF1 Exporting farmer 4:
Average value 200 Euro/ha, segment size 40,000 ha
Segment size (units)
Fig. 10. Customer Value Analysis and the Pricing Decision for a New Product.
market segment and the segment size (in units). The figure below illustrates
these relationships: (Fig. 10)
The chemical company is able to use this information in a number of ways:
first, the company is able to design a range of products whose features are
uniquely tailored to the needs and perceptions of value of each of the six
segments identified. Secondly, the company is able to design a price struc-
ture for each of these six product offerings which closely track the value these
products create for customers in the respective segment. As a result, the
company is able to radically change its value delivery and pricing policy for
new products: instead of developing and launching one new product to
a market with differentiated needs, expectations of value, and willingness to
pay, the company designs a range of products, each with unique features, and
a unique value/price profile. As a result, revenues increase by more than 80%
compared to the previous ‘‘one size fits all’’ approach; as a secondary benefit,
the array of products the company now has on the market makes the company
much less vulnerable to generic entry, once the patent on the product expires.
Another example of pricing decisions directly influenced by customer value
analysis is the case of a Japanese industrial equipment manufacturer. In
Japan its standard model carries a price equivalent to 80,000 USD compared
to 50,000 USD for a similar model by its main competitor from the United
States. Prices in the US, the second largest market, are slightly different,
although the same absolute price differential between the two models exists.
In Japan, the company sells about 80% more units than its US competitor,
while in the US, where the company has a weaker distribution system, both
companies have roughly the same unit sales – although historical growth
rates of the Japanese company by far exceed the growth rates of its US rival.
What is the reason the Japanese company is able to achieve both a high
relative market share and a significant price premium?
The answer lies in a unique understanding of the sources of value to
customers on the one hand, and in a superior ability to create and deliver
this value to customers on the other hand. For each industry segment, the
Japanese company develops detailed financial models of different cost and
benefit components of its own equipment versus its main competitor.
For a customer in the printing ink industry, the company sales and
marketing personnel quantify the positive and negative differentiation value
as follows:
Reduced start-up expenses (one-time benefits) 5,000 USD

Reduced operating expenses (monthly avg. benefits) 3,000 USD
Value of 99% of output meeting specifications compared 2,000 USD
to 95% for main competitor (monthly average benefits
for a medium-sized printing ink manufacturer)
Value of reduced change-over time (monthly average) 1,000 USD
Value of reduced downtime (monthly average benefits) 5,000 USD
Higher residual value after standard amortization period 10,000 USD
(one-time benefits)
Re-training of maintenance staff (one-time costs) 20,000 USD
Increased energy consumption (monthly average costs) 1,000 USD
Increased supervision of equipment (monthly average 3,000 USD
costs for first 6 months of operation)
Net benefits (yearly average) 97,000 USD
Under this angle, the price premium of the Japanese company is modest:
if an interest rate of 8% is applied to the net benefits gained over the average
life-cycle of this equipment of 4 years, the positive differentiation value
amounts to over 300,000 USD. Customers are expected to pay only a small
fraction – less than 10% or USD 30,000 US – of the product’s incremental
value to this particular customer segment.
Also in this case, the higher priced product ends up costing the
customer less. This is an important lesson for industrial marketing
managers: If researchers and company personnel create, quantify, and
communicate value to customers, high prices and high relative market share
can co-exist.
9. CONCLUSIONS AND DIRECTIONS FOR FURTHER

RESEARCH
The cynic knows the price of everything and the value of nothing. Oscar
Wilde.
This paper covers a number of points. First, the paper advances the
conceptualization of value in business markets by further developing the
model of Ulaga and Eggert (2006), arguably the most rigorous conceptua-
lization of customer value in business markets today. The empirical basis
of these advancements is a grounded theory approach where the author
captures, summarizes, tests, and validates the experiences of 35 marketing
executives. Specifically this empirical work adds two new dimensions – ease
of doing business and self-enhancement – as sources of value for customers
in industrial markets which existing models do not capture well. Based on
in-depth discussions with managers participating in these workshops,
empirically grounded evidence exists that industrial companies are already
providing value to their customers along these two new dimensions.
Further validation of the proposed model and measurements to quantify
value are the next critical empirical steps which are urgently required. On
the one side, the property of future orientation of the construct of value in
business markets (par 3) opens up potentially fruitful research questions
such as: What is the impact of perceived and what is the impact of true (i.e.,
objective) uncertainty on perceived customer value? What is the role of
emotions – such as fear – in shaping perceptions of uncertainty which affect
perceived customer value? How can companies shape uncertainty to their
advantage (increase perceived uncertainty of competitive products, reduce
perceived uncertainty of own products)?
In addition, further qualitative studies are needed to understand whether
the proposed model of value creation in business markets is exhaustive. Next,
LISREL and structural equation models can be used to understand the
validity of the entire model and to pinpoint which subdimensions of value
(product, delivery capabilities, services, ease of doing business, vendor, self-

enhancement) are most closely associated with overall customer value:
Consider which subdimensions of the construct value in business markets
(Table 2) relate most closely with overall customer value across industries,
across countries, for different members of the buying center, across
customer categories, across product categories, across market segments,
and across intensity of buyer–supplier relationships. From a theoretical
perspective, this step allows the building and validating parsimonious
models of value creation and delivery where causal links become evident.
From a practical standpoint this step helps managers understand along
which dimensions customer value needs to be further increased to maintain,
defend, or gain a competitive advantage, and, conversely, which dimensions
of value matter less. The resulting insight from this understanding will have
profound impact on business unit strategies.
Longitudinal analysis finally can help to shed light on dynamic aspects on
customer value in business markets: causal relationships triggering shifts in
the relative importance of alternative subdimensions of value and overall
customer value need to be explored. Extant research in this area acknowl-
edges the need for further theory development (Flint & Woodruff, 2001;
Flint et al., 2002).
In a second step this paper summarizes available empirical research on
pricing practices in industrial companies. Own empirical research on pricing
practices at a major Fortune 500 company in the industrial process industry
complements this literature survey. As conclusion the author notes that
customer value-based pricing approaches are currently the least diffused
approaches in industrial pricing practice (average influence 17% across all
surveys), despite being nearly universally heralded as superior approaches to
set prices. In this respect, this paper also summarizes extant literature on the
link between pricing approach and profitability: Despite repeated claims in
extant marketing literature (e.g., Monroe, 2002) that customer value-based
pricing approaches increase profitability, extant marketing literature does
not produce a single empirical study supporting this claim.
The empirical exploration of the consequences of alternative
approaches to pricing – that is, their impact on business unit or company
performance – is thus one of the areas where most urgently further research
is required in the future. In particular, further work is necessary to
operationalize the degree to which alternative and often not mutually
exclusive approaches, to pricing are used in practice and to understand the
performance impact of alternative pricing approaches on business unit or
company profitability.
In a third step, the paper proposes a model of value delivery and value-
based pricing in industrial markets. After taking a company’s objectives into
consideration, the author suggests to create value along the six dimensions
of customer benefits defined (see paragraph 3). The next step is value
communication. The tools of customer value analysis, CVP analysis,
channel analysis, and competitive analysis are appropriate to reflect the
customer, company, channel, and competitor perspective relevant for all
strategic decisions. The last step implements the value delivery and pricing
policy and illustrates ways to overcome challenges industrial companies face
in this respect. Pricing is a process with a feedback loop: assumptions need
to be revisited, environmental dynamics, changes in customer desired value
need to be taken into consideration, which requires a reiteration of the steps
outlined.
Customer value analysis receives heavy emphasis in this respect. A solid
understanding and quantification of customer value is a key to value
delivery and value-based pricing. This understanding can suggest where to
increase prices and where to launch new (premium) products while at the
same time increasing sales and profitability. Customer value analysis is a
tool which can be used to justify price increases to customers;
customer value analysis is furthermore vital in the new product development
process.
This paper also shows that a relentless focus on competitiveness has major
drawbacks: instead of attempting to create and to communicate value
to customers, companies risk paying an unjustified attention to current
product features of competitors, regardless of whether these features meet
customer requirements and truly create superior customer value.
Empirical research supports this claim: In a field study involving 20 US
Firms over an extended period of time Armstrong and Collopy (1996)
find that companies with a pure competitor-oriented strategy are less
profitable and less likely to survive than companies with a strong customer
orientation.
Differentiation from competitors does not per se add value. Differentia-
tion might lead to a sustained investment in product features which do not
add any value for customers. Product differentiation strategies have to be
preceded by an understanding of the real sources of value for customers,
which then will lead to appropriate positioning and pricing. Customer value
analysis is a valuable tool even when products are relatively undiffer-
entiated: in this case, insights in the way in which the product adds value can
lead to ways to develop the product further and to position the product in
ways which add value to customers.
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VALUE CREATION OPTIONS FOR
CONTRACT MANUFACTURERS:
MARKET STRATEGY TRANSITION
AND COEVOLUTION IN
NETWORKS
Paul Matthyssens, Koen Vandenbempt and

Sara Weyns
ABSTRACT
Manufacturers increasingly seek new ways to add customer value and

differentiate. However, in business markets such efforts often remain
relatively unsuccessful, leading to a large number of services offered and
higher costs, but with limited corresponding returns. Based on extensive
expert interviews and case study research, this paper studies how suppliers
in the highly commoditized metalworking industry try to realize new types
of customer value. The paper identifies ‘‘ideal’’ value positions pursued by
Belgian contract manufacturers and service providers in order to survive in
an industry characterized by fierce price competition from low labor cost
countries. Further, the paper shows how companies can migrate to these
‘‘ideal’’ value offerings. Key success factors and potential traps for each

ISSN: 1069-0964/doi:10.1016/S1069-0964(08)14012-1
449
450 PAUL MATTHYSSENS ET AL.
ideal type are identified. Market strategy transition necessitates an internal

‘‘alignment’’ strategy and an external ‘‘coevolution’’ with chain partners.
1. INTRODUCTION AND PROBLEM STATEMENT
Manufacturers increasingly seek new ways to differentiate in buyer–seller

relations (Ulaga & Eggert, 2006). Marketing has evolved away from
tangibles and transactions, toward a new dominant logic consisting of
services, interaction, and the cocreation of value (Vargo & Lusch, 2004).
Gebauer and Friedli (2005), however, describe how in business markets such
transition processes often remain unsuccessful, leading to a large number of
services offered and higher costs, but with limited corresponding returns.
Suppliers and customers seem to have different views on what is a
customer solution. Tuli, Kohli, and Bharadwaj (2007) report customer view
solutions as relational processes comprising of requirements definition,
customization and integration, and deployment and post-deployment
support. To the contrary, suppliers tend to have a product-centric view of
solutions. The research of Tuli et al. (2007) also demonstrates that solution
effectiveness depends on both supplier and customer behaviors. Mutual
adaptations and close interactions are a precondition for a solutions strategy
to succeed.
A transition to a new value-added market approach must be managed
actively in order to become successful. The business marketing literature
offers a number of insights. First, Oliva and Kallenberg (2003) pinpoint
the need to adapt firm activities and to realize organizational changes.
Second, Gebauer and Friedli (2005) suggest behavioral changes such
as the need to accept higher levels of risk, empowerment, and a more
professional service approach. Third, Ford et al. (1998) acknowledge that
the extent and content of a company’s offering determines its partners.
A transition from basic products and a commodity-based business model
toward a new ‘‘value-added’’ and service-based business model is, therefore,
expected to have an impact on the position of the company in the network.
This process must also be managed for service transitions to become
successful. This view is in line with Matthyssens, Vandenbempt, and
Berghman (2006) who describe that value innovation goes hand in hand
with the generation and management of ‘‘multilevel absorptive capacity’’
within industries.
Möller and Törrönen (2003) introduce the concept of a supplier’s value
creation potential building on the (interrelated) dimensions of efficiency,
Value Creation Options for Contract Manufacturers 451
effectiveness, and network functions. The value-producing potential of a

supplier is relatively easy to assess in the case of its ‘‘core value’’ as existing
offerings of the supplier are good indicators. Assessing ‘‘added value’’ and
‘‘future value potential’’ is a much bigger challenge, they claim. In their
cases, the value creation potential is dependent on partner networks and the
development of technologies. A capability for understanding the business
logic of the customer becomes key. Möller and Törrönen (2003, p. 11) call
for research ‘‘to establish a validated set of capability indicators.’’
The paper addresses (1) the ‘‘transition imperative’’ by studying how
companies in the metalworking industry try to create additional value in a
highly commoditized, basic industry, and (2) how this process can be
managed within existing business networks. The problem statement thus
focuses on how Belgian contract manufacturers and subcontractors in the
metalworking industry build successful market strategies. Amid delocaliza-
tion tendencies, professionalization of purchasing processes of customers,
and fierce volume competition from low labor cost countries, Belgian
contract manufacturers in the metalworking industry have no choice but to
continuously add value to their offerings. Although tactics to drive costs
down and to boost efficiency have had some effect, really securing and
further developing their market positioning calls for more strategic choices.
This paper identifies ‘‘ideal’’ positions in the market and how companies can
migrate to these positions. This process operationalizes the necessity of
‘‘coevolution in business markets,’’ a statement often put forward in the
business-to-business (B2B) literature.
The paper is structured as follows. In the next section, the empirical
research context (the Belgian metalworking industry) and the method that
was followed (a mixture of qualitative methods: expert interviews, a focus
group, and case study research) are introduced. In the findings section is
reported how contract manufacturers can create value and how they can
migrate to these market positions. The argument is built on (1) the trends
and challenges within the industry, (2) the value creation and market
positioning options for these contract manufacturers, and (3) the key success
factors and preconditions for each of these options.
In the last section, the contribution of this study is highlighted and the
findings are confronted with the extant business marketing literature. As
given above, this paper contributes to the business marketing strategy and
customer value literature by showing how in a commoditized setting,
suppliers will face ‘‘paradoxes’’ that limit their degrees of freedom in
realizing new customer value. Further, the paper shows the interaction
between these ideal value-based strategy types with organizational issues on
the one hand and with relationships and networks features on the other
hand. Specifically, conclusions are drawn on how companies must upgrade
their network/partnership capabilities and on how relationships and
networks can act as inhibitors/drivers of a value creation strategy.
2. RESEARCH CONTEXT, DESIGN, AND

METHODOLOGY
In this paragraph, we present (1) the research context, (2) the research
problem and methodology, and (3) the research design.
2.1. Research Context
The context of this qualitative study is the Belgian metalworking industry.

The companies operating in this industry are contract manufacturers to
other companies (operating in industries such as mechatronical engineering,
automotive). Contract manufacturers take on different roles in the supply
chains. For this reason, it is quite difficult to give a straightforward picture
of the metalworking chain (see Fig. 1). Fig. 1 provides a linear
representation of the supply chain (from raw materials to products for end
customers), and lists the different players in this chain [such as original
equipment manufacturers (OEMs) and brand owners, general suppliers,
raw materials suppliers, suppliers of components and subsystems, and
specialized suppliers].
Fig. 1 gives a clear view of the types of activities necessary to get from raw
materials to end products. Fig. 1 illustrates that subcontractors/contract
manufacturers are often situated upstream in the supply chain and/or are
shielded from end users/customers. Using this figure, it is reasonable to
deduct that through their role played in the supply chain, it is quite vital for
contract manufacturers to have a large network of contacts.
2.2. Research Problem and Methodology
The research is situated in the upper right-hand corner of the Golfetto and
Gibbert (2006) matrix on value creation competencies. The study focuses on
a potential (ex ante) value creation strategy from the suppliers’ perspective.
The study identifies migration paths to new value-added strategies together
Raw materials suppliers

General suppliers First-tier suppliers
and suppliers
of
components/
Contractors
subsystems
Brand owners/OEM
Machines
Complex products
Raw materials (Sub) Total Needs

Components
Parts Assembly Solutions End customers
Specialized suppliers (machining,

finishing,surface treatment, ...)
Fig. 1. The Supply Chain of the Metalworking Industry.
with their key success factors. In this process, the study focuses on the
problems these companies encountered and how they tried to succeed in
their endeavor of market strategy reorientation. Knowledge of the industry
is crucial in this process. The essence of the metalworking industry is that it
supplies to other industries. The historical reason of existence of these
contract manufacturers is that they can offer certain products/services at a
lower cost than the contractor. By specializing in certain types of operations,
product sizes, and/or services, they can have considerable cost advantages
compared with their contractors. The key success factors are thus based on
clearly defined economic variables, such as economies of scale and
economies of scope. ‘‘Economies of scale’’ (for instance, in production and
purchase) occur when the average production costs decrease as the produced
volume increases. ‘‘Economies of scope’’ occur when, for example,
production resources can be used to serve several customers with different
metal products, or when a cross-fertilization of expertise takes place.
Combining economies of scale and scope becomes more and more essential
for contract manufacturers. The latter is supported by the availability of
multipurpose metalworking machines.
Besides scale and scope economies, other potential sources of comparative

advantages reside in economies of experience, economies of learning, and
economies of span.
‘‘Economies of experience’’ occur when an organization specializes in a
certain type of activity, such as surface treatment or custom-made goods.
Execution and operation will thus be faster, smarter, and more cost
efficient than less-specialized organizations.
‘‘Economies of learning’’ occur when the contract manufacturer focuses
on continuously developing new applications. The contract manufacturer
excels in listening to contractors and translating these needs in specific
products/solutions. Eventually, this may even lead to becoming a product
innovator. For example, a contract manufacturer developed a preas-
sembled tank (including fillers, hoses, e-components, and wires) for off-
road applications.
‘‘Economies of span’’ refer to the strength of the companies’ network. It
must have an extended and quickly mobilizable network of partners,
customers, and other market players. This enables the contract manu-
facturer to offer a superior solution in a smart and cost-efficient manner. In
the supply of components, more and more intense networks arise, which
decrease ‘‘manutention’’ (refers to all labor-intensive movements during
the production process). For example, through alignment of the activities
of the customer, contract manufacturer, and designer, the design of a wheel
was modified so that four treatments in operations were reduced to one.
The resulting ‘‘economies’’ were shared among the participating parties.
This paper uses a mixed qualitative research method (Patton, 1990). The
study was conducted in cooperation with the Belgian sector federation for
the technological industry, Agoria. The method includes interviews with
participants of metalworking companies, carefully selected through
purposeful sampling. With the help of an industry expert (a member of
the sector federation), companies were identified that were seen as leading
and successful (realizing above average rents) by their peers.
This study uses a rich qualitative research design for the following
reasons. The literature on strategic value positions in the metalworking
industry is scant. As a consequence and before embarking on the study
of value-adding positioning strategies, the study includes deep digging in
the selected industry and its typical companies. This procedure is in line
with Pettigrew’s (1992) statement that relatively undefined constructs (such
as creating additional value in a highly commoditized market) should be
studied in their natural context in order to improve their validity and
measurement. Further, this method enables revealing of managerial and

organizational cognitions (Laukkanen, 1994) and crafting causal maps
(Hodgkinson, 1997; Huff, 1997; Spender, 1989; Weick, 1979) of the market
actors. The latter is useful to increasing understanding of active sense-
making schemes and drivers for market actions of companies.
2.3. Research Design
The research design was conceived as follows. In first phase of this research
project (year 2005), 20 CEOs from metalworking companies were
interviewed. Discussions centered around how trends and tendencies
(societal, technological, organizational, market and supply chain) have a
potential impact on the strategies of metalworking companies.
A second wave, carried out during 2006–2007, includes an additional six
in-depth interviews with CEOs and commercial managers (duration from
1.5 to 2.5 h), a focus group (discussion of nearly 3 h) with 12 managers from
metalworking companies (as well specialized as more general contract
manufacturers), 2 suppliers, and 2 industry experts (1 technical and 1 market
expert). Two managers from the steel federation specialized in metalworking
were interviewed as experts. The interview guides and focus group guides
focused on identifying trends, successful market strategies, value-added
and differentiation efforts, and perceived critical success factors (CSFs;
internally and externally).
An expert from the sector federation participated in all interviews to
enhance understanding and interpretation, and was involved in a discussion
with the two interviewing authors in generating a summary report after each
interview. By doing this, and by using diverse types and sources of data in the
two waves of data gathering, This study fulfills the data triangulation
requirements in qualitative research (Eisenhardt, 1989; Yin, 1994; Woodside &
Wilson, 2003). Also, existing theories on strategic positioning enrich
preliminary findings. In this way, the empirical data gathering and analysis
process is in line with the ‘‘iterative grounded theory’’ method from Orton
(1997) who describes a continuous and ‘‘systematic combining’’ (Dubois &
Gadde, 2002) of theoretical and empirical insights during interviews.
3. FINDINGS
This section starts, first, with an elaboration of the specific market position of
metalworking contract manufacturers. Second, trends and challenges
observed in the metalworking sector are discussed. Building further on these

trends and the specific nature of the contract manufacturers, ‘‘ideal’’ strategy
types for value creation and differentiating market positioning for
metalworkers are introduced. This section ends with the identification of
CSFs and the description of development paths for contract manufacturers
(how to evolve from the current situation to the ideal types).
3.1. The Specific Nature of Contract Manufacturers
The common characteristic of contract manufacturers is that they work

‘‘under assignment’’ of a third party. In many cases, brand owners,
outsourcers, and OEMs initiate the demand for metalworking products.
One of the very important implications is that these contract manufacturers
do not have direct contact with the customers of the contractors/OEMs.
Metalworkers perform their production on the (detailed) specifications of
these other companies. The fact that they do not have direct contact with the
end customer, the customer’s customer not the principal, makes upgrading
their role in the chain extremely difficult.
Next, the metalworking industry should be seen as a network of actors.
Each company has its own incomplete view of the network it is operating in.
This is obvious, as it is impossible to form an unbiased view of the network
for each of the actors involved. Setting boundaries and objectively
representing the importance of each of the actors (as each of them thinks
of themselves as the center of this network) are extremely difficult. These
views on the networks are called ‘‘network pictures’’ (Ford, Gadde,
Håkansson, & Snehota, 2003). In the following figure, a possible network
picture of the metalworking industry is represented, including relationships
between actors. The different shapes and sizes of the actors in the network
represent their heterogeneity (Fig. 2).
General business dynamics influence the metal industry in general and the
metalworking industry in particular. The next section details more specific
trends and challenges.
3.2. Trends and Challenges
3.2.1. Globalization
A first set of trends is related to the increasing globalization of customers
and competitors and the exploitation of cost advantages on a global scale.
Focal
metalworking
contract
manufacturer OEMs
End
markets
1st tier
suppliers
Raw 2nd tier

materials suppliers
Fig. 2. A Network Representation of Metalworking. Source: Inspired by Ford

et al. (2003).
More specifically, there is observed:
1. an increase of imports from low(er) cost countries (e.g., Eastern Europe,
China);
2. a continuing and gradual delocalization of the production capacity of
OEMs to lower cost countries; and
3. optimization by OEMs of their (global) purchasing, logistics, and
production architecture.
First, the competition from low labor cost countries has been frequently
cited as putting pressure on the lower value-added work performed by
metalworking contract manufacturers. The interviewees pinpoint in
particular CEE and Asian new competitors as pushing down prices.
Second, the greatest threat might lie in the fact that the contractors/
OEMs themselves are delocalizing. They start moving their production
capacity to the Far East or to CEE, thereby closing down the Western
facilities that are actually buying from local subcontractors/contract
manufacturers. This process is, however, not always the case and varies
from sector to sector (automotive versus specific purpose machine building).

OEMs themselves are confronted with increasingly fierce competition. A lot
of these organizations are also active in pan-European and/or global
markets. The pressure on their competitiveness is very high. Obviously,
these companies are striving at optimizing their organization, to distinguish
themselves in their market, and to press costs. In many cases, business
processes are reconfigured by delocalization and concentration of produc-
tion activities, guided outsourcing/offshoring, and subcontracting. Deloca-
lization does not necessarily mean a movement to low-wage countries. The
main goal is to optimize all activities in view of an efficient organization,
with a global architecture. The customers of contract manufacturers thus at
least think on a European scale.
Third, the importance to do business cost-efficiently is one of the drivers
of the further professionalization of the purchasing function of the OEMs.
Multiplant organizations evolve more and more to centralization of
purchasing. Mostly, this process means that the personal relationship
between local buyers and (local) suppliers is broken. By centralizing and
upgrading the purchasing function, the buyer gets more and more elusive for
the contract manufacturer. The metaphor of the buyer as ‘‘ghost’’ (not
seizable and not nameable) is indeed well chosen. The consequences of this
professionalization are demonstrated in another way. The number of
contract manufacturers cooperating in the first tier is still diminishing. In
some sectors – like automotive – this is resolutely being implemented (or is
implemented already). Contract manufacturers are then situated even one
step further from the end customer. This intermediation makes it even more
difficult to get to know the demands of end customers, and thus makes paths
to value creation even less accessible and less known.
Besides the optimization of their organization and the streamlining of
their buying policy, OEMs search for ‘‘unhealthy profits upstream in the
supply chain.’’ By doing so, they often skip the first-tier suppliers to
optimize business processes and control margins higher in the chain.
Possible optimization and efficiency improvements are imposed by the first-
tier supplier. Similarly, a demand is made that contract manufacturers have
a branch in a low labor cost country.
3.2.2. Role Proliferation

A second set of trends relates to the change in the role taken up by contract
manufacturers. The empirical data reveals at least two major shifts:
1. More tasks are transferred to the contract manufacturer.
2. Changes in the content of the tasks performed by contract manufacturers.
First, contract manufacturers feel pressure to take on more roles as OEMs

are pushing the business risk up the supply chain. Delivery deadlines get
shorter and more and more flexibility is demanded. At the same time,
contract manufacturers often carry the inventory risks and take over supply
risks. This is illustrated by the situation in which the contract manufacturer
gets a production planning from the OEMs of 3 months, whereas his or her
own purchasing (of raw materials) has a lead time of over 6 months. This
situation, however, differs from sector to sector. The automotive industry
works on a totally different basis and is in that way probably the most
optimized. Production volumes are better known by the contract
manufacturers, which makes efficient cooperation possible.
Second, not only a widening of tasks occurs, but also a change in the
content of the tasks performed by the contract manufacturers. They sense
an obligation to shift more and more to quality and precision work, but this
does not necessarily imply better prices. The change in the role from mere
‘‘capacity offering’’ to design and specialty company is often considered as
normal and there appears to be little room for a financial compensation of
the new tasks performed.
3.2.3. Challenges
One of the consequences of the trends is that contract manufacturers in
metalworking have specialized in and focused on specific markets,
customers, and processes. Two broad categories of contract manufacturers
have arisen. The first category is the application supplier, which focuses on
specific customers/markets and offers total solutions or components to
contractors/OEMs. For these application suppliers, the application and the
product are of crucial importance. The second category is the process
supplier, which specializes in parts of the production process, such as forges,
foundries, finishers, and other specialized fabrication applications and
technologies (machining). For process suppliers, the process and the
specialized knowledge of this process are of main importance (e.g., surface
treatment). In many cases the process suppliers are called into the
production process of application suppliers.
The above processes produce challenges that concern all companies in the
metalworking industry. Below, these challenges are represented as ‘‘dualities’’
(Dittrich, Jaspers, van der Valk, & Wynstra, 2006) between two extremes. In
this way, they can be seen as paradoxes that need to be managed. The basic
paradox has to do with the unnatural split between efficiency and
effectiveness. Efficiency requires standardization and a certain scale in the
entire organization; effectiveness refers to alignment, custom-made goods,
EFFICIENCY EFFECTIVENESS
(standardization) (1 on1 relations)
• Standardization • Custom-made goods

• Cost reduction • Service
• Strict asset management • Dedicated investments
• Controls • Risk-sharing with
customers
• Routines • Flexibility, pro-activity
=> Optimization of =>Providing a

the processes system/sub-
solution
Fig. 3. General Paradox.
and 1-on-1 relationships with customers. Flexibility, adaptability, and the

capacity to empathize are crucial. This basic paradox is listed in Fig. 3.
The customers are at the origin of the basic paradox in Fig. 3 because of
their high expectations. Customers want to try and purchase products at the
prices of low-wage countries, and expect at the same time the quality,
service, and know-how of the Western companies. Contract manufacturers
are struggling with this dilemma. The pressure of efficiency pushes contract
manufacturers toward process efficiency, standardization, cost reduction,
and a strict asset management. The pressure of effectiveness stresses the
importance of custom-made goods, service, flexibility, and a proactive
attitude.
3.3. Value Creation and Market Positioning for Metalworkers
This section of the paper discusses the pathways followed by application and
process suppliers in order to strengthen their market position. A stronger
position on the market is only possible if the contract manufacturers realize
extra customer value. The creation of customer value implies that the
contract manufacturer can make a significant contribution to the
contractor’s profitability. Important is that the contract manufacturer can
add value by integrating into the customer’s processes. A variety of
strategies used by contract manufacturers in their quest for value addition
are observed. These efforts can be grouped along the two axes of the value
augmentation model presented by Matthyssens and Vandenbempt (2008).
Along the first dimension, the contract manufacturer seeks further
integration in the production process of the customer. For instance,
a company of components could think about coupling these components

and as such deliver submodules. The latter holds added value for the
customer because a number of operations in production or assembly are
integrated and automized by these submodules (integrated components).
This movement can further lead to the supply of integral systems. The
following case examples illustrate this point. On the one hand, a foundry
tries to move up by offering a form of ‘‘processing’’ (e.g., by gluing fittings
in the metal part), but the customer is not always willing to outsource these
extra production steps. On the other hand, a contract manufacturer of
preassembled units tries to sit down together with the engineers of the
customer, to coordinate designs, and add surface treatment (e.g., degreasing,
anticorrosion treatment).
The second dimension illustrates to what extent a company searches
added value by integrating further in the customer’s business process. In this
case, the enterprise mainly tries to give solutions to simplify the customer’s
business process. In other words, it goes further in the customer’s
administrative value chain, and will try to add value to the components/
products with extra services. For instance, ‘‘vendor-managed inventory,’’ in
which the stock management is taken over for the customer. Going further
along this axis of added value can put the company eventually in a position
of process management. The full business process then gets taken over.
A contract manufacturer studied, adds coating, piping, and cables to his
or her (sub)systems as a leading director. Therefore, he or she exploits his
or her customer’s network. The foundry moves along this X-axis by offering
flexible logistic service in order to reduce ‘‘changeover costs.’’ Vendor-
managed inventories, just-in-time (JIT) supply, and labeling are examples of
simple service concepts.
Taking a leading position in the market forces the process supplier and
the application supplier to create added value for customers. The ‘‘ideal’’
types are represented in Fig. 4. The next section describes these ideal types
(efficient capacity supplier, super customer bonder, design partner, and
strategic partner) toward which process suppliers and application suppliers
can migrate more thoroughly, and identify CSFs for each type.
3.4. Critical Success Factors
The ideal contract manufacturers at the end of the development

paths illustrated in Fig. 4 (efficient capacity supplier, super customer
bonder, design partner, and strategic partner) have tried to adapt their
Development path 1:
Evolve through technical integration and business
re-engineering into an
Efficient Capacity Supplier
Process
supplier
Development path 2:
Evolve through business process integration into a
Super Customer Bonder
Development path 1:
Evolve through technical integration into a
Design Partner
Application
supplier Development path 2:
Evolve through technical and
business process integration into a
Strategic Partner
Fig. 4. Value-Adding Development Paths in the Metalworking Industry.
business model to address the perceived CSFs. As a result, a clear

specialization occurs in the value positions aimed at. This specialization
is induced by the behavior of the contractor and the increased competition
in the end markets. The next scheme indicates, for each type, the market
positioning pursued, and the according perceived CSFs and qualifiers.
The case companies experience CSFs as factors on which differentiation
is still possible, and qualifiers as the minimum conditions to participate
(see Table 1).
3.4.1. Critical Success Factors for the Efficient Capacity Supplier

The efficient capacity supplier is organized to use its product capacity and
processing knowledge as efficiently as possible. This enterprise chooses
resolutely to compete on price. That is why it tries to actively have an effect
on the direct costs of customers. A company strives for high efficiency and
scale. More concrete, their whole organization attunes to the contractors’
demands. The engineering focuses on being able to take over production
questions of customers, and a strong response capacity occurs that leads to
logistic and cost performance. These actions represent a pure cost leadership
option of the metal industry, mainly giving the customers price advantages.
The path implies that the process supplier integrates further into the
technical process of his or her contractors. Contractors are mostly globally
Table 1. CSFs for the Sustainable Strategy Types.

The Efficient The Super The Design Partner The Strategic
Capacity Supplier Customer Bonder Partner
Market Most efficient Most flexible Cooperating in the Thinking integrated

positioning supplier (price) supplier for design phase total solutions
(customer of high volumes series and
value searched projects (offering
for) solutions and
custom-made
goods)
Leanest Solution with Custom-made Custom-made
manufacturing flexible services goods and goods and
integration into integration in
technical process technical,
of customer administrative,
logistic, and
financial
processes of
contractor
Supplier of fair Alignment with In high-end In high-end
value customer’s markets, play a markets,
business role in the new safeguarding the
processes in product contractors’
order to realize development of differentiation
transaction cost contractors
reduction
Critical success Economies of scale Economies of scope Economies of scope Economies of
factors in the entire experience
setup of the
organization and
production
Organization is Economies of Economies of Economies of
specialized in one experience in experience learning
type of buyer custom-made
goods or
customized
solutions
Economies of span Economies of Economies of span
(network of learning (network of
contacts and contacts and
partners) partners)
Qualifiers Efficient use of Sufficient scale to Sufficient scale to Sufficient scale to
engineering be price be price be price
capacity competitive competitive competitive
Competence Competence
development development
Potential pitfalls Drastic alignment Organization can A lot of upfront Is the contract
on one customer get stuck in the investments manufacturer
or one type of middle, between needed in supposed to
customer efficiency and engineering integrate
effectiveness capacity, but is
The Efficient The Super The Design Partner The Strategic
Capacity Supplier Customer Bonder Partner
increases the risk the company strongly with the

profile really looked at contractor?
as partner by the
client?
Organization Too expensive to Too little proactive Not all
cannot switch to compete with attitude competences are
other application low-cost players; under direct
in the short term too less control. The
specialization in company is
technique and dependent on
development to specialist
compete with suppliers. Not
knowledge easy to
companies manageþbig
responsibility
Difficult to capture
the value created
Examples/typical Volume markets Project market Series markets Series markets
markets (diverse (diverse
applications) applications)
Customers are Series markets Developing end Developing end
optimized markets markets
globally
Automotive End markets where Niche markets Niche markets
speed and
flexibility are
important
Market Application
specialization specialization
optimized or managed and active in volume markets. The OEM product

itself experiences heavy competitive pressure and this is passed onto the next
upward link in the chain.
CSFs refer to realizing maximum economies of scale in purchase,
production, factory layout, distribution, and logistics. The specific
organization of this metalworking company is completely attuned to the
needs of the OEMs in this segment and there is a far-reaching
standardization to be able to realize the lowest possible price for a certain
product. In other words, although contractor-specific investments are made,
this type of supplier seeks scale economies across different projects. For
example, a metalworker has resolutely chosen for less, but bigger customers,
a redesign and streamlining of the plant’s lay out and an exclusive focus on
ironwork (metal plates) (no profiles for example). There is also heavily
invested in new production apparatus. The company is now cost efficient

compared to Central-European low-wage countries.
3.4.2. Critical Success Factors for the Super Customer Bonder

The core element of the super customer bonder is that the corporation
proactively searches for better solutions for its customers, and mainly
focuses on being able to satisfy the needs of the contractor in a flexible way.
The super customer bonder searches for added value by integrating as deep
as possible in the customer’s business process. The contract manufacturer
mostly develops projects (rather than serial production), where he or she
also has an engineering task. Also, the end markets are less predictable and
volatile, making a focus on standardization and efficiency very difficult. Of
course, price remains an important factor and realizing minimal efficient
scale is a qualifier. Generally, super customer bonders are multifaceted
players, focusing on a few markets/applications.
Organizationally, this process means that economies of scope are very
important. The service concepts applied successfully in one market can then
be rapidly transferred to other markets. These companies strive also at
flexibility, joint logistics, and delivery planning. Apart from economies of
scope, economies of experience are of great importance. They indicate how
fast and efficient a certain project can be executed and delivered. The more
experience, the lower the ‘‘changeover costs’’ can be. Economies of experience
must be realized by super customer bonders, mainly by EDI interfaces,
vendor-managed inventories, optimization of total cost of ownership, service
delivery, and so forth. The customer of a foundry signs a ‘‘metal contract,’’
agreeing with the contract manufacturer on a fixed price for a predetermined
volume planned and confirmed in advance. Also, the foundry jointly develops
delivery and logistics in order to minimize changeover costs.
3.4.3. Critical Success Factors for the Design Partner

The design partner is looking to add value mainly by integrating technology
in its solutions. This way, this company tries to shift from basic solutions
supplier to supplier of submodules and even system integrator. The higher the
technical integration in the customer’s processes, the more tasks a contract
manufacturer fulfills (e.g., assembling components, developing intermediary
products to full systems) and the more custom-made goods are involved.
Specialization in specific domains and applications becomes a necessity.
The design partner thus goes one step further and must have economies of
learning. He or she remains a contract manufacturer but builds up advanced
knowledge in basic engineering and design aspects of the production
process. Supplying parts, components, and solutions also implies the

establishment of a network of knowledge partners who take care of specific
parts of the total solution. The expertise in design and production leads to a
strategic relation with the contractor. To realize co- and redesign value
engineering together with customers, contract manufacturers try to
coordinate with customers and designers. For this purpose they must have
an extensive material and application knowledge (e.g., to think about
alternative materials). A foundry also offers its customers design modifica-
tions such as ‘‘ennobling’’ and polishing (mostly outsourced). Application
engineers also try to market their specific technical knowledge (e.g., by
supporting the customer in optimizing its specifications in order to
optimizing the ‘‘design for assembly’’ of their outsourced parts).
3.4.4. Critical Success Factors for the Strategic Partner

The strategic partner combines the roles of system integrator and service
provider. He or she is the ‘‘turnkey provider’’ for the goods/products he or she
has to supply, responsible for the management of all processes involved. The
strategic partner strives for a total integration in the processes of the customer,
both technical and business related (financial, logistic, information and
communication technologies (ICT), service).
Integrating in the technical processes requires the knowledge of a design
partner. Integrating in the customer’s business processes requires the
competence of a customer bonder as well. The ability to analyze the
customer’s business model and to offer a wide range of tailored services are
recommended in this respect. Services can consist of support for process
management (e.g., vendor-managed inventories), risk management (also
willingness to share risks), cofinancing, document management, packing,
parts-management, and other service concepts. A contract manufacturer
coordinates design and logistics more and more with selected customers.
The subsystems and service concepts are specifically developed for the
customers’ production processes and are delivered JIT.
4. INTERPRETATION: THE NECESSITY FOR

EVOLUTION AND COEVOLUTION
4.1. Facing the Gaps Along the Development Paths
The following section illustrates gaps contract manufacturers can follow to

evolve further on the path of distinctive capacity. This development path is
Competence levels for different supplier profiles
Basic level Advanced level
Cost efficient
technical execution
of specifications
(re-active)
Pro-active thinking
with customer
on technical issues
(offeringfunctionality)
Offering extra service

cost-efficiently
Pro-active thinking with

suppliers to support/optimize
business model
the process the customer bonder
supplier
the efficient capacity supplier
Fig. 5. Gaps Faced by Process Supplier.
represented in a generic manner. The following figures illustrate how the

‘‘traditional’’ contract manufacturers can grow toward the two ideal types.
Fig. 5 indicates how the gaps a process supplier has to face when growing
into an efficient capacity supplier or a super customer bonder.
Fig. 6 illustrates the gaps for the ‘‘traditional’’ application supplier aimed
at becoming a design partner or strategic partner. Each time it is indicated
how the current position relates to the ‘‘ideal’’ types. This way, it becomes
also clear where the extra value is created. The efficient capacity supplier
scores extremely high on cost-efficient technical realization of the given
specifications. The customer bonder, however, puts the focus on the cost-
efficient offer of extra services (see Fig. 5). Which efforts the process supplier
has to do to reach the ideal types becomes clear. For the application supplier
(see Fig. 6) the situation is analogous.
4.2. The Need for Active Coevolution
The relationship between contract manufacturer and contractor is crucial

for reaching the chosen ideal type successfully. Without stressing this
explicitly during the discussion of the ideal types, relationship management
Competence levels for different supplier profiles
Basic level Advanced level
Cost efficient
technical execution
of specifications
(re-active)
Pro-active thinking
with customer
on technical issues
(offeringfunctionality)
Offering extra service

cost-efficiently
Pro-active thinking with

suppliers to support/optimize
business model
the design partner
the application supplier
the strategic partner
Fig. 6. Gaps Faced by Application Supplier.
and account management are considered by interviewees as crucial in their

strategy. Depending on the market positioning pursued, other issues will be
stressed, but in all cases, the relationship goes further than a simple buy/sell
contract. The close operational connection will not be sufficient when the
contract manufacturer evolves to the right in Fig. 5, and especially in Fig. 6.
The relationship will have to be developed on the management level. This
has direct consequences on the implementation of a development path, with
which a contract manufacturer tries to pursue another market positioning.
Here, this paper identifies the most difficult bottleneck in their search for a
new business model. The identification of the ideal type with a matching
business model is just the first step. The experience of the interviewees shows
that contract manufacturers wishing to extend their role in the chain, for
example, an application supplier that wants to evolve to a strategic partner,
does not only have to change the internal organization and competences but
also to stimulate contractors to coevolve.
In line with the industrial marketing and purchasing (IMP) literature
(e.g., Ford & Håkansson, 2002; Snehota, 2003), the only way a company can
achieve change is through its network. Of main importance is that the other
actors in the network are convinced of the need for change through intensive
interactions. They have to clearly see the benefits of this change and all
Application Original Equipment

supplier Manufacturer -Contractor
system Co-
integration development
breakthrough market
value/cost performance
co-
Added value engineering
functionality+ product
Capacity Reduce own

plus capacity
Fit in work performance
rhythm of of the chain
customer and
Delivering keeping
production margins Contracting
capacity out
In accordance cost
with performance
customer’s
demands
Fig. 7. Active Coevolution of Contract Manufacturer and Contractor. Source: On

the basis of Vollmann et al. (2005).
interdependencies need to be managed accordingly. The development path

can only deliver the expected results if there is collective enactment of all
parties involved. Conflicting characteristics and interests need to be
managed. Interacting frequently and thoughtfully with the contractor(s) is
therefore very important.
Ford et al. (1998, p. 75) states that ‘‘coevolution means that the way in
which a company changes and develops are to a large extent conditioned by
developments that take place in its relationships and in parallel with the
changes in its counterpart’s companies. This process reinforces the idea that
strategy development in business markets centers on, is affected by, and is
implemented through relationships’’. This is illustrated with a general
example (see Fig. 7). Using the model Vollmann, Berry, Whybark, and
Jacobs (2005) describe for supply chain management, this paper can
elaborate on the idea of coevolution in B2B relationships. First, consider the
bottom of Fig. 7. This part of Fig. 7 represents the situation in which, for
example, a contractor works together with a contract manufacturer of metal
products, and decides to contract out a larger share of the production to
that contract manufacturer. This is a first step in the coevolvement process
of contractor and contract manufacturer. For instance, it can be the case
that the contractor asks the contract manufacturer to assemble several
components and deliver this as a whole. Another example is the contract

manufacturer performing extra surface treatments on the metal products. In
the right-hand bottom corner, one can see the decision the contractor has to
take (above the line) and how he or she does or does not follow up the
success of this decision (underneath the line). Mostly, this first decision is
intended to generate cost savings (cost performance). In the left-hand
bottom corner, one can see what this decision means for the contract
manufacturer. Above the line, is indicated which competences need to be
strengthened/build up (in this case: delivering production capacity for
submodules). The CSF in this situation concerns the ability of the company
to meet the customer’s demands/specifications.
This first step is in line with the description of Penttinen and Palmer
(2007) regarding evolutionary paths and completeness of an offering. Here,
a movement from a less complete toward a more complete offering is seen.
The nature of the buyer–seller relationship, however, still remains
‘‘transactional’’ at this stage of the coevolution model. A proof of this
integration of different components into a system as a source of market
value can be found in Jacob (2006). The first level of coevolution is endorsed
by his representation of ‘‘customer integration competence.’’ In his research,
he found that this competence can indeed create extra market value.
In this position, the contract manufacturer can take the initiative for a
subsequent transformation. ‘‘Capacity plus’’ in Fig. 8 represents this
initiative. Besides being able to produce in accordance with its customer’s
demands, the contract manufacturer also needs to be capable to tune itself
to the production rhythm of the contractor. Obviously, new competence
building is required in the area of, for example, logistics and borate concepts
(e.g., vendor-managed inventories, no stock outs). At this point, a
bottleneck needs to be concurred. The relationship can only grow through
or be kept status quo in a healthy way, if the contractor is decreasing its own
production capacity accordingly. If this is not the case, then there are no
cost savings in the supply chain and there is a serious threat that parties
might fall into merely price negotiations. At the same time, this is a difficult
step for contract manufacturers, as they have to offer extra services without
making too many additional costs. Conserving margins is important, as
additional costs cannot be transferred to the contractor (this would be in
contradiction with the original intention to save costs).
A next step the contract manufacturer could take is to further develop the
offered products/services. In this step, he or she seeks for additional value
by, for example, R&D and/or engineering breakthroughs, which led to cost
savings in the entire supply chain. Another way is to make efforts to
Original Equipment
Supplier Manufacturer-Contractor
system Co-
integration development
breakthrough market
co-
Added value engineering
functionality+ product
Capacity Reduce own

plus capacity
Fit in work performance
rhythm of Traditional of the chain
customer and buy-sell relations
Delivering keeping
production margins (with possible installation of Contracting
capacity mutual technical teams) out
In accordance cost
with performance
customer’s
demands
Fig. 8. Possible Mismatch.
improve the functionality of the contractor’s product. Obviously, this

requires establishing new competences, for example, technology that exceeds
the own production, developing a system that generates information about
the customer’s customer and even the end customers. The criterion contract
manufacturers have to fulfill does not only concern the increase in
functionality of the product, but also a drastic improvement in customer
value that is created per unit of costs made. Fig. 7 represents this as
functionality and value/cost. Depending on the ideal type that will be
pursued, the improvement of the value/cost ratio will be achieved otherwise.
Contract manufacturers that pursue to be capacity supplier realize this
through economies of scale as much as possible. Customer bonders seek for
economies of scope and experience in complementarities between customers.
The strategic partner is on a quest for real innovations that influence the
market positioning of its customer. What matters is to learn quickly and be
able to translate new needs cost efficiently into total solutions.
Here, yet another bottleneck needs to be dealt with. The only way, in
which the contract manufacturer will succeed in raising the value/cost ratio,
is when the contractor is coevolving. Crucial is that the contractor is
receptive for co-engineering and evaluates the relationship on the product
performance rather than exclusively on the efficiency of the supply chain.
A real partnership is yet one step further and implies codevelopment.

A contract manufacturer can only reach this point through drastic
specialization, in the technical aspects, as well as in the value chain of the
contractor. That way, system integration is made possible, leading to a
strong value/cost ratio improvement.
The path to value addition thus implies active coevolution of contractor
and contract manufacturer. In other words, it seems impossible for a
contract manufacturer to develop into a new business model without the
coevolution of his or her most important customers. If the alignment within
the dyad is not realized, the development path might be blocked (Fig. 8).
For one reason or the other, the contractor in this situation is not going
further than the optimizing of the logistics in the supply chain. The
consequence of this is that the contract manufacturer is being obstructed in
his or her development. In this example, he or she will thus not be able to
‘‘prove’’ his or her capacity to deliver more functionality and value.
Figs. 7 and 8 demonstrate that the road to value addition is long and
partly dependent on the contractor. Here, analogies are seen with the second
dimension of Penttinen and Palmer’s (2007) framework. They describe
subsequently the evolution to a more complete offering and then a relational
buyer–seller relationship instead of a transactional one. They also state
that moving to a more complete offering while keeping the relationship
transactional leads to a less sustainable position, as this goes hand in
hand with high coordination costs. This move is in line with the findings
of the study that coevolution and thus going from a transactional to a more
open and collaborative relationship with the contractor is of main
importance.
Some issues are very important in developing this kind of relationships.
This paper addressed some issues, which are in line with Windahl and
Lakemond (2006, p. 806), who identify ‘‘the following six factors as
important when developing integrated solutions: the strength of the
relationships between the different actors involved, the firm’s position in
the network, the firm’s network horizon, the solution’s impact on existing
internal activities, the solution’s impact on customer’s core processes, and
external determinants.’’ They craft a matrix, with on the axes the integrated
solution’s impact on existing internal activities (X-axis), and ties to
important external relationships (Y-axis). The model of coevolution
described in this paper can surely be situated at the right side of their
matrix, with a high impact on existing internal activities. They state that in
the case of high impact on existing internal activities and strong ties to
important external relationships, the companies should create processes and
organizational structures to handle both internal and external dependencies.

In case of high impact on existing internal activities and weak ties to
important external relationships, they advise to secure internal commitment
and match it to end customers’ needs. This is in line with the findings of the
study for this industry.
Wagner and Hoegl (2006) argue that supplier involvement is indeed a
possible source of sustainable competitive advantage, but their research on
the subject clearly indicates that there are still many companies that have a
problem with managing such new product development teams with supplier
involvement, and fear loss of proprietary information. Ploetner and Ehret
(2006) state along the same lines that companies should be selective in
choosing their partners. Spekman and Carraway (2006) describe certain
barriers and how to overcome them for the transition toward more
collaboration. In line with our study, they identify managerial attitude as on
of those barriers and suggest to reflect about certain questions such as ‘‘is
strategic information willingly shared across the supply chain?,’’ ‘‘is
technology used to link all supply chain members for the ultimate good of
the end-use customer?,’’ and ‘‘are partners flexible and responsive enough to
meet the changing needs of the customer?’’
In line with the staircase model, Helander and Möller (2007) argue that
different agreements between supplier and customers/network partners need
to be developed when adopting a ‘‘higher’’ system supplier’s customer
strategy. According to the authors, equipment material suppliers evolving
first into a solution provider and eventually into a performance provider not
only need different sets of capabilities, but also different agreements with
customers and network partners (from simple services/service level
agreements over shared resource agreements into shared revenue and
codevelopment agreements). This study empirically proves this point while
simultaneously uncovering potential pitfalls.
5. CONCLUSION
This paper describes a research project conducted in the Belgian

metalworking industry. The study includes interviews of executives of
companies that seem to be able to create above average returns. Observing
and interpreting their approaches led to the identification of four value-
adding positions and their perceived CSFs. The study then identified gaps in
the development paths to migrate from the original process or application
supplier positions to these ‘‘ideal’’ types.
5.1. Key Messages
To make sure these market strategy changes have the desired effect, it seems
vital that the development path is followed ‘‘together’’ with the contractors,
so-called coevolution. A relational model was introduced to illustrate what
to focus on in each step of the ‘‘coevolution ladder.’’
The above analysis indicates that the market strategy transitioning path
toward value added is far from evident. Contract manufacturers in this
industry face a daunting task in upgrading their own resources/competences
and in coevolving with their partners. This case study has the potential to
enrich and contribute to different streams of literature. The paper
contributes to B2B marketing and strategic marketing theory by enhancing
the understanding of value addition through business model innovation in a
commoditized industry facing the backside of enduring arm’s length
relations and having difficulty of reaching constructive (and mutually
beneficent) collaboration. Thus, this study contributes to the integration of
the theories of service-based value addition (Ulaga & Eggert, 2006),
organizational alignment (Beer, Voelpel, Leibold, & Tekie, 2005), and
IMP-based notions of value creation through partnering and networking
(Möller & Törrönen, 2003; Helander & Möller, 2007).
5.2. Limitations
Like all studies, this one also has its limitations. The research focuses on the
metalworking industry, and the ideal types and development paths
suggested are thus valid only for this specific industry. They can neither
be generalized nor applied ‘‘copy–paste’’ in other industries. Nevertheless,
as a reviewer suggested, several industries nowadays are experiencing similar
threats and challenges, such as wholesaling, providers of textile machines,
chemicals, providers of tank storage, cargo and logistics services. In such
commoditized settings, suppliers seek to rethink their customer solutions
(Tuli et al., 2007) and move up the value ladder. Additional studies in such
industries are likely to result in similar models.
Another limitation of this study is that the model describes only the
dyadic relationship between contractor and contract manufacturer in the
model of coevolution and not the entire network. Modeling the entire
network was impossible to do for the metalworking industry as networks
and network pictures differ for each of the actors involved. A crucial
precondition for advancing along the development path, however, is to look
at the entire network, and focus on alignment of interests and concerns of

key players and to manage all relationships simultaneously.
5.3. Managerial Implications
All practitioners seeking additional value creation can learn from this paper,
even if they come from other B2B industries. First, the four development
paths might inspire them and they can draw analogies. Second, the gap
analysis method might be applied also in their case. A comparison of intended
strategy to present competences is at the heart of an evolution toward value
addition. Third, the staircase model can be used by marketing and accounting
managers when developing account strategies for key customers. Relational
strategies can be optimized that way. Networks are inherently unstable and a
company also has to be careful not to fully focus on a certain contractor/path.
One must find a balance between commitment versus freedom to act, which
can be seen as an extra duality that needs to be managed.
ACKNOWLEDGMENTS
The authors thank Agoria, the Belgian technology federation, for their
valued support in realizing this study and the editors and anonymous
reviewers for their valued criticisms and suggestions.
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ADVANCES IN BUSINESS MARKETING

Volume 7: Advances in Business Marketing and

Fabio Ancarani University of Bologna, Bologna, Italy

Thomas Ritter Copenhagen Business School,

First edition 2008

Copyright r 2008 Emerald Group Publishing Limited

Reprints and permission service

British Library Cataloguing in Publication Data

United Kingdom – North America – Japan

Fabio Ancarani Mette P. Knudsen

Stefania Borghini J. David Lichtenthal

Michele Costabile Hans Mühlbacher

Michael Gibbert Chezy Oﬁr

Francesca Golfetto Diego Rinallo

Stephan C. Henneberg Günter Specht

Andreas Hinterhuber Arch G. Woodside

Wesley J. Johnston Fabrizio Zerbini

Arch G. Woodside, Francesca Golfetto and

Creating and Managing Superior Customer Value

Second, the paper introduces advances in research in describing and

STRATEGIC STANCE FAVORING THEORY AND

relative sum of weighted benefits perceived

Value ¼relative sum of weighted benefits perceived

relative sum of total consequences

Value ¼ relative sum of total consequences relative total costs perceived

MEASURING PERCEIVED BENEFITS VERSUS

Design Relative Total Beneﬁts Relative Total Costs Value

R 1.33 1.80 .74

200 Fair Value Line

A recurring pattern across many industries includes early adoption of

R 1.33 1.80 .47

ESTIMATING TOTAL BENEFITS OF ALTERNATIVE

Customers recognize several categories of beneﬁts that accrue from physical

• Supplier reputation for quality Company or Brand Benefits

• Competence Emotional Benefits

Current Standard New Technology Standard

Benefits Costs Benefits Costs

Service Price Paid

lampposts by many electrical utility ﬁrms. Customer value here includes

IDENTIFYING CUSTOMER VALUE HEURISTICS

Customers do not think and purchase on the bases of ‘‘key drivers’’ or

CENTRAL MANAGEMENT ISSUES

The shotblasting development and marketing team identiﬁed several

Each of these attributes could be changed substantially by management

Table 1. Competing Product–Service Design in the Conjoint Study.

Table 1 summarizes the proﬁles of the existing furnace tube cleaning

1. Would a price decrease in the new service be likely to cause an increase in

(B) 4 hours (B) 4 hours (B) 4 hours

(C) 90% (C) 75% (C) 100%

(D) .005* to .020* (D) < 005* (D) 1/16*

(B) 7 hours (B) 7 hours (B) 7 hours

(C) 100% (C) 90% (C) 75%

(D) < .005* (D) 1/16* (D) .005* to .020*

Fig. 5. Nine Shotblasting Furnace Cleaning Treatments.

Customers participating in this study were each asked to provide the

Steam Air Decoking

• Cleaning Time .. 36 hrs

• Energy Efficiency .. 75%

• Tube Damage .. 0.020" Carburization Loss

• Cleaning Time .. 4 hrs

• Energy Efficiency .. 75%

• Tube Damage .. < .005" Metal Loss

• Cleaning Time .. 120 hrs

Total Points: 100