Define value, value sources, value creation, value networks and value chain equity.
Business suppliers’ value creation potential A capability-based analysis $ K.E. Kristian Mo ¨ller * , Pekka To ¨rro ¨nen Department of Marketing, Helsinki School of Economics and Business Administration, POB 1210, FIN-00101 Helsinki, Finland Abstract Joint value creation through partnering and networking is a topic of current interest. This paper proposes that the dimensions of the supplier’s value creation in a supplier–customer relationship could be classified according to efficiency, effectiveness and network functions. These functions are interrelated, but they are conceptually distinct. The value creation process could be described as a spectrum ranging from core value, to added value, to future value. The value-producing potential of a supplier can be assessed reasonably well only in the case of the core value, where there is sufficient benchmarking information in the form of existing alternative offerings and solutions. A priori evaluation of the costs and benefits of added value and, especially, future value projects is problematic, because the realisation of the value is dependent on the development of multiple partners, technologies and industries. In these cases, we suggest that a customer could use a supplier’s capability profile as an indicator of how suitable that particular supplier is for specific value creation projects. A framework connecting specific capabilities to different types of value production is suggested, and its managerial implications are discussed. D 2002 Elsevier Science Inc. All rights reserved. Keywords: Business networks; Joint value-creation; Relational capabilities; Supplier partnerships 1. Introduction Traditional supplier–buyer relationships have changed dramatically during the past decade. Business firms are increasingly concentrating on their core competencies and are externalising traditionally important activities such as manufacturing, design and logistics. This externalisation of value activities is dependent on the creation of strong supplier partnerships in areas that have high strategic relevance for the customer firm and has primarily led to hierarchical supply chain networks comprising several tiers of suppliers. The management of these hierarchical supply systems covering industrial components and parts has been studied within both logistics, or supply chain management, and business marketing [12,13,20,39] . What is much less understood is the more complex partnering targeted at generating innovative products, services or system solutions through a joint value creation process. These projects are often future oriented, and there is no market for a priori assessment of the economic value of the inputs of any supplier. Moreover, the emerging network character of industries enhances the risks involved in this kind of strategic partnering, because the potential network effects of specific partners are difficult to anticipate (see Refs. [1,22] ). In this article, we address the question of how to evaluate the value creation potential of a strategic supplier in a network context. Both the buyer and the supplier often have to make substantial adaptations and commitment of resources in the development of partnering supplier relationships [9,22, 37,40] . These efforts reflect the investment character of partnership establishment. The strategic nature of key sup- plier relationships makes it essential for the buyer to be able to evaluate the value creation potential of available suppli- ers. This is a demanding task for a number of reasons. First, a particular supplier’s value potential is often based on several organisational capabilities that are at least partly tacit and not easy to benchmark. Second, a significant part of a supplier’s value is generally realised in the future and is thus dependent on the development of multiple partners, technologies and even industries. Third, as already men- tioned, the value creation potential may be dependent on the network of other relationships that this supplier and the customer firm have. These network effects may be either functional, such as when a supplier provides the customer with access to other important actors, or dysfunctional, such 0019-8501/02/$ – see front matter D 2002 Elsevier Science Inc. All rights reserved. PII: S0019-8501(02)00225-0 $ Financial support from the Academy of Finland is greatly acknowl- edged. * Corresponding author. Tel.: +358-9-4313-8515. E-mail address: [email protected] (K.E.K. Mo ¨ller). Industrial Marketing Management 32 (2003) 109–118
as when the selection of a particular supplier leads to the loss of an important customer. We address the problem of evaluating the value creation potential of a strategic supplier as follows: (1) by discussing the types of value that may be achieved through or with a supplier, (2) by identifying the factors that enable or impede value creation and (3) by proposing a conceptual framework for the assessment of a supplier’s value creation potential. In essence, we argue that a customer could use a supplier’s current capability profile as a proxy indicator of how suitable that particular supplier is for specific value creation projects. Our conceptual discussion is illustrated with business exam- ples; managerial recommendations conclude the article. 2. Types of supplier value 2.1. The issue of value The issue of supplier value could be seen as a ‘‘mirror problem’’ to that of analysing customer value, which has attracted considerable interest. At the operational level, it is a question of estimating the revenue received from a customer and the cost of serving that customer [38,41,43] . Beyond this simplistic view lies the problem of defining value. Value and perceived value have received considerable attention in literatures on such wide-ranging issues as pricing, consumer behaviour, business marketing and strat- egy (for good reviews, see Refs. [18,47] ). Some researchers in the field of business marketing define value primarily in monetary terms [3,6] . Others use broader definitions that include nonmonetary benefits and sacrifices, such as competitive gains, competencies, social relationships, knowledge, managerial time spent, etc. [8,19,36,47] . In their recent review of value, de Chernatory et al.  show that the prevalent view is to regard it as the perceived trade-off between the total benefits obtained and the total sacrifices incurred. The actual assessment of value is seen as a complex task due to the problems in identifying and measuring both the monetary and non- monetary benefits and sacrifices. Moreover, perceived value and sacrifices are bound to vary between cultures, between customers, among customers and within the supplier–customer relationship. 2.2. Relational value: dimensions and realisation levels A supplier provides value for its customers in several ways. In its simplest form, this value is reflected by the market price of the resources that can be transacted through competitive markets. When the value creation requires sustained joint efforts, the focus of this analysis, the value, is dependent on the characteristics of the particular sup- plier–customer relationship. Functions of business relation- ships have been basically classified into direct and indirect functions [2,10,14,20,23,44] . Direct functions describe the immediate cost-and-revenue effects of a supplier relation- ship for the customer. Indirect functions are more difficult to ascertain, because their impact is realised through linking of the supplier–customer dyad to other actors. Two recent contributions may help us to understand the dimensions of value and value generation in a more refined fashion. Walter et al. [44,45] used the following direct- and indirect-value dichotomy for identifying the following value functions in a business relationship from the supplier’s perspective: Direct-value functions ± Profit function—refers to the relative direct revenue from a customer. ± Volume function—refers to the volume of business generated by a customer. ± Safeguard function—refers to the possibility of ‘guaranteeing’ a level of business and revenue through contractual arrangements with specific cus- tomers. Indirect-value functions ± Innovation function—refers to the possibility of product and process innovation with a particular customer. ± Market function—refers to the possibility of accruing new customers/distributors through the reference impact of a particular customer. ± Scout function—refers to the market and other information that can be acquired from the working environment through a particular customer. ± Access function—refers to gaining access to relevant other actors in the working environment though a particular customer. These functions are interrelated, and they are dynamic, meaning that the functional profile of a supplier–customer relationship evolves over time. The direct functions may be realised within a specific dyad, whereas the indirect func- tions rely on the linkages provided by the customer to a larger network environment. This dyad-versus-network aspect of value creation has been investigated by Ford et al. [21,22] . They propose that the influence of actions carried out in a relationship should be analysed on the following four levels. The first level, the direct effects ‘‘in a relationship’’ refers to activities that can be realised without any—or with only minor—adaptations among the exchanging actors. For example, a customer’s decision to concentrate the procure- ment of certain components on a specific producer generally reduces purchasing costs and may also involve a reduction in the need for incoming quality inspections. The producer may also achieve cost reductions in selling and negotiation costs and more predictable production runs. The key point is that ‘‘in-the-relationship’’ effects are relatively transparent and, as such, identifiable and often calculable in monetary terms. We K.E.K. Mo ¨ller, P. To ¨rro ¨nen / Industrial Marketing Management 32 (2003) 109–118 110
Managing the trade-off between relationships and value networks. Towards a value-based approach of customer relationship management in business-to-business markets Michael Ehret * Institute for Marketing, Freie Universita ¨t Berlin, Otto-von-Simson-Str. 13/15, Berlin D–14195, Germany Accepted 15 March 2004 Available online 26 June 2004 Abstract The management of buyer–seller relationships was an early antecedent to the development of customer relationship management (CRM) concepts. Currently, CRM concepts are being challenged by the rise of value networks. Value networks can and, often, do interfere with customer relationships and thereby call for a broader range of concepts to analyze and understand relationship management and the influence of value networks on relationships. This introductory article describes the nature of the problem between relationships and value networks, reviews the current state of research, and describes the contributions of the articles presented in this special issue on CRM in business-to- business markets. D 2004 Elsevier Inc. All rights reserved. Keywords: Customer relationship management; Relationship marketing; Value networks; Business networks; Customer lifetime value; Business-to-business marketing; B2B; Business market management 1. Value networks—A challenge for business-to-business relationships Business marketing has been a key driver in the devel- opment of relationship-based concepts, such as relationship marketing or customer relationship management (CRM). The notion that value can be created by cooperation has led marketing managers to search for ‘‘win–win’’ positions as a way to enhance profitability through collaborative value creation (Anderson, Hakansson, & Johanson, 1994; Kanter, 1994) . Academic research has shifted attention from the narrow focus on market transactions posed by microeco- nomic theory and transaction-based marketing concepts to the study of the antecedents of value creation bred in buyer–seller relationships (Morgan & Hunt, 1994) .A l - though management and research focused initially on buy- er–seller relationships (Dwyer, Schurr, & Oh, 1987) , pioneers of relationship management concepts predicted the evolution of value networks early on (Anderson et al., 1994) . Then, it was common sense that the growing interconnectedness of business processes would call for an understanding of how value is created through cooperation (Hunt & Morgan, 1994) . With the growing usage of the Internet in the business world and the enhanced coordina- tion of companies through supply chain and value network concepts, the requirement to understand this interconnec- tedness has manifested itself on a broader scale (Kelly, 1998) . However, it remains unclear what the direct impli- cations are for relationship-based marketing concepts. Concepts such as relationship marketing or CRM are used with a variety of sometimes contradictory connota- tions. For instance, a higher degree of interconnectedness is not necessarily best addressed by an exclusive focus on buyer–seller relationships, which was traditionally sug- gested by relationship marketing concepts. Given the cur- rent market situation, even the most brilliantly managed buyer–seller relationships can be and, often are, under- mined by the complex dynamics of networks (Christensen, 1997) . In this special issue on CRM in business-to-business markets, we explore the challenges that the growing com- plexity of value networks bear for the management of 0019-8501/$ – see front matter D 2004 Elsevier Inc. All rights reserved. doi:10.1016/j.indmarman.2004.03.002 * Tel.: +49-30-838-56014; fax: +49-30-838-54557. E-mail address: [email protected] (M. Ehret). Industrial Marketing Management 33 (2004) 465–473
buyer–seller relationships and for the well-established re- search frameworks in the relationship field. As Parvatiyar and Sheth (1999) argued, relationship marketing has not developed to a discipline yet. This issue further explores the current challenges for relationship concepts posed for buyers and sellers in a value network context. 2. Value creation through cooperation—The evolution of cooperative buyer–seller relationships in the realm of business-to-business markets The success of companies like Dell, Nike, or Cisco, and other such companies with similar business models based on the integration of value networks (Anderson & Narus, 1998; Peppers & Rogers, 2001) , has called attention to business models based on relationship concepts, such as CRM or relationship marketing. This development was envisioned by early pioneers in relationship concepts in both the academia and management. In business markets, it became apparent early on that cooperative buyer–seller relation- ships can be the source of value creation (Anderson & Narus, 1998) . This insight has been reinforced by the reorganization of companies and their procurement policies since the 1980s. Traditionally, the vertically integrated industrial company focused its buying policies on the availability and price of standardized components. Then, the dominant goal was to enable production and reduce component costs. In this framework, suppliers were forced to compete on price and to rely on transactional marketing programs (see ‘‘circle’’ 1 in Fig. 1 ). Because original equipment manufac- turers controlled the complete manufacturing and design process, room for differentiation amongst suppliers was minimal. The advent of modern management techniques, driven by the large-scale success of Japanese companies and their management policies throughout the 1980s, rendered the procurement policies of traditional industrial firms obsolete. Backed by their strong ties to capable suppliers, Japanese companies were able to introduce new products at a faster rate, with higher quality, and at a lower price than the then incumbents in the United States and Europe. The economic rationale of this competing business model was based on functional integration and economies of scope (Drucker, 1991) , whereas the traditional vertically integrated industrial company, which was skilled at producing prede- fined products in high volumes at comparatively low costs, employed an economic rationale based on economies of scale. This model could not compete with the pace of innovation shown by process-focused companies, which leveraged economies of scope. Whereas economies of scale rely on the cost reduction potential created by mass pro- duction, economies of scope focus on the flexibility of implementing standard processes. The basic aim is to implement an integrated process that enables the rapid introduction of new products, enhances product quality, and reduces costs all at the same time. Companies focusing on economies of scope mastered this by establishing smoothly integrated processes, which crossed functional borders within the company as well as organizational borders between buyers and sellers. The capability of managing cross-functional and cross-organizational process- es therefore became a basic prerequisite for companies to be able to compete (Magretta, 2002) . This fundamental change to the source of competitive advantage has drawn the attention of marketing managers and researchers to the management of buyer–seller relation- ships (see arrow 2 in Fig. 1 ). As it became apparent that industrial companies would have to rely on stronger and more capable suppliers, an opportunity arose for suppliers to differentiate themselves in their field (Anderson & Narus, 1998) . The basic prerequisite for dealing with industrial cus- tomers then became the ability to integrate customers’ and suppliers’ processes through the application of management concepts as just-in-time inventory management or total quality management (Stalk & Hout, 1990) . These concepts called for new and creative marketing management concepts to address the new competitive landscape, rather than the traditional market transaction focus that had previously dominated the field of marketing research. To compete in this new context, industrial suppliers had to modify their focus in the following three areas: . Strategic marketing : Because the basic prerequisite for creating a sustainable competitive advantage was based on the coordination of the buyers’ and sellers’ processes, strategic marketing was forced to embrace customer-focused concepts. Managers of industrial suppliers had to develop an understanding of and insights into the hidden value in customers’ processes (MacMillan & McGrath, 1996) . Con- cepts such as customer lifetime value or customer equity (Rust, Lemon, & Zeithamel, 2004) , for example, aim to identify a company’s key customers. Activity-based costing, on the other hand, enabled the development of offerings, which reduced the customers’ costs and increased the suppliers’ margins at the same time (Cooper & Kaplan, 1991) . The most important field for such win–win cooper- ation became logistics and supply management (Anderson Fig. 1. Evolution of sourcing strategies and relationship concepts. Source: Anderson and Narus (1998) . M. Ehret / Industrial Marketing Management 33 (2004) 465–473 466
0019-8501/01/$–see front matter PII S0019-8501(00)00152-8 Industrial Marketing Management 30 , 379–389 (2001) © 2001 Elsevier Science Inc. All rights reserved. 655 Avenue of the Americas, New York, NY 10010 The Future of Competition Value-Creating Networks Prabakar Kothandaraman David T. Wilson In buyer–seller relationships, the focus has moved beyond individual firms to value-creating networks formed by key firms in the value chain that deliver value to the end consumer. The article develops a rationale for value-creating networks using three core building blocks: superior customer value, core competencies, and relationships. The rationale is devel- oped based upon an understanding of the value-creation pro- cess and its links to core capabilities of firms in the network. The importance of inter-firm relationships in realizing the true potential of the value-creation networks is also highlighted. The authors argue based on their sample analysis of some ex- amples that competition in the future will shift to the network level from the firm level. The influence of some emerging busi- ness tools such as electronic commerce on redefining value creation is also discussed. © 2001 Elsevier Science Inc. All rights reserved. INTRODUCTION As the world becomes more complex, the analytical task of managers is also becoming more complex as they can no longer just examine the major competitor, but must examine the network of firms that relate to that competitor. Value, core capabilities and relationships in- tertwine to impact the total value chain for the product or service. In this article, the underlying forces that drive value chain analysis are examined in a network context in order to understand what insights one may gain from do- ing value chain or value network analysis. Porter  dis- cusses the value chain from the perspective of the indi- vidual firm, examining the value-adding activities without exploring the links between the firms in the value chain. In 1985 the dominant buyer–seller paradigm in business Address correspondence to Prabakar Kothandaraman, 701E BAB, Depart- ment of Marketing, The Smeal College of Business Administration, The Pennsylvania State University, University Park, PA 16802. Tel.: (814) 865- 0576; fax: (814) 865-3015. E-mail: [email protected]
380 markets was the buying center that was guided by an ad- versarial relationship between the buyer and seller. To- day, businesses have moved deep into a cooperative par- adigm that is based upon cooperative relationships between the buyer and seller. The focus has moved be- yond individual firms to examining the value-creating network formed by the key firms in the value chain that delivers the value to the end consumer. This research develops a rationale for the value-creat- ing network based upon an understanding of the value creation process and its links to core capabilities of firms in the network. The network is built on relationships be- tween the key firms in the value chain. Emergence of electronic data and information exchanges support net- work development through enhanced communication be- tween the partners. The development of electronic com- merce redefines value-creating networks as new low-cost paths to serving customers and consumers. In the follow- ing sections of the article, a model for describing and an- alyzing value-creating networks is presented. It is argued that value-creating networks will take businesses into a competitive domain where competition will shift to the network level from the firm level. VALUE Customer value is one of the key words in North American business today as within business, the rallying cry is to “increase customer value.” But what does in- creasing customer value mean to operations of the firm? What is customer value, and how can one measure cus- tomer value? To understand customer value, one needs to go back and revisit the marketing concept. The marketing concept states, “that achieving organizational goals de- pends on determining the needs and wants of target mar- kets and delivering the desired satisfaction more effec- tively and efficiently than competitors do” . Businesses have not been very successful in fully implementing the marketing concept in the United States. Their failure is more due to the success of technology and product-driven companies in the marketplace. These firms market but be- lieve strongly that technology and good products are the way to win in the marketplace. However, there is a strong trend emerging to add, not replace, the strength of mar- keting to the already strong product and technology base of companies. A lot of the leading business-to-business firms have programs in place to upgrade the marketing skills of their marketers. Kotler and Armstrong  note that marketing success depends upon achieving the “de- sired satisfaction” of customer needs. North American firms have chased the “Holy Grail” of customer satisfac- tion as they seek to retain customers. However, satisfying customer needs or creating a satisfied customer is no longer enough to win their loyalty. Firms must create bet- ter value than their competitors. To create this better value, managers must fully integrate the resources to use the core capabilities of the firm to deliver a product that fully satisfies the needs at a competitive price, which means creating superior value for the customer. The total market offering of the firm encompasses the technology supporting the product or service, the benefits of the product, the company reputation and the benefits delivered by people representing the organization. The customer weighs the complex bundle of benefits or mar- ket offering against competitive market offerings, with relative price being the item that relates the two market offerings. Value, as shown in Figure 1, is the relationship of a firm’s market offering and price weighed by the con- sumer against its competitor’s market offering and price. For a customer to perceive value, a choice is necessary PRABAKAR KOTHANDARAMAN is a doctoral student in the Department of Marketing, The Pennsylvania State University, University Park, Pennsylvania. DAVID T. WILSON is the Alvin H. Clemens Professor of Entrepreneurial Studies in the Department of Marketing, The Pennsylvania State University, University Park, Pennsylvania. To understand customer value, one needs to go back and revisit the marketing concept
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