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  • Closeness to the Customer in Industrial Markets: Towards a Theory-Based Understanding of Measurement, Organizational Antecedents

    and Performance Outcomes

    Christian Homburg Johannes-Gutenberg University, Mainz

    ISBM REPORT 5-1993

    Mailing address:

    Dr. Christian Homburg Johannes-Gutenberg Universitaet Mainz Lehrstuhl fuer Betriebswirtschaftslehre und Marketing Postfach 3980 D-6500 Mainz Germany 49-6131-392227 Phone 49-6131-393727 Fax

    Institute for the Study of Business Markets The Pennsylvania State University

    113 Business Administration Building II University Park, PA 16802-3009

    (814) 863-2782 or (814) 863-0413 Fax

  • Closeness to the Customer in Industrial

    Markets: Towards a Theory—Based Under-

    standing of Measurement, Organizational

    Antecedents, and Performance Outcomes

    Christian Homburg

    This paper describes an ongoing research project at

    Johannes—Gutenberg—University Mainz, Germany. Its purpose

    is to provide the reader with an understanding of the

    project’s main features, the issues to be addressed, the

    underlying theoretical reasoning, and the methods to be

    used. The paper should serve as a basis for discussion

    with other researchers. Any comments and suggestions

    are greatly appreciated

    .

    I would like to thank Professor Hermann Simon for directing

    my research interests towards, the topic of closeness to the

    customer and for many helpful discussions that have had a

    significant impact on my work. Support by the Deutsche For-

    schungsgemeinschaft (DFG) is also acknowledged.

    This paper was written while I was a visiting scholar at

    ISBM. During this stay I gained a number of important in-

    sights on how a research project of this orientation and

    scope should be carried out. Special thanks are therefore

    due to ISBM’s directors Gary Lilien and David Wilson.

  • 2

    1. Introduction

    The notion of being close to the customer has been gaining

    increasing attention since Peters and Waterman (1982) iden-

    tified closeness to the customer as one of the distinctive

    features of America’s best—run companies. Getting closer to

    the customer has recently been among the most important ob-

    jectives driving changes in major companies’ organizational

    structures, systems and cultures (e.g., Simon 1991a). The

    MIT Commission on Industrial Productivity found closeness to

    the customer to be related to a company’s performance in a

    highly significant way: “All of the successful firms that we

    observed are making a concerted effort to develop closer

    ties to their customers” (Dertouzos, Lester, and Solow 1990,

    p. 119). Based on interviews among some 550 knowledgeable

    practitioners and analysts in industry, government, orga-

    nized labor, and universities, visits to more than 200

    companies in the U.S., Europe and Japan including industries

    such as automobiles, chemicals, commercial aircraft, consu-

    mer electronics, machine tools, semiconductors, computers,

    office equipment, steel, and textiles, this study is cer-

    tainly among the most important analyses of determinants of

    corporate performance that have ever been conducted.

    There is a sharp contrast between the importance of close-

    ness to the customer in business practice and the amount of

    academic research on the topic. Similar to observations by

    Daft and Lewin (1990) and Bettis (1991) that major changes

    on the organizational landscape are taking place far removed

    from academic research in organization theory and business

    policy, theoretical knowledge on closeness to the customer

    is scarce.

    The aim of the research project to be described here is to

    bridge the gap between managerial relevance and academic

    knowledge of the topic. The study refers to industrial mar-

  • 3

    keting settings, i. e. business taking place between two

    companies (sometimes referred to as business—to—business

    marketing). The reason for choosing this specific context

    is that a meaningful context—free conceptualization of

    closeness to the customer that could be applied to both

    industrial markets and consumer goods and service markets

    does not seem possible.

    The organization of the paper is as follows: Prior to de-

    veloping our conceptualization of closeness to the customer,

    we provide a discussion of practitioners’ increasing inte-

    rest in closeness to the customer in section 2. This dis-

    cussion is based on an intuitive understanding of closeness

    to the customer (as most practitioners have it) rather than

    a precise definition. Section 3 reviews previous research

    and defines this study’s objectives. A brief overview of

    related theoretical work is given in section 4. Our concep-

    tualization of closeness to the customer as well as a mea-

    surement approach are developed in the subsequent section.

    Section 6 deals with performance outcomes of closeness to

    the customer at the level of the individual supplier-buyer

    relationship. Organizational antecedents of closeness to the

    customer are discussed in section 7, and the following

    section elaborates on overall performance of closeness to

    the customer. The concluding section provides an outlook on

    the research project focusing on aspects of data collection

    and methodology.

    2. Closeness to the Customer: A Managerial Perspective

    Drawing upon results from interviews with managers in

    several industries as well as an extensive review of

    managerially oriented literature, a number of features

    in today’s business environment were identified that en-

    hance the necessity for industrial companies to move closer

  • 4

    to their customers. These features include changes in custo-

    mers’ systems of operations, changes in forces shaping com-

    petition, changes in organizational environments and issues

    and techniques in improving organizational efficiency (as

    shown in Figure 1).

    Major changes in companies’ systems of operations have been

    taking place concerning the way relations with suppliers are

    organized. Partly as a result of learning from Japanese com-

    panies’ management techniques, firms are beginning to reduce

    the number of their suppliers establishing closer relation-

    ships with the remaining suppliers. Presenting results from

    a survey of U.S. automotive suppliers, Helper (1991) notes:

    “Where once contracts were short term, suppliers were nume-

    rous, and competition was almost solely price—based, now

    contracts are increasingly long term, sole—sourcing is

    becoming more common, and competition is based on quality,

    delivery, and engineering as well as price.” This way of

    handling supplier relationships is among the components of

    the lean production system described by Womack, Jones, and

    Ross (1990).

    This development is paralleled by a reduction of the value

    added (defined as sales volume minus the amount of purchased

    products and services) in many manufacturing companies

    (e.g., Burt 1989), leading to an increase of the purchasing

    function’s importance. Once purchasing volume makes up more

    than 60 % of a company’s sales volume (which is the case,

    e.g., for some of the leading German automobile manufac-

    turers), effective purchasing becomes a critical success

    factor. Companies start taking a look at their suppliers

    from a strategic perspective, often discovering that price

    is a rather superficial criterion for selecting suppliers.

    Total costs incurred by a purchasing decision are replacing

    purchasing price as the most important economic criterion

    for selecting a supplier. These total costs consist of

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  • 5

    acquisition costs (i.e., the purchasing price) and costs of

    ownership such as costs for quality control, inventory costs

    and costs incurred by the products in use. Costs of owner-

    ship are not unimportant compared to acquisition costs:

    During a recent interview with the author, the purchasing

    director of a leading German chemical company gave examples

    of costs of ownership rising up to 70 % of the costs of

    acquisition. Supplying a customer with products that have

    low costs of o