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Closenessto the Customerin Industrial Markets:Towards a Theory-BasedUnderstandingofMeasurement,OrganizationalAntecedents
and PerformanceOutcomes
Christian HomburgJohannes-GutenbergUniversity,Mainz
ISBM REPORT5-1993
Mailing address:
Dr. ChristianHomburgJohannes-GutenbergUniversitaetMainzLehrstuhlfuerBetriebswirtschaftslehreundMarketingPostfach3980D-6500MainzGermany49-6131-392227Phone49-6131-393727Fax
Institutefor theStudyof BusinessMarketsThePennsylvaniaStateUniversity
113BusinessAdministrationBuildingIIUniversityPark,PA 16802-3009
(814) 863-2782or (814)863-0413Fax
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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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 ownership requires having detailed knowledge
about the customer’s processes. Closeness to the customer
is needed to acquire this kind of knowledge.
Another important trend in manufacturing is the increasing
importance of JIT-systems. The new partnership philosophy
imposed by the JIT-approach requires a high degree of close-
ness between suppliers and customers (Frazier, Spekman, and
O’Neal 1988).
The implementation of the marketing concept is an important
organizational efficiency issue related to the concept of
closeness to the customer. Based on interviews conducted
with chief executive and operating officers in 30 major U.S.
corporations, Webster (1981) reported a substantial degree
of frustration in getting the marketing viewpoint implemen-
ted. This problem seems to be as prevalent today in business
practice as it was when Webster did his study. Establishing
a culture emphasizing closeness to the customer throughout
the organization may be thought of as a step towards solving
the problem of implementing the marketing concept. Germany’s
hidden champions (Simon 1992) seem to have achieved such a
culture whereas many major companies, while running marke-
ting operations in a professional manner, have failed to
establish a culture of closeness to the customer (Simon
1991a).
6
Another problem that most companies are still struggling
with is to increase the efficiency of new product develop-
ment. Involving customers in the product development process
at an early stage, or even getting the very ideas for new
products from customers (von Hippel 1988), can be a way of
getting a better understanding of customers’ present and
future problems and thus of enhancing new product success.
Total quality management (TQM) has become a prominent
approach for enhancing organizational efficiency. Especially
in the U.S., many companies have adopted a very customer—
oriented version of TQM based on a customer—oriented rather
than a technical definition of quality (quality is what the
customer says it is). As Webster (1991, p. 2) puts it:
“Firms with a strong customer focus will by definition have
a core commitment to quality, where quality is defined by
the customer.” This customer—oriented understanding of
quality is also reflected in the criteria used by the
Malcolm Baldrige National Quality Award. Customer focus
and satisfaction form the most important group of criteria
accounting for 30 % of the total points to be obtained by
applying companies (National Institute of Standards and
Technology 1993).
Many companies are beginning to realize that they will not
be able to enhance organizational efficiency to the desired
extent while relying on their own resources. Cross—company
alliances have become an increasingly important approach in
such situations. While much of the business policy litera-
ture emphasizes horizontal partnerships (often between com-
petitors, e.g., Hamel, Doz, and Prahalad 1988), vertical
alliances between suppliers and customers are a more natural
form of partnerships.
7
There are essentially two significant changes in the forces
that shape competition in many industries. The first one is
that different competitors’ products have become increasin-
gly similar to each other and interchangeable in the custo-
mer’s view. Given the increasing difficulty of creating
sustainable competitive advantage by means of superior
products and the wish to avoid price wars, many companies
rely on (industrial) services as a source of competitive
advantage (e.g., Simon 1991b). Emphasizing industrial ser-
vices, e.g., technical maintenance, rather than the product
results in a higher degree of closeness to the customer as a
significant portion of the value created for the customer
originates from work at the customer’s rather than the
supplier’s plant.
Another major change in the forces shaping competition in
many industries is the increasing importance of time as a
source of competitive advantage (Stalk 1988). Getting closer
to one’s customer may be considered as a viable strategy for
being faster than competitors, e.g., in bringing products to
the market that correspond to changed customer needs.
Finally, a higher degree of closeness to the customer can
also provide a suitable way of coping with increasing
environmental uncertainty and speed of change. While a
company is usually not able to influence the degree of
uncertainty in its macro—environment, building close and
stable relationships with customers may lead to a reduced
degree of uncertainty in the micro—environment. Also,
emerging changes in customers’ needs may become evident
earlier to a firm with close relationships with its custo-
mers, which gives the firm more time to respond to these
changes than its competitors have.
8
In sum, then, we argue that closeness to the customer
— is a suitable response to modern manufacturing and
purchasing strategies,
— can contribute to overcome problems in organizational
efficiency and is related to some popular techniques for
enhancing efficiency (including TQM and building inter-
organizational alliances),
- provides a higher ability of competing on non-product
success factors (such as services and time), and
— can increase a company’s capability of coping with an
environment characterized by increasing uncertainty and
speed of change.
We feel that these are the main reasons why closeness to the
customer has become such an important notion in today’s
business practice.
3. Previous Research and Objectives of the Study
As mentioned previously, research on closeness to the
customer is scarce. A clear definition and an approach for
measuring closeness to the customer are missing. Peters and
Waterman (1982) merely described closeness to the customer
by such terms as “a seemingly unjustifiable overcommitment
to some form of quality, reliability, or service” (p. 157)
and illustrated the concept by means of numerous examples.
The author is aware of only one empirical study designed
to develop an understanding of the construct going beyond
Peter’s and Waterman’s (1982) descriptive examples
(Albers, Bauer, and Eggert 1987, 1988; Albers and Eggert
1988). This exploratory study identified a differentiated
marketing approach, flexibility in responding to customer
requests, and the ability to cope with medium- to long-term
9
changes in the market environment as the most important
features of closeness to the customer. While being a first
important step towards an improved understanding of close-
ness to the customer, this study does not incorporate
several dimensions of closeness to the customer which we
consider to be important (see section 5).
Conceptual discussions of closeness to the customer have
been provided by Kuehn (1991) who focuses on organizational
culture, by von Werder and Gemuenden (1989) who emphasize
organizational and information systems aspects, and by Simon
(1991a) who provides an integrative perspective. A measure
of individual salespeople’s customer orientation was de-
veloped by Saxe and Weitz (1982).
A number of recent studies have documented an increasing
interest in measuring a company’s market orientation and
in relating market orientation to business performance
(Jaworski and Kohli 1992; Kohli and Jaworski 1990; Narver
and Slater 1990, 1991; Shapiro 1988). While Kohli and Ja—
worski (1992) developed an understanding of market orien-
tation as “the organizationwide generation, dissemination
and responsiveness to market intelligence”, Narver and
Slater operationalized market orientation in terms of the
three behavioral components of customer orientation, compe-
titor orientation, and interfunctional coordination. Still
other approaches to the measurement of market orientation
have recently been developed by Kasper (1993), Pelham
(1993), and Ruekert (1992).
While these studies differ in their operationalizations of
market orientation, there is a good deal of convergence in
that market orientation has a positive impact on business
performance. Disagreement relates to whether this perf or—
mance impact is moderated by environmental factors in any
significant way (Jaworski and Kohli 1992; Pelham 1993). The
10
increasing interest in the concept of market and customer
orientation is also reflected in a number of recent books
emphasizing the market/customer—orientation of business
strategy (e.g., Day 1990, Schnaars 1991).
It is interesting that all these studies look at market
orientation from the supplier’s rather than the customer’s
perspective. Analyses have been based on the supplier’s
self—assessment of market/customer—orientation rather than
the customer’s evaluation of the supplier’s market/customer—
orientation. Recently, Deshpande, Farley, and Webster (1993)
found that a supplier’s own assessment of customer orienta-
tion did not correspond well to that of the customer.
Additionally, the customer’s evaluation of the supplier’s
customer orientation was strongly related to the supplier’s
business performance, which was not the case for the
supplier’s self assessment of customer orientation.
Marketing managers’ inability to assess their own organiza-
tion’s market orientation seems to provide an explanation
for the lack of convergence between the various approaches
to the measurement of market orientation. The conclusion to
be drawn from the study by Deshpande, Farley, and Webster
(1993) for our analysis is that data for the development of
a valid scale of closeness to the customer should be collec-
ted from customers rather than suppliers. Within this
customer—oriented measurement approach, we would like to go
a step further than Deshpande, Farley, and Webster (1993).
Note that these authors measured the customer’s assessment
of the supplier’s customer orientation on a scale similar to
the operationalizations developed by Kohli and Jaworski
(1990) and Narver and Slater (1990), respectively. As the
authors put it: “Hence the measures we use are very con-
sistent with those used by Narver and Slater (1990) as well
as the conceptual discussion by Kohli and Jaworski (1990).”
11
As mentioned previously, these operationalizations have been
developed on the basis of data collected from the supplier’s
perspective. While it is interesting to note Deshpande’s,
Farley’s, and Webster’s (1993) finding that customers tend
to rate their suppliers differently than the suppliers rate
themselves on the criteria in such a scale, it may well be
that the very criteria customers tend to use to assess a
supplier’s customer orientation differ from the ones in
these scales. The question whether previously developed
scales measure what a customer would call customer—oriented
is still unanswered.
One of this study’s objectives is to provide a scale for
measuring closeness to the customer as it is perceived by
the customer himself. Criteria used by a customer in making
judgments of a supplier will be related to the customer’s
perception of the supplier’s closeness to the customer. The
importance of such a scale is underlined by Deshpande’s,
Farley’s, and Webster’s (1993) findings.
A second objective consists in the development and empirical
evaluation of a theoretical framework of closeness to the
customer including environmental and organizational
antecedents as well as performance outcomes of closeness to
the customer.
Both of the objectives are expected to produce useful
managerial implications. Specifically, the study aims at
providing industrial marketing managers as well as general
managers with a scale for measuring their organizations’
closeness to customers. Further managerial implications are
related to organizational antecedents that tend to facili-
tate closeness to the customer. Guidelines under what en-
vironmental conditions closeness to the customer is likely
to have an impact on business performance is also expected
to produce useful managerial insight.
12
4. Theoretical Framework
While there is hardly any work related specifically to
closeness to the customer, there are at least four inter-
connected research streams that have the potential to con-
tribute to the development of a theory of closeness to the
customer. These research streams include
— theories of interorganizational relations (reviews by,
e.g., Aldrich 1979; Galaskiewicz 1985; Oliver 1990; Van de
yen 1976; Whetten 1981),
— theories of marketing channels analyzing relations between
manufacturers and distributors (e.g., Anderson and Narus
1984, 1990),
— theories of buyer—seller relationships (Diller and
Kusterer 1988; Dwyer, Schurr, and Oh 1987; Frazier,
Spekman, and O’Neal 1988; Wilson and Mummalaneni 1988),
and
— organizational interaction approachesessentially
developed by Europe’s Industrial Marketing and Purchasing
(IMP)-group (e.g., Hakansson 1982; Johanson, Hallen, and
Seyed Mohamed 1991).
While theories of interorganizational relations are mainly
rooted in the fields of public administration and business
policy, the remaining three streams are related to the field
of marketing. The last two research streams have evolved
mainly as a response to an increasing interest in industrial
(business—to—business) marketing. Largely independent from
each other, they have contributed to the emerging concept of
relationship marketing (e.g., Webster 1992) in the U.S. and
Europe, respectively. An integration of the two perspectives
has been provided by Wilson and Moeller (1988).
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The four research streams have a number of theoretical bases
in common, including
- social exchange and power theory (Blau 1964; Emerson 1962;
French and Raven 1959; Thibaut and Kelley 1959),
- the political economy paradigm (Achrol, Reve, and Stern
1983; Stern and Reve 1980; Zald 1970)
— transaction cost economics (Williamson 1975, 1985),
— special perspectives in organization theory, especially
the resource dependence perspective (Pfeffer and Salancik
1978),
— MacNeil’s theory of norms in relational contracts (MacNeil
1980), and
— psychological theories of close interpersonal relations
(e.g., Kelley and Thibaut 1978).
Figure 2 illustrates the theoretical framework. An arrow
connecting a theoretical field to one of the research
streams means that work within this research stream has
built upon the specific theory to a significant extent.
The strength of the arrow corresponds to the strength of
the theory’s impact. This, of course, includes some subjec-
tive judgement on the author’s part.
A detailed elaboration on the theoretical framework is
beyond the scope of this paper. The emerging theory of
closeness to the customer described in the subsequent
sections draws upon this framework essentially by using
constructs developed in the fields shown in Figure 2 and
by developing hypotheses based on previous theoretical
considerations and empirical findings in these fields.
14
5. Measuring Closeness to the Customer
In order to achieve an understanding of the factors that
drive a customer’s perception of a supplier’s closeness, we
used ~ qualitative research approach as suggested by Zalt-
man, LeMasters, and Heffring (1982). Interviews with some
30 senior managers in European companies (mostly German com-
panies) were conducted. A wide variety of industries inclu-
ding machine tools, chemicals, automobiles, pharmaceuticals,
original equipment manufacturers COEMs), consumer electro-
nics, and other consumer goods industries were covered.
Consistent with our philosophy to tackle closeness to the
customer from the customer’s perspective, we chose respon-
dents that were involved in the management of supplier
relationships at a senior level. Companies’ presidents or
vice—presidents provided assistance in selecting respon-
dents, after having been explained the purpose of the study.
Some of the respondents were purchasing managers, others’
responsibilities were in materials management, and the
sample also included a number of manufacturing managers.
In about one third of the cases, the respondents’ respec-
tive responsibilities included some combination of these
functions.
The interviews were semi—structured. About half of the time
was devoted to an open discussion on the dimensions of
closeness to the customer including a comparison between two
suppliers of the company (providing equivalent or similar
products) one of which was perceived as being close to the
customer whereas this perception did not apply to the other
supplier. During the second half of the interview the re-
spondents were confronted with a number of variables taken
from studies in the research areas shown in Figure 2 as well
as writings from the managerially oriented literature (e.g.,
Peters and Waterman 1982) and asked to which extent they
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thought of these variables as components of closeness to the
customer.
This procedure led to the identification of four dimensions
of closeness to the customer (see Figure 3):
- The first dimension is related to features of the
supplier’s products, services, and logistics. Based on
the interviews, we gained the impression that quality and
flexibility are the two overriding themes within this
dimension. Our understanding of quality is not restricted
to output quality. Process quality, e.g., the quality of
the order handling process, is considered to be an impor-
tant component of customer—oriented quality (e.g., Treacy
and Wiersema 1993). Flexibility refers, e.g., to the
supplier’s ability to handle at low costs a change in a
product’s technical specification made by the customer
after the order has been placed. Flexibility in delivery
times is another important component of a supplier’s
flexibility.
— The second dimension is the supplier’s interaction
behavior. It includes such variables as his readiness to
have the customer participate in product development
projects, to provide information openly, to respond to
the customer’s suggestions, and to make suggestions to
the customer.
— The third dimension, the customer’s perception of the
supplier’s commitment to the relationship, is related
to the atmosphere in the customer—supplier relationship.
Following Anderson and Weitz (1992), we define commitment
as “a desire to develop a stable relationship, a willing-
ness to make short—term sacrifices to maintain the rela-
tionship, and a confidence in the stability of the rela-
tionship”.
16
— Finally, closeness to the customer also seems to contain
an atmospherical dimension related to the customer’s
affective outcomes, trust in the supplier and commitment
to the relationship being the most important factors in
this dimension.
Thus, we tentatively define a supplier’s closeness to the
customer as a way of dealing with customers characterized by
- high degrees of (customer-oriented) quality and flexibili-
ty in products , services , and logistics and
— a high readiness to interact with customers,
— leading to a customer’s perception of the supplier as
being highly committed to the relationship,
— thus enhancing a customer’s trust in the supplier and his
commitment to the relationship with the supplier.
Our approach for developing a scale for measuring closeness
to the customer will be based on the structure shown in Fi-
gure 3 and guided by the principles for construct develop-
ment that can be found in the marketing research literature
(e.g., Churchill 1979). We expect a structure involving
several factors per dimension for most of the dimensions.
This is especially true for the dimensions related to the
customer’s behavior (features of products, services,
logistics, and interaction behavior). It is unknown, at
this moment, how many factors these dimensions comprise.
Also, it is not sure that one factor will be sufficient to
model such constructs as commitment and trust. The dimen-
sions’ specific sub—structures will be developed by methods
of exploratory and confirmatory factor analysis.
As a result of this procedure, a model of the structure
described in Figure 4 will be fitted to the data to be
collected (see section 9 for information concerning the
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17
data collection). The items for measuring the factors will
compose the measurementscale. An overall measureof close-
ness to the customer will be computed as a weighted average
of the scores on the items with weights being derived from
factor loadings. Note that Figure 4 uses the causal modeling
form of representing a model (e.g., Bagozzi 1980; Joereskog
and Soerbom 1982), using circles for latent (i.e. unmea-
sured) variables and squares for measured variables. Struc-
tural and measurement error variables are not shown in Fi-
gure 4. Note also that this model will be evaluated on data
collected from the customer.
6. Interrelations among the Dimensions and Micro—Performance
Outcomes of Closeness to the Customer
With respect to the performance outcomes of closeness to the
customer, we have to distinguish between two levels of
performance: The first level is the supplier’s performance
within the business relationship with a specific customer.
This notion of performance is associated, e.g., with the
supplier’s share of the customer’s demand of the relevant
products and with the number of alternative suppliers. The
best performance a supplier can achieve at this level is
being a single—source supplier (supplying 100 % of the
customer’s demand with no alternative suppliers being consi-
dered). The second level of performance is the supplier’s
overall business performance relative to his competitors,
relative market share and relative profitability being among
the measures to be used for this level of performance.
In the sequel, we will refer to these two levels of perfor-
mance as micro— and macro—performance, respectively. This
section deals with micro—performance, only, relating it to
the dimensions of closeness to the customer. Macro—perf or—
18
mance outcomesof closeness to the customer will be dealt
with in section 8.
With respect to the interrelations between the dimensions of
closeness to the customer and their performance impact, our
general hypothesis is that of a causal chain from the lower
via the upper levels of the pyramid (shown in Figure 3)
aiming at the supplier’s performance within the relation-
ship. (Note that this causal chain, to some extent, is
inherent in our tentative definition of closeness to the
customer in the previaus section. ) Specifically, we assume
a direct impact of the quality/flexibility dimension on
customer’s trust and commitment, whereas the assumedimpact
of the suppplier’s interaction behavior is somewhatmore
complex. As it is shown in Figure 5a there is no direct
effect on the customer’s trust and commitment. Rather,
we would assumethat the customer’s perception of the
supplier’s commitment acts as a mediating variable.
A customer’s perception of the supplier’s commitment to the
relationship does not necessarily have a significant influ-
ence on the customer’s trust and commitment. Our argument is
that a highly committed supplier is only appreciated by the
customer if the customer perceives a high degree of uncer-
tainty in the corresponding purchasing environment. Uncer-
tainty concerning the availability of products, a high de-
gree of product complexity, difficulty in assessing a poten-
tial supplier’s capabilities, among others, are factors lea-
ding to a high degree of uncertainty on the part of the
customer.
The effect of the supplier’s commitment (as perceived by the
customer) on customer’s trust and commitment is therefore
hypothesized to be contingent upon the degree of the
customer’s uncertainty. We assume that there is no signifi-
cant effect in situations characterized by a low degree of
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uncertainty (so that, in such a situation, customer’s trust
and commitment depend essentially on features of the
supplier’s products, services, and logistics), whereas the
effect is very strong in the case of high uncertainty
(Figure Sb). Theoretical support for an influence structure
of this type is provided by transaction cost economics
suggesting that a committed exchange relationship may be
more efficient than a pure market exchange if the trans-
action environment is highly uncertain. Thus, if the custo-
mer perceives a high degree of uncertainty, he will appre-
ciate a supplier’s commitment to the relationship, which
will not (or, at least to a smaller extent) be the case if
uncertainty is low.
Note that the model in Figure Sa assigns an important role
to the customer’s trust and commitment, as they are the only
constructs that directly affect the supplier’s performance
within the relationship. The importance of gaining customer
commitment has been emphasized, e.g., by Ulrich (1989).
7. Organizational Antecedents of Closeness to the Customer
The question whether and how organizational factors affect a
company’s closeness to the customer is probably the one with
the greatest managerial relevance in our study. Besides or-
ganizational size, we distinguish three types of organiza-
tional variables that might be considered as antecedents of
closeness to the customer. These include variables related
to organizational structure, systems, and culture, respec-
tively. Note that the distinction between structure and
systems is ambiguous in the literature. As an example, Desh—
pande and Zaltman (1982) and Menon and Varadarajan (1992)
refer to formalization and centralization as or—ganizational
structure variables whereas in Kohli’s and Jaworski’s (1990)
20
framework the same factors occur as organization systems
variables.
In our study, the notion of organizational structure is
restricted to variables describing formal properties of the
organization, most of which are shown in the company’s
organization chart. These include the number of hierarchy
levels in the company (addressing the question whether a
flat hierarchy is a suitable way of enhancing an organiza-
tion’s closeness to the customer as much of the managerially
oriented literature is suggesting) and the degree of depart-
mentalization (both of these variables measured relative to
the organization’s size). Smith et al. (1991) refer to these
variables as structural complexity. Numerous studies have
shown that, as structural complexity increases, so does the
probability that the information being transmitted will be
distorted or blocked totally (see the literature reviewed by
Smith et al. 1991, p. 65). Thus, structural complexity is
likely to inhibit the organizationwide dissemination of in-
formation concerning current and future customer needs and
is therefore hypothesized to have a negative impact on
closeness to the customer.
Organization systems variables describe the way the work is
carried out in the organization in terms of formalization,
centralization, and interdepartmental cooperation. Our con-
ceptualization of closeness to the customer has a lot to do
with an organization’s ability to learn about its customers’
needs, to understand emerging changes in these needs, and to
be flexible in responding to them. Therefore, our hypotheses
concerning organizational antecedents of closeness to the
customer are based on theory and previous findings related
to antecedents of organizational flexibility and organiza-
tional learning. We drew upon literature in organization
theory emphasizing work on organizational learning (see
Huber 1991 for a recent overview) and upon literature re—
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21
lated to market research and marketing knowledge use within
the firm (e.g., Deshpande1982; Deshpandeand Zaltman 1982,
1984, 1987; Menon and Varadarajan 1992).
An additional variable in the field of organizational
systems is organizational slack. Bourgeois (1981, p. 30)
defines slack as “that cushion of actual or potential re-
sources which allows an organization to adapt successfully
to internal pressures for adjustment or to external
pressures for change in policy as well as to initiate chan-
ges in strategy with respect to the external environment”.
We hypothesize a positive impact of organizational slack on
closeness to the customer. This is consistent with work by
Cyert and March (1963), who noted that slack resources
enhancean organization’s adaptability, and with theoreti-
cal reasoning by Smith et al. (1991) concerning the effect
of organizational slack on organizational information pro-
cessing and response to competitors’ actions.
Following Deshpande and Webster (1989), who reviewed more
than 100 studies in organizational behavior, sociology, and
anthropology, we refer to organizational culture as “the
pattern of shared values and beliefs that help individuals
understand organizational functioning and thus provide them
with the norms for behavior in the organization”. Similar to
Deshpande, Farley, and Webster (1993) we use a typology of
corporate cultures developed by Cameron and Freeman (1991)
and Quinn (1988) distinguishing between clan, adhocracy,
hierarchy, and market type cultures.
Our hypothesis concerning organizational culture’s impact on
closeness to the customer is that adhocracy type cultures
will yield the highest degree of closeness to the customer
followed by market, clan, and hierarchy type cultures.
22
Organization size is hypothesized to exert a negative impact
on closeness to the customer. This hypothesis is consistent
with statements by Simon (1991a) as well as the observations
on hidden champions (Simon 1992). Additionally, theoretical
and empirical work by Fiegenbaum and Karnani (1991) identi-
fied a trade-off between output flexibility and firm size
which suggests that output flexibility (a dimension of
closeness to the customer) is a viable source of competitive
advantage for small firms. Our hypotheses on organizational
antecedentsof closeness to the customer are summarized in
Figure 6.
8. Modeling the Macro—Performance Impact of Closeness to the
Customer
In modeling the overall performance impact of closeness to
the customer we adopt a contingency perspective arguing that
closeness to the customer is a suitable way of dealing with
environmental uncertainty (including such factors as demand
and technology dynamism, e.g., Aldrich 1979). Note that we
mean a company’s uncertainty in its market environment which
has nothing to do with the purchasing organization’s percep-
tion of uncertainty incorporated in the model in Figure 5.
Uncertainty has been found to be an important environmental
variable in organization theory (e.g., Gerloff, Muir, and
Bodensteiner 1991; Miller 1992, p. 159). The early work of
March and Simon (1958) noted that absorption of uncertainty
is a key function of the organization. According to Thompson
(1967, p. 159), “uncertainty appears as the fundamental pro-
blem for complex organizations and coping with uncertainty,
as the essence of the administrative process.” Environmental
uncertainty is also considered to be of major importance for
the study of manufacturer-distributor relationships in the
23
marketing channels literature (e.g., Achrol, Reve, and Stern
1983).
Theoretical support for a positive impact of environmental
uncertainty on closeness to the customer is provided by
transaction cost economics and the resource dependence per-
spective of organization theory. Transaction cost theory
suggests that establishing close relationships with
suppliers is a more efficient governance structure in the
presence of high uncertainty than pure market exchange.
The resource dependence model views organizations as
coalitions of interest drawing a distinction between
internal and external coalitions (Anderson 1982; Pfeffer and
Salancik 1978). The survival of the organization depends on
its ability to obtain resources and support from its exter-
nal coalitions. An organization is assumed to emphasize
external coalitions that provide resources that are most
needed for survival. In this theoretical framework, a com-
pany’s relationship with a customer is an external coalition
providing the company with the resource of demand (or money,
in other words). While this is always a critical resource
for a company’s survival, it becomes especially critical in
situations characterized by high uncertainty, because demand
dynamism is one of the most important dimensions of uncer-
tainty. Thus, a high level of environmental uncertainty
would lead a company to place stronger emphasis on its
coalitions with its customers than it would tend to do in
a low uncertainty environment.
Additional support for a positive effect of environmental
uncertainty on closeness to the customer is provided by
Menon’s and Varadarajan’s (1992) finding that environmental
uncertainty enhances the use of marketing knowledge within
firms.
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24
A positive impact of environmental uncertainty is thus
firmly embedded in the relevant theory. It is worth noting,
though, that this hypothesis is in contrast to an important
stream in organization theory suggesting loose coupling as a
responseto uncertainty (e.g., Orton and Weick 1990; Weick
1976).
Our approach to modeling the macro—performance outcomes of
closeness to the customer (see Figure 7) is embedded in the
structure—conduct—performance paradigm of industrial econo-
mics. The basic theoretical argument is that environmental
uncertainty (structure) enhances companies’ closeness to the
customer (conduct) which in turn impacts on performance. The
model is shown in Figure 7. Environmental uncertainty is
hypothesized to have a direct impact on closeness to the
customer as well as an indirect one because a company would
also respond to high uncertainty by designing organizational
structure, systems, and culture in a way enhancing closeness
to the customer. It will be interesting to observe, to what
extent an organization can achieve a high degree of close-
ness to the customer as a response to environmental uncer-
tainty (this is related to the direct impact) without desig-
ning the organizational variables in a corresponding way.
Furthermore, environmental uncertainty is assumed to have a
direct negative effect on performance. This hypothesis is
based on early theoretical work in organization theory
(March and Simon 1958; Thompson 1967) although research
results on this linkage have been ambiguous (Gerloff, Muir,
and Bodensteiner 1991). Note, however, that through its im-
pact on closeness to the customer, uncertainty has an indi-
rect positive impact on performance. An interesting finding
from the analysis of this model will be to what extent the
unfavorable impact of uncertainty can be weakened by the
indirect favorable effect associated with closeness to the
customer.
25
9. Outlook on the ResearchProject
From a methodological point of view, the work in this pro-
ject will be guided by the principle of applying multiple
methods in order to assert a high degree of validity. The
underlying situation is what a philosopher of science might
call a ‘context of discovery’. However, as shown in this
paper, there is a broad range of theoretically sound work in
related areas. Thus, both deductive and inductive principles
of knowledge generation are applied in this project.
Application of multiple methods also refers to data analysis
issues. Theory development in this study is based on quali-
tative research (interviews and case studies) as well as
analysis of survey data by means of multivariate statistical
methods, such as factor analysis, regression analysis, and
confirmatory as well as exploratory approaches to causal
modeling (e.g., Homburg 1991).
Specifically, the following data will be used:
— Results from interviews with managers responsible for
supplier management; these interviews have already been
carried out and have contributed significantly to the
conceptualization of closeness to the customer shown in
Figures 3 and 4.
— Data collected within a large—scale survey conducted in
collaboration with the German Association of Materials
Management,Purchasing, and Logistics (Bundesverband
Materialwirtschaft, Rinkauf und Logistik e.V.); within
this survey, more than 1000 managers whose companies are
membersof this association will be asked to fill out a
questionnaire concerning a specific supplier of the com-
pany. Questions related to the constructs shown in Figures
26
4, 5, 6, and 7, respectively, are contained in the
questionnaire. These survey data are the major data source
for the study allowing for empirical evaluation of the
four models shown in Figures 4, 5, 6, and 7, respectively.
— However, customers’ ability to make judgments about a
supplier’s internal organization is expected to be limi-
ted. Therefore, a minor survey study is to be conducted
among suppliers mainly addressing their organization
structure, systems, and culture.
— Finally, a limited number of in—depth interviews and case
studies will be carried out in some suppliers organiza-
tions. These suppliers will be selected on the basis of
the large—scale survey described previously. We will focus
on suppliers that have been judged by customers to have
changed their closeness to the customer lately. Interviews
and case studies will be used to identify factors that led
to an increase or decrease in a supplier’s closeness to
his customers and related performance outcomes. This pro-
cedure (based on a suggestion by Gary Lilien) is expected
to yield some insight into the dynamics of closeness to
the customer.
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