creating and managing superiou customer value

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 Piscopo Georgia State University, Atlanta, GA, USA vii viii LIST OF CONTRIBUTORS Thomas Ritter Copenhagen Business School, Frederiksberg, Denmark Robert Salle E.M LYON, Lyon, France Torkel Stro¨msten 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 JAI Press is an imprint of Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2008 Copyright r 2008 Emerald Group Publishing Limited Reprints and permission service Contact: booksandseries@emeraldinsight.com No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center No responsibility is accepted for the accuracy of information contained in the text, illustrations or advertisements The opinions expressed in these chapters are not necessarily those of the Editor or the publisher British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-84855-172-5 ISSN: 1069-0964 (Series) Awarded in recognition of Emerald’s production department’s adherence to quality systems and processes when preparing scholarly journals for print 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 University of Bologna, Bologna, Italy Mette P Knudsen University of Southern Denmark, Odense, Denmark Stefania Borghini Bocconi University, Milan, Italy J David Lichtenthal Baruch College, City University of New York, NY, USA Michele Costabile University of Calabria, Arcavacata, Calabria, Italy Hans Mu¨hlbacher University of Innsbruck, Innsbruck, Austria Michael Gibbert Bocconi University, Milan, Italy Chezy Ofir Hebrew University, Jerusalem, Israel Francesca Golfetto Bocconi University, Milan, Italy Diego Rinallo Bocconi University, Milan, Italy Stephan C Henneberg Manchester Business School, University of Manchester, Manchester, UK Gu¨nter Specht Technical University Darmstadt, Darmstadt, Germany Andreas Hinterhuber Hinterhuber & Partners and Bocconi University, Milan, Italy Arch G Woodside Boston College, Boston, MA, USA Wesley J Johnston Georgia State University, Atlanta, GA, USA Fabrizio Zerbini Bocconi University, 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 propositions 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 marketplace 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 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 multidimensional 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: Value ¼ relative sum of weighted benefits perceived relative total costs perceived (1) Value ¼relative sum of weighted benefits perceived À relative total costs perceived ð2Þ Customer Value: Theory, Research, and Practice Value ¼ relative sum of total consequences relative total costs perceived (3) Value ¼ relative sum of total consequences À 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.) ARCH G WOODSIDE ET AL 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 R S T V Relative Total Benefits Relative Total Costs Value 1.33 1.10 80 70 1.80 90 60 1.10 74 1.22 1.33 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 illustrates four product– service value locations The dashed boundary region in Fig 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 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 463 Value Creation Options for Contract Manufacturers Table Market positioning (customer value searched for) CSFs for the Sustainable Strategy Types The Efficient Capacity Supplier The Super Customer Bonder The Design Partner The Strategic Partner Most efficient supplier (price) of high volumes Most flexible supplier for series and projects (offering solutions and custom-made goods) Solution with flexible services Cooperating in the design phase Thinking integrated total solutions Custom-made goods and integration into technical process of customer Custom-made goods and integration in technical, administrative, logistic, and financial processes of contractor In high-end markets, safeguarding the contractors’ differentiation Leanest manufacturing Supplier of fair value Critical success factors Economies of scale in the entire setup of the organization and production Organization is specialized in one type of buyer Qualifiers Efficient use of engineering capacity Potential pitfalls Drastic alignment on one customer or one type of customer Alignment with customer’s business processes in order to realize transaction cost reduction Economies of scope Economies of experience in custom-made goods or customized solutions Economies of span (network of contacts and partners) Sufficient scale to be price competitive Organization can get stuck in the middle, between efficiency and effectiveness In high-end markets, play a role in the new product development of contractors Economies of scope Economies of experience Economies of experience Economies of learning Economies of learning Economies of span (network of contacts and partners) Sufficient scale to be price competitive Competence development Is the contract manufacturer supposed to integrate Sufficient scale to be price competitive Competence development A lot of upfront investments needed in engineering capacity, but is 464 PAUL MATTHYSSENS ET AL Table (Continued ) The Efficient Capacity Supplier The Super Customer Bonder increases the risk profile Organization cannot switch to other application in the short term Examples/typical markets Too expensive to compete with low-cost players; too less specialization in technique and development to compete with knowledge companies Volume markets Project market Customers are optimized globally Automotive Series markets End markets where speed and flexibility are important The Design Partner The Strategic Partner the company really looked at as partner by the client? Too little proactive attitude strongly with the contractor? Not all competences are under direct control The company is dependent on specialist suppliers Not easy to manageþbig responsibility Difficult to capture the value created Series markets (diverse applications) Developing end markets Series markets (diverse applications) Developing end markets Niche markets Niche markets Market specialization Application 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 Value Creation Options for Contract Manufacturers 465 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 466 PAUL MATTHYSSENS ET AL 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 modifications 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 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 467 Value Creation Options for Contract Manufacturers Competence levels for different supplier profiles Advanced level Basic 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 supplier the customer bonder the efficient capacity supplier Fig 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 indicates how the gaps a process supplier has to face when growing into an efficient capacity supplier or a super customer bonder Fig 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 costefficient offer of extra services (see Fig 5) Which efforts the process supplier has to 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 468 PAUL MATTHYSSENS ET AL 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 application supplier the design partner the strategic partner Fig 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 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 & Ha˚kansson, 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 469 Value Creation Options for Contract Manufacturers Application supplier Added value functionality+ value/cost Delivering production capacity In accordance with customer’s demands Fig Capacity plus Fit in work rhythm of customer and keeping margins Original Equipment Manufacturer -Contractor system integration Codevelopment breakthrough value/cost market performance coengineering product performance Reduce own capacity performance of the chain Contracting out cost performance 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 This part of Fig 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 470 PAUL MATTHYSSENS ET AL 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 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 471 Value Creation Options for Contract Manufacturers Original Equipment Manufacturer-Contractor Supplier system integration Codevelopment breakthrough value/cost market performance Added value functionality+ value/cost Delivering production capacity In accordance with customer’s demands Capacity plus Fit in work rhythm of customer and keeping margins coengineering product performance Reduce own capacity Traditional buy-sell relations (with possible installation of mutual technical teams) Fig performance of the chain Contracting out cost performance 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 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 472 PAUL MATTHYSSENS ET AL 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 and 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 Value Creation Options for Contract Manufacturers 473 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 Mo¨ller (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 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 valueadding 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 474 PAUL MATTHYSSENS ET AL 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 (Mo¨ller & To¨rro¨nen, 2003; Helander & Mo¨ller, 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 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 Value Creation Options for Contract Manufacturers 475 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 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Maintenance and Usage Costs Disposal Costs Fig 3 Perceived Benefits and Value Creation for New Lamppost Standard (Fiberglass-Reinforced Plastic) 11 Customer Value: Theory, Research, and Practice Current Standard (Aluminum Lamp Posts) Benefits Product Benefits Costs Customer Value Service Benefits Price Paid Company or Brand Benefits Acquisition Costs Fig 4 Benefits Costs Product Benefits Customer Value Service... 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... 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, 22 ARCH G WOODSIDE ET AL 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. .. Assessment by Customer Customer Value Assessment of Product-Service Design + + Executive Leadership/Stance favoring Change Fig 7 Customer Acceptance of Product-Service Customer s Purchase Share of Business Awarded by Customer Customer Retention Antecedents and Consequences of Customer Value Assessments of Product–Service Designs ADVANCES IN RESEARCH IN VALUE THEORY, MEASUREMENT, AND PRACTICE The remaining... 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... 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 relationships can act as integrators, which, by interlocking limited value. .. 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 Customer Value: Theory, Research, and Practice 21 of assessing the intangible part of the value, particularly... 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... 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. .. 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 ... 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... 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... data, and search for evidence supporting the superior value of the discontinuous innovation work against its adoption by many customers 7 Customer Value: Theory, Research, and Practice 200 Fair Value