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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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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