Market orientation, strategic flexibility, and performance: implications ...

Market orientation, strategic flexibility, and performance: implications for services providers Rajshekhar (Raj) G. Javalgi, Thomas W. Whipple and Amit K. Ghosh James J. Nance College of Business Administration, Cleveland State University, Cleveland, Ohio, USA, and

Robert B. Young Business Division, Lorain County Community College, Elyria, Ohio, USA Abstract Purpose – This article proposes investigating implications for service providers who adopt a market orientation. It hopes to extend current thinking by integrating market orientation and market-focused strategic flexibility. Design/methodology/approach – A model is extended to apply to services marketing. The “strategic wheel of service performance” provides a framework to discuss the managerial implications from integration of market orientation, strategic flexibility, competitive advantage, and service performance. Findings – The impact of developing a market orientation should be higher levels of customer relationship marketing (CRM), retention, satisfaction, loyalty, and lifetime value (LTV). Increases in one or more of these interrelated variables should help service providers improve their judgmental and objective performance. Research limitations/implications – More research needs to be conducted to expand the market orientation philosophy to the service provider. Subjecting the framework to analytic rigor would allow scholars and practitioners to understand more fully the inter-relatedness of the service implications. Practical implications – Practice implications of the paper are: the service economy is an opportunity to practice market orientation; investments in customer profitability, retention, and loyalty programs pay dividends; A market orientation enhances financial and strategic performance; integration of principles across organizational boundaries requires a long time; financial and strategic business performance criteria need to be quantified; crossfunctional customer feedback mechanisms need to be designed; and market orientation must be integrated across all service function providers. Originality/value – The conceptual framework integrates market orientation, market-focused strategic flexibility, strategic competitive advantage, and subjective and objective performance outcomes as applied to service providers. The discussion strengthens the strategic value of market orientation and provides managerial implications for the services sector. Keywords Market orientation, Marketing strategy, Response flexibility, Competitive advantage, Services, Performance measurement (quality) Paper type Conceptual paper

competitiveness, and efficiency in service companies are predicted to be key drivers of growth and performance. Competitiveness in the service industry, rather than in manufacturing, will propel the global economy in the twentyfirst century. A popular belief among consumers is that the service economy is new and is only recently replacing the obsolete manufacturing base developed in the twentieth century. Zeithaml and Bitner (2003) provide a more accurate picture of the long-term influence of the service economy: . as early as 1929, more than half of the working population was employed in the service sector; . approximately 54 percent of gross national product (GNP) was generated by services as early as 1948; and . the trend has continued and as of 1999 services represented 80 percent of employment and 78 percent of gross domestic product (GDP).

An executive summary for managers and executive readers can be found at the end of this article.

Introduction In the era of globalization, which has brought about unprecedented changes in the service economy, organizations of all sizes and structures are searching for strategies to improve performance without sacrificing quality. A market orientation that provides for market-focused strategic flexibility to sustain competitive advantage is a strategic solution. Characteristically, the service sector is diverse, ranging from large multinational corporations to small-and-medium enterprises. With the increasing importance of the service sector, the quality, The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The USA is the world leader and champion in the transformation to a service economy. The transformation from a manufacturing-based to a service-centered economy seems to be nearly complete. The fastest growth rates in job formation and in number of jobs are in service industries. In 2000, there was an $81 billion US trade surplus in services while manufactured goods remained in the red (Bach, 2001). A great deal of customer communication, interaction, and knowledge transfer relies on a consistent and committed use

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Journal of Services Marketing 19/4 (2005) 212– 221 q Emerald Group Publishing Limited [ISSN 0887-6045] [DOI 10.1108/08876040510605244]

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Market orientation, strategic flexibility, and performance

Journal of Services Marketing

Rajshekhar (Raj) G. Javalgi et al.

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of the market orientation philosophy. Since service delivery requires human interaction with external and internal customers, a market orientation should be particularly important for a service firm (Schneider, 1987). What are the implications of a market orientation for the growing number of service providers? Should service providers utilize the market orientation philosophy differently than their goods producing counterparts? Managers, employees, and other stakeholders need to be asking these questions given the significance of the service sector. The importance of a marketoriented culture is crucial to all levels of the modern organization (Day, 1990; Deshpande´ and Webster, 1989). Service providers should be part of this universe of modern organizations. However, service marketing is different. When purchasing goods, the consumer employs many tangible cues to judge quality, including color, style, finish, package, and fit. When customers purchase services, fewer tangible cues exist. In many cases, tangible evidence is limited to the service provider’s physical facilities, equipment, and personnel. Differences in the inseparability, intangibility, heterogeneity, and perishability of services underscore the importance of a market orientation (Lovelock, 2001). This article draws on the literature in market orientation and services marketing to suggest implications for service providers who adopt a market orientation. According to Caruana et al. (1999), the constructs of market orientation and service quality are related. Market orientation’s positive association with market performance provides the critical foundation (Narver and Slater, 1990). However, research focusing on market orientation concepts as they relate to the service sector is sparse (Van Egeren and O’Connor, 1998). This investigation extends current thinking by integrating market orientation and market-focused strategic flexibility within the services marketing arena. A model Johnson et al. (2003) developed for goods marketing has been adapted and extended to apply to services marketing. Discussion of this new model for service providers is the basis for the framework development contribution of this paper. In addition, the “strategic wheel of service performance” provides a framework to discuss the managerial implications that are forthcoming from an integration of thinking regarding market orientation, strategic flexibility, competitive advantage, and service performance. The focus and contribution of this research is framework development and managerial implications, not empirical testing.

the organization, and organization wide action or responsiveness to it”. A market orientation is valuable because it focuses the organization on continuously collecting information about target customers’ needs and competitors’ capabilities and using this information to create continuously superior customer value (Slater and Narver, 1995). Researchers developed comprehensive theories that explain the nature and consequences of a market orientation (Kohli and Jaworski, 1990; Narver and Slater, 1990), resulting in a body of research that investigated the relationship between market orientation and performance (Deshpande´ et al., 1993; Ruekert, 1992; Slater and Narver, 2000). Market orientation is also central to discussions about marketing management and strategy (Day, 1992). Studies that explore the effect of market orientation on performance are well known in the extant literature. While some studies found significant relationships, others did not, suggesting that perhaps some mediating factor may be involved. Johnson et al. (2003) proposed that marketfocused strategic flexibility might be a potential mediator of the market orientation, performance relationship. We extend their model and apply it to the context of service providers. This extension makes intuitive sense for at least two reasons. First, service providers are increasingly important to the overall marketplace in terms of both the number of organizations involved in services and overall job growth. Second, the nature of services marketing, with its emphasis on personal interactions with customers, lends itself well to developing and maintaining a strategy based on the concept of market orientation. The conceptual framework shown in Figure 1 integrates the market orientation and strategic flexibility constructs, as well as environmental turbulence, sustainable competitive advantage, and service performance, into a single model. The framework begins with the three components of market orientation, consisting of customer and competitor orientations and inter-functional coordination (Narver and Slater, 1990). Market orientation is an antecedent to marketfocused strategic flexibility that in turn provides a sustainable competitive advantage and influences service performance. Strategic flexibility Johnson et al. (2003, p. 77) explore the concept of marketfocused strategic flexibility and its relationship to a firm’s market orientation. These authors define market-focused strategic flexibility “as the firm’s intent and capabilities to generate firm-specific real options for the configuration and reconfiguration of appreciably superior customer value propositions”. Without a market focus, any type of flexibility, whether strategic, tactical, or operational, will not help the firm create superior value and sustainable competitive advantage. They argue that market-focused strategic flexibility plays a critical role in the firm’s success. Moreover, the authors suggest that these successes are related to the firm’s market orientation. If a service firm’s organizational objective is to create a superior value proposition for its customer base, and therefore a sustainable competitive advantage, an advanced conceptualization of strategic flexibility should incorporate a market-focused perspective and directly consider a firm’s options with regard to services and markets (Johnson et al., 2003). Market-focused strategic flexibility could provide the

Market orientation, strategic flexibility, and services framework Market orientation Scholarly attention has focused on the definition, measurement, impact, and organizational drivers of market orientation and its enhancements (Jaworski and Kohli, 1996). One definition of marketing orientation states that: “market orientation consists of three behavioral components: 1) customer orientation, 2) competitor orientation, and 3) inter-functional coordination and two decision criteria: 1) long-term focus and 2) profitability” (Narver and Slater, 1990). Another definition, by Jaworski and Kohli (1993), is: “the organization wide generation of market intelligence pertaining to current and future needs of the customers, dissemination of intelligence horizontally and vertically within 213




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Figure 1 Framework for market-focused strategic flexibility and service providers

organizing its marketing and sales functions around distinct customer segments, Dell was able to address varying customer needs with greater precision and speed. In most industries, a few firms are superior performers. Those firms conceivably possess something special and difficult to imitate that allows them to outperform their rivals. Researchers generally distinguish between two broad sources of competitive advantage: 1 unique resources or assets; and 2 distinctive skills or capabilities (Bharadwaj et al., 1993).

organization with the appropriate structure necessary for long-term survival and prosperity. Environmental turbulence Turbulence in the environment has an affect on both the organization’s market orientation and its competitive advantage. Glazer and Weiss (1993) define environmental turbulence in terms of high levels of change in magnitude and/ or direction in the values of key environmental variables and considerable uncertainty and unpredictability as to the future values of these variables. Environmental turbulence moderates the impact of market orientation on marketfocused strategic flexibility (Johnson et al., 2003). Factors included in environmental turbulence are macro influences such as political, economic, legal, technological, and demographic changes that can affect the organization.

Barney (1991) lists four essential requirements for a resource/ skill to be a source of sustainable competitive advantage. It must be: 1 valuable; 2 rare among a firm’s current and potential competitors; 3 imperfectly imitable; and 4 there must not be any strategically equivalent substitutes for this resource/skill.

Sustainable competitive advantage To achieve superior performance, a business must develop and sustain a competitive advantage (Porter, 1985). Organizations have long sought how to achieve a competitive advantage in uncertain and swiftly changing environments (Dobni and Luffman, 2000). Some authors believe that gaining a competitive advantage will be achieved by placing a renewed emphasis on delivering superior quality products and services to customers (Bitner, 1992; Day and Wensley, 1988; Parasuraman et al., 1985). Others feel that organizations should take a more pragmatic approach by considering tradeoffs between the external environment and strategic initiatives in search of “best practices” (McKee et al., 1989; Narver et al., 1992; Venkatraman and Prescott, 1990). Whereas competitive advantage was previously based on structural characteristics, such as market power, economies of scale, or a broad product line, the emphasis today is capabilities that enable a business to deliver superior value consistently to its customers (Slater and Narver, 2000). To do so requires that a seller understand a buyer’s entire value chain as it evolves over time. Competitive advantage is not just a function of how well a company plays by the existing rules of the game. More importantly, it depends on the firm’s ability to change those rules radically. Govindarajan and Gupta (2001) discuss one way for changing those rules through a customer knowledge advantage. They cite direct contact with customers as having helped Dell Computer gain a superior understanding of specific customer needs. By

A competitive advantage becomes sustainable if the advantage resists erosion by competitor behavior over time (Porter, 1985). Service performance It is acknowledged that performance is a multidimensional construct, consisting of two broad measures: judgmental performance (e.g. customer service loyalty) and objective performance (e.g. ROA) (Guo, 2002; Agarwal et al., 2003). Scholars have noted that while judgmental measures of performance are important to profitability, objective measures of performance provide the link to profitability in service organizations (Heskett et al., 1994; Agarwal et al., 2003). Heskett et al. (1994) note that performance ultimately is measured by profitability. For example, it is driven by such strategic variables as customer retention and customer satisfaction. Measuring customer profitability is common among banking organizations. Garland (2002) examined 1,100 retail bank customers to determine the non-financial drivers of customer profitability. Jarrar and Neely (2002) looked at cross-selling in the financial services sector, Sutherland (2001) provided guidelines about what is considered to be important in a bank account and customer profitability valuation, Narayanan and Brem (2002) examined customer profitability and customer relationship management (CRM) at RBC Financial Group, and Hasapidis (2001) 214




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investigated using the Marketing Customer Information File (MCIF) as a database to help determine customer profitability. Niraj et al. (2001) extended customer profitability analysis to an intermediary in a supply chain.

1994). The retention of customers by building relationships receives top priority in organizations that adopt the relationship marketing philosophy. Palmer and Mayer (1996) propose that relationship marketing can be characterized in terms of three principal orientations: a tactical relationship orientation, a strategic relationship orientation, and a philosophical orientation which sees relationship marketing as going to the core of marketing. It is the philosophical orientation that is most relevant to the current discussion about market orientation. It follows that the concepts of relationship marketing and market orientation are closely intertwined with each other especially as they relate to service providers. The tactical level is linked to customer transactions, databases, and information technology found, for example, in financial service organizations. The use of frequent flyer programs by airlines is an example of relationship marketing at a tactical level. Increasing the costs and complexities of switching providers is an example of the strategic orientation to relationship marketing. For example, mortgage penalties for early payoff represent a high switching cost, thereby keeping customers over a longer term. A more recent strategic conceptualization of relationship marketing sees the process of relationship development as being essentially about sellers’ attempts to restrict the choice set of buyers (Palmer and Mayer, 1996). This restriction can come about consensually, where buyers limit their choices due to earlier satisfaction, or non-consensually, where customers are effectively prevented access to suitable alternative providers. Sheth and Parvatiyar (1995) describe a firm’s motivation to develop ongoing relationships as being based primarily on choice reduction. At a more philosophical level, relationship marketing goes to the heart of the marketing philosophy (Palmer and Mayer, 1996). Traditional definitions of marketing focus on the primacy of customer needs, while relationship marketing refocuses marketing strategy away from products and their lifecycles towards customer relationship lifecycles. Recent conceptualizations of market orientation stress the use of all employees of an organization to meet profitably the lifetime needs of targeted customers better than the competition.

Performance implications for service providers A service firm’s judgmental and objective performance can be enhanced by improving the organization’s CRM, retention, satisfaction, loyalty, and lifetime value (LTV). Specific customer-focused strategies for each performance type depend on the service organization’s strategic flexibility, adaptability to environmental turbulence, and achievement of a competitive advantage. The following discussion focuses on managerial implications in these areas, as depicted in the “strategic wheel of service performance” (Figure 2), with specific company examples. CRM The marketing discipline has undergone a radical change over the past two decades. The most significant of these shifts is the movement away from transaction-oriented strategies to more relationship-oriented strategies. CRM is defined as establishing, developing, and maintaining successful relational exchanges (Morgan and Hunt, 1994). It is part of the developing “network paradigm” which recognizes that global competition occurs increasingly between networks of firms (Thorelli, 1986). Berry (1983) states “relationship marketing is attracting, maintaining and – in multi-service organizations – enhancing customer relationships”. Proponents of relationship marketing encourage organizations to seek partners for long-term marketing relationships (Morgan and Hunt, 1999). For example, focusing on customer retention rather than customer capture is one of the cornerstones of relationship marketing (Vavra, 1992). Many scholars are in agreement about the central focus on the customer in the relationship-marketing framework (Christopher et al., 1991; McKenna, 1991; Sheth, Figure 2 Strategic wheel of service performance

Company example: Amazon.com The 2000 American Customer Satisfaction Index reflected a rating of 84 for Amazon – one of the highest ratings of any company in any industry, and certainly higher than the 73 average rating for e-commerce endeavors and the 60-70 point ratings for many other service businesses. Jeff Bezos, CEO of Amazon, believes that his customers come first. With a continued focus on customers, relationships, value, and the brand itself, Bezos and others believe that sales will continue to grow and profits will continue. Amazon allows customers to find related books on virtually any topic by simply typing key words and initiating a search of its massive database. Its one-to-one marketing system allows the company to track what individual consumers buy and let them know of additional titles that might interest them. This is done while the customer is shopping as well as through periodic direct email that identifies books specifically related to the customer’s past purchase patterns and interests (Zeithaml and Bitner, 2003). Customer retention Most organizations spend a disproportionate amount of their time and resources courting new customers. Many advertising 215




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campaigns and strategies are designed to attract new clients rather than retain current customers. Some departments are dedicated to developing what has become known as “new business”. In reality, 80 percent or more of marketing budgets are often earmarked for attracting new customers, leaving only 20 percent allocated to retaining existing customers (Weinstein, 2002). While it is critical to replace lost customers and discover expanding markets, this objective should be secondary to the primary goal of maintaining relationships and retaining existing customers. Keaveney (1995) found that servicerelated problems such as inconvenience, core service failures, failed service encounters, and response to failed service accounted for more than two-thirds of the reasons why customers switch service providers. Pricing was related to only 17 percent of the switching occasions. Once marketers realize that many customers leave primarily due to service related reasons, these issues become highly controllable from the firm’s perspective (Weinstein, 2002). Reichheld (1996) builds a case for why organizations should develop and use customer retention strategies. He shares the following insights related to customer retention: . the typical organization loses 10-30 percent of its customers every year; . increasing the customer retention rate by 5 percent can increase the value of an average customer (lifetime profits) by 25-100 percent; and . on average, US corporations lose one-half of their customers over five years.

former US military personnel and their families. USAA owns and manages more than $60 billion in assets. It consistently appears on Fortune magazine’s list of the 100 best companies to work for in the USA, and customer retention figures approach 100 percent. In fact, the most likely reason for a customer to leave the company is death. USAA believes so strongly in the importance of customer retention that managers’ and executives’ bonuses are based on this metric (Zeithaml and Bitner, 2003). Customer satisfaction Reviews of the literature on satisfaction suggest that two constructs, performance-specific expectation and expectancy disconfirmation, play a major role in satisfaction decisions (Oliver, 1980). Satisfaction became a popular topic in marketing during the 1980s and is a debated topic during both business expansions and recessions. Most discussions on customer satisfaction involve customer expectation of the service delivery, actual delivery of the customer experience, and expectations that are either exceeded or unmet. If expectations are exceeded, positive disconfirmation results, while a negative disconfirmation results when customer experience is poorer than expected. Customer satisfaction with a service is influenced significantly by the customer’s evaluation of service features. For a luxury hotel, features may include restaurants, room amenities, staff courtesy, and sports facilities (pools, fitness rooms, and golf) (Oliver, 1997). In addition, satisfaction is influenced by customers’ perceptions of equity and emotional responses (Zeithaml and Bitner, 2003). Perceptions include price and value comparisons as well as equity assessments among other customers. Emotional evaluations are related to temporary mood states including the overall positive frame of mind consumers have when they are on vacation. According to Oliver (1980), antecedents of customer satisfaction include expectations and disconfirmations. Consequences of customer satisfaction include positive influences on post-purchase attitude and intentions. Other researchers discussed additional outcomes of customer satisfaction (Zeithaml and Bitner, 2003). For example, some public policy makers believe that customer satisfaction is an important indicator of national economic health. They believe that satisfaction levels may be as important as economic efficiency and pricing statistics. Satisfaction may be related to a better quality of life. Moreover, customer satisfaction may be correlated with other measures of economic health, such as corporate earnings and stock prices.

Aspinall et al. (2001) examined how organizations approach the topic of customer retention. Respondents were asked if their organization had an agreed on a definition of what constitutes customer retention. Results indicate that over half of the sample of 314 considered customer retention to be more important than customer acquisition, but only one quarter of the sample claimed that the company had a definition of customer retention. Moreover, 20 percent of those with a claimed definition stated that they did not know it. It appears that as companies espouse the importance of customer retention, they do not do much to define, measure, or manage it. Reibstein (2002) discusses several potential measures related to customer retention for internet shoppers, including customer satisfaction, repeat buying, share of requirements, and likelihood to purchase again. Customer satisfaction should be an indication of how well customers like their online shopping experience, and it is probably the best indication of their willingness to return to the site in the future. He refers to repeat buying in terms of the frequency of specific site visits, while share of requirements refers to the portion of purchases for a specific customer that is conducted at one particular site. It follows from his discussion that the likelihood to repurchase should be related directly to higher levels of satisfaction, repeat buying, and share of requirements.

Company example: Marriott Corporation How important is customer satisfaction to the Marriott Corporation? According to the founder of Marriott, J. Willard Marriott, Sr, what has defined his company’s greatness are the following principles: . timeless core values and enduring purpose; . a relentless drive for progress; and . strength beyond the presence of any one individual. The Marriott staff is constantly looking for ways to improve the customer experience at its hotels. After making the observation that overnight guests were throwing away pizza boxes from local pizza chains, Marriott decided to offer pizza delivered via room service along with the full room service menu. Marriott is known for its passionate business practices. One of the best known is its procedural manual covering 66

Company example: USAA Insurance USAA is a preeminent example of a company focused on building long-term relationships with customers. Customer retention has been a core value of the company since long before customer loyalty became a popular business concept. In business since 1922, USAA provides for the insurance needs of a highly targeted market segment: current and 216




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separate steps for cleaning a hotel room and all in less than half an hour. Over the past 40 years, this dedication to customer satisfaction has contributed to Marriott’s growth from a $50 million restaurant and airline catering chain with one hotel into a $12 billion global company managing more than 1,500 hotels, resorts, and time-share properties; dozens of senior living communities; and thousands of food service contracts and other special services. (Marriott and Brown, 1997).

Customer LTV Organizations are realizing that losing a profitable customer translates to more than losing a single sale. It means losing the future revenue stream of that customer over his entire lifetime. According to Bitran and Mondschein’s (1997) definition, customer LTV is the total net worth of a customer to an organization over the duration of the relationship. Customer LTV is at the core of the relationship approach to marketing strategy. When marketers understand how much a customer may be worth over a long period of time, they can begin to customize marketing offerings to achieve overall profitability. The numbers are compelling when considering the long-term value of a customer. For example, Stew Leonard estimates that if a given customer spends $100 per week in his/her supermarket, shops 50 weeks per year, and lives in the local area for ten years, he/she loses $50,000 if that customer is lost. Similarly, Taco Bell has estimated that the LTV of a customer exceeds $12,000, while Lexus estimates that a single customer is worth $600,000 in lifetime sales (Kotler, 2001). LTV analysis can be used to drive the following four management decisions (Sargeant, 2001): 1 assigning acquisition costs; 2 choosing media for initial customer acquisition; 3 setting selection criteria for customer marketing; and 4 investing in the reactivation of lapsed customers.

Customer loyalty Most research investigating brand loyalty examines loyalty focused on goods rather than on services (Dick and Basu, 1994). In an analysis of how consumers evaluate products and services, Zeithaml (1981) concluded that some of the main determinants of brand loyalty for products and services are past satisfaction with a brand, perceived risk associated with a purchase, availability of substitutes, and the costs of switching brands. Since services have distinct characteristics that result in differences in strategic orientation, it follows that the most effective strategies for building and retaining loyalty may vary between product and service providers (Javalgi and Moberg, 1997). Furthermore, these differences imply that a market orientation may indeed have different implications for service providers as opposed to product marketers. The difficulty of evaluating quality of services makes switching brands of service less likely as customers become familiar with a particular service (Javalgi and Moberg, 1997). Inseparability of provider and customer in many service settings results in less switching after customers develop a relationship with a service provider. Since services are intangible and heterogeneous, most consumers perceive a higher risk in services than in goods. As perceived risk increases, the likelihood of loyalty to a brand increases (Cunningham, 1966; Guseman, 1981; Roselius, 1971). The intangibility of services makes the evaluation of service quality more difficult. Thus, consumers often depend on credence qualities to evaluate services (Zeithaml, 1981). Intangibility makes it more difficult and expensive to gather information about services. The higher cost may lead to less consumer information about services than about goods. Therefore, it appears that brand loyalty may be more important for services than it is for products (Zeithaml, 1981).

Assigning acquisition costs An understanding of LTV helps firms to determine how much to spend on new customer recruitment. Customer segments that are worth more over their lifetime may be more expensive to recruit initially, but these early marketing investments should be more than compensated for over the longer term. Choosing media for initial customer acquisition Marketers searching for new customers routinely ask media questions, such as “Which media should be used for recruiting new customers?” or “How can the various media options be prioritized in terms of spending amounts?” Traditional analysis to answer these questions needs to be reversed. Rather than conducting a return on investment (ROI) for each medium and allocating budget to the highest scoring media options according to ROI, LTV analysis begins by analyzing customers first and only then prioritizing media options based on which ones deliver the most profitable customers over time.

Company example: Southwest Airlines Southwest Airlines occupies a solid position in the minds of US air travelers as a reliable, convenient, fun, low-fare, nofrills airline. Translated, this position means high value. It has maintained this position consistently over 30 years while making money every year; no other US airline comes close to this record. The Dallas based carrier has managed to be the low-cost provider and a preferred employer while enjoying high levels of customer satisfaction and strong customer loyalty. Southwest Airlines has the best customer service record in the airline industry and has won the industry’s “Triple Crown” for best baggage handling, on-time performance, and best customer complaint statistics many years in a row. This is a feat accomplished by no other airline. The consistent positioning using the services marketing mix reinforces the unique image in the customer’s mind, giving Southwest Airlines its high-value position, which has resulted in a huge and committed following of satisfied customers and consistently increasing profits (Zeithaml and Bitner, 2003).

Setting selection criteria for customer marketing LTV analysis can be used to evaluate contract strategies for ongoing customer development as well as to recruit new customers. By projecting an estimated LTV for new customers, an organization can segment its database into different LTV strata. Marketing approaches that are more customized to these different segments based on projected LTV can be developed and implemented. Conversely, segmenting the customer database based on LTV may indicate segments that may be unprofitable over the long term and therefore the organization should consider demarketing strategies. Dunn and Bradstreet estimate that the first time an organization calculates a LTV analysis of its customer base, between 5 and 15 percent of the database will be labeled as unprofitable (Sargeant, 2001). Organizations must then determine if these customers can become profitable over a short period of time, or consider alternative 217




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distribution channels that are less costly to the organization, or decide to terminate the relationship with that specific customer segment.

The following guidelines should be useful to service provider managers who plan to develop a business philosophy based on market orientation: . The service economy is large, growing, and represents an ample opportunity to practice market orientation principles to determine their extended applicability to service providers. . The market orientation literature offers many insights into competing in today’s competitive marketplace for service providers. Investments in customer profitability, retention, and loyalty programs should pay significant dividends for service marketers. . Developing a market orientation has the potential to provide several positive financial and strategic performance consequences for service firms who are successful at integrating this philosophy across their organizations. . Managers working on integrating a market orientation into their organizations should not expect gains in specific financial and strategic business performance over the short term. To integrate these principles properly across organizational boundaries requires a longer-term time horizon. . Service organizations will need to develop accurate measurement instruments to quantify the levels of the financial and strategic business performance criteria discussed. . Managers will need to design customer metric feedback mechanisms that are cross-functional to help determine when marketing strategies need to be modified. . Developing and maintaining a market orientation cannot be the responsibility of the internal marketing department alone, but must be fully integrated across all functions of service providers.

Investing in the reactivation of lapsed customers The argument that a former customer is more likely to return to the organization than the person who has never purchased is supported by marketing logic. Most organizations would support the strategy of marketing to former customers. LTV analysis can help determine which specific segments of former customers are worth the targeting effort. Customer metrics such as amount of last purchase, total value of former purchases, or length of time since defection can be used along with LTV projections to help determine which segments of defectors should be targeted. The inherent risk is that companies will reactivate unprofitable customers that that they are better off having lost. Using LTV analysis can help prioritize the appropriate segments that would be profitable over the long term. Company example: Lexus. Lexus, the luxury division of Toyota, has consistently established itself as one of the premier automotive brands in the USA. In its own words, Lexus’ goal is to become the royalty of loyalty. Although Lexus is the first brand ever to win all three of the industry’s customer satisfaction awards in the same year, the division is not content with mere satisfaction. According to Lexus, the only meaningful measure of satisfaction in this industry is repurchasing loyalty. On average, auto dealers retain only 3040 percent of the post-warranty service dollars spent on the cars they sell. To address this opportunity Lexus has developed a computer system that estimates how much service work the cars a dealer has sold should generate. The system compares dealers’ service billings to its estimates and also checks which customers have not returned for their first two checkups, which are free. The system also calculates the additional profit a dealership would have earned if its loyalty performance had been in the top quartile. Results indicate that industry norms for same brand car repurchase rates are in the 30-40 percent range. In contrast, Lexus repurchase rates are double the industry norm at approximately 68 percent. Moreover, financial indicators show that Lexus accounts for just 2 percent of Toyota’s unit sales but delivers one-third of the corporation’s operating profits (Reichheld, 1996).

Limitations and future research Service providers will greatly benefit from such a framework that embraces the marketing orientation construct, strategic flexibility, and service performance. Research emphasizing market orientation concepts as they relate to the service sector is sparse. Clearly, more conceptual and empirical research needs to be conducted to expand the market orientation philosophy from product marketer to service provider. As with most articles based on conceptual arguments, this paper is subject to certain limitations. The framework discussed here has not been tested empirically. Empirical evidence based on a cross-section of service providers would extend this initial discussion further. Subjecting the framework to analytic rigor would allow scholars, as well as practitioners, to understand more fully the inter-relatedness of the service implications discussed.

Conclusions and guidelines for managers The impact of developing a market orientation for service providers should be higher levels of CRM, retention, satisfaction, loyalty, and LTV. Moreover, these implications should be even more visible and meaningful for service providers as opposed to goods marketers due to the nature of services themselves. The saliency of market orientation in service firms is underscored by the pivotal role that it plays. Caruana et al. (1999) found empirical support that the reliability of a service firm is positively related to its judgmental and objective performance. The context of this framework is further complicated by the fact that many, if not most, of the service implications are interrelated. They all would not necessarily change in unison. However, it follows that increases in customer retention, for example, should be related to increases in satisfaction and loyalty (Figure 2). Increases in one or more of these variables should help service providers improve their judgmental and objective performance.

References Agarwal, S., Erramilli, M.K. and Chekitan, S.D. (2003), “Market orientation and performance in service firms: role of innovation”, Journal of Services Marketing, Vol. 17 No. 1, pp. 68-82. Aspinall, E., Nancarrow, C. and Stone, M. (2001), “The meaning and measurement of customer retention”, Journal of Targeting, Measurement and Analysis for Marketing, Vol. 10 No. 1, pp. 79-87. 218




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Executive summary and implications for managers and executives This summary has been provided to allow managers and executives a rapid appreciation of the content of this article. Those with a particular interest in the topic covered may then read the article in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefits of the material present. In an era of globalization, which has brought about unprecedented changes in the service economy, organizations of all sizes and structures are searching for strategies to improve performance without sacrificing quality. Javalgi et al., argue that a market orientation that provides for market focused strategic flexibility to sustain competitive advantage is a strategic solution.

Market orientation A market orientation involves customer orientation, competitor orientation, inter-functional co-ordination and two decision criteria – long-term focus and profitability. A market orientation is valuable because it focuses the organization on continuously collecting information about target customers’ needs and competitors’ capabilities, and using this information to create continuously superior customer value. A great deal of customer communication, interaction and knowledge transfer relies on a consistent and committed use of the market orientation philosophy. Since service delivery requires human interaction with external and internal customers, a market orientation should be particularly important for a service firm. Market-focused strategic flexibility Market-focused strategic flexibility is “the firm’s intent and capabilities to generate firm-specific real options for the configuration and reconfiguration of appreciably superior customer value propositions”. Without a market focus, flexibility will not help the firm to create superior value and sustainable competitive advantage. A firm that aims to create superior value for its customers, and therefore a sustainable competitive advantage, should have an advanced conceptualization of strategic flexibility that incorporates a market-focused perspective and directly considers the firm’s 220




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options with regard to services and markets. Market-focused strategic flexibility could provide the organization with the appropriate structure necessary for long-term survival and prosperity. However, turbulence in the environment – such as political, economic, legal, technological and demographic changes that can affect an organization – moderates the impact of market orientation on market-focused strategic flexibility.

Performance implications for service managers Improving the organization’s customer relationship management, customer retention, customer satisfaction, customer loyalty and customer lifetime value can enhance a service firm’s judgmental and objective performance. Specific customer-focused strategies for each performance type depend on the service organization’s strategic flexibility, adaptability to environmental turbulence, and achievement of a competitive advantage. Javalgi and Young conclude that investments in customer profitability, retention, and loyalty programs should pay significant dividends for service marketers. Developing a market orientation has the potential to provide several positive financial and strategic performance consequences for service firms that successfully integrate this philosophy across their organizations. However, properly integrating marketorientation principles across organizational boundaries can take a long time. Service organizations need to develop accurate ways of measuring any improvements. Developing and maintaining a market orientation cannot be the responsibility of the internal marketing department alone, but must be fully integrated across all functions of service providers.

Sustainable competitive advantage Companies that manage to achieve a sustainable competitive advantage are able consistently to deliver superior value to their customers. Two broad sources of competitive advantage are a company’s unique resources or assets, and a firm’s distinctive skills or capabilities. A competitive advantage becomes sustainable if it resists erosion by the behavior of competitors over time. Service performance Sustainable competitive advantage is closely linked, then, with service performance. This consists of two broad measures: judgmental performance (such as customer service loyalty) and objective performance (such as return on assets). While judgmental measures of performance are important to profitability, objective measures of performance provide the link to profitability in service organizations. Performance, ultimately, is measured by profitability.

(A pre´cis of the article“Market orientation, strategic flexibility, and performance: implications for services providers”. Supplied by Marketing Consultants for Emerald.)

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