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Knowledge of Inter-customer Relations as a Source of Value Creation and Commitment in Financial Service Firm’s Intermediation K E N T E R I K S S O N , Ø Y S T E I N D . F J E L D S T A D and AMIR SASSON1
This paper develops a knowledge perspective on value creation in organisations that employ mediating technology to facilitate inter-customer relations. Mediators, individually and collectively, build networks of customers between whom linking can take place, and they provide services that facilitate inter-customer exchanges. Earlier research has shown the importance of size and standardisation in mediation. A different stream of research has shown that contextual knowledge is important for problem solving and innovation in organisations. Combining theories of mediating technology and situated problem solving, the paper posits that inter-customer relations constitute the fundamental context for value creation of firms using the mediating technology. LISREL is used to test relationship-level, cross-sectional hypotheses that link knowledge of inter-customer relationships, added value, and customer commitment to bank services for small firms. This work extends Thompson’s work on mediating technology with implications for organisation action by demonstrating that mediators’ knowledge of inter-customer relationships is an important resource in intermediation. Three contributions are made to strategic management and organisation theory. First, the paper provides a deeper understanding of the relationship between knowledge and committed customers. Second, fundamental resources are developed for firms using mediating technology. Finally, the use of the situated knowledge concept is extended to inter-customer relations, thus explaining performance beyond the contexts to which the concept has previously been applied. The findings have implications for segmentation practices, organisation domain decisions and the corresponding organisational
Kent Eriksson, Centre for Banking and Finance, KTH, The Royal Institute of Technology, Stockholm, Sweden. Email:
[email protected]; Øystein D. Fjeldstad, Department of Strategy, The Norwegian School of Management, Sandvika, Norway. Email:
[email protected]; Amir Sasson, Department of Strategy, The Norwegian School of Management, Sandvika, Norway and University College, Dublin, Ireland. Email:
[email protected] Correspondence address: Øystein D. Fjeldstad, Department of Strategy, The Norwegian School of Management, BI, Elias Smiths vei 15, P.O.B 580, 1302 Sandvika, Norway. Email:
[email protected] The Service Industries Journal, Vol.27, No.5, July 2007, pp.563–582 ISSN 0264-2069 print/1743-9507 online DOI: 10.1080/02642060701411724 # 2007 Taylor & Francis
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structures, and practices that can provide effective service to inter-customer relations rather than to atomistic independent customers.
INTRODUCTION
In this paper we explore a question that we believe is of fundamental importance to mediation: how does knowledge of inter-customer relationships impact on mediator value creation and customer commitment to the mediator? In order to frame and motivate this question we present an initial case for illustration purposes. The 1982 annual report of a major Swedish bank contained a photograph of a bank branch manager demonstrating new services to a family in their carpet store. By displaying this picture, the bank wanted to promote their services for the small and medium sized business customer segment. Mattbolaget, the depicted carpet retailer, became a customer of the bank at the time of its founding in 1971. In the ensuing years, Mattbolaget paid off its debt and grew to become the largest local carpet retailer in its community of approximately 200,000 inhabitants. Mattbolaget accumulated capital by increasing its stock of expensive oriental rugs. It had outstanding, interest free, supplier debt for 3– 6 months each year. In the period from 1982 to 1998, the company’s average outstanding supplier debt was 16 per cent of turnover, while in the same period it had no bank debt. Mattbolaget thought of the outstanding supplier debt as a discount given by their suppliers; however, they could alternatively have borrowed capital from the bank and negotiated a substantial reduction in price. During the 1980s, Mattbolaget developed its relationship with one of its main suppliers, Regor AB. Together they created designs and fabrics for Mattbolaget’s local market in a successful, cooperative business relationship. They jointly developed their model for cooperation into a formalised purchasing organisation, encompassing approximately 30 stores. A credit firm, with which Regor had business relations, offered a tailor-made credit package for all of the carpet retailers in the purchasing organisation. This was of great benefit to Mattbolaget because the credit firm had previously resolved credit problems by making individual instalment plans for customers. Customer credit management consumed precious management time, and, furthermore, it was perceived as emotionally difficult to occasionally have to repossess goods. The owners of Mattbolaget never brought up the issues of supplier or customer credit with their bank because they did not perceive the bank as relevant for solving these kinds of business problems. The areas in which the bank failed to provide solutions for a customer’s important financial problems are illustrated in Figure 1. First, the bank failed to assist a valued customer in solving important trade related financial problems due to a lack of contextual knowledge. Second, the customer was not made aware of the bank’s ability to improve the customer’s relationships with its own suppliers and customers. The bank failed to provide the customer with added value, despite their long-term relationship, and the fact that the bank considered the relationship with this particular customer to be very good.
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FIGURE 1 SUPPLIER AND CONSUMER CREDIT HANDLING AT THE CARPET RETAILER MATTBOLAGET AB
From a theoretical point of view, the bank – carpet trader case illustrates several important issues concerning banks, as a type of firm using the mediating technology [Thompson, 1967: 38] to create value, that have only partially been examined in the organisational and financial literature. First, it exemplifies how creating value with the mediating technology, i.e. linking customers who are or wish to be interdependent, implies that the relationships serviced constitute the relevant context for adding value [Stabell and Fjeldstad, 1998; Thompson, 1967]. Second, the case shows how a lack of situated knowledge [Tyre and von Hippel, 1997] about intercustomer relationships can cause a mediator to fail in providing value adding financial services. Finally, since Mattbolaget did not consider the bank able to offer a consumer credit service, the case also illustrates that complex bank services are experience goods for which the customers’ perception of value depends on experience of value [Johnson et al., 1996; Nelson, 1970; Shapiro and Varian, 1999]. In this paper we explore the question: how does knowledge of inter-customer relationships impact on mediator value creation and customer commitment to the mediator? We contribute to strategic management and organisation theory by developing the understanding of the relationship between knowledge and committed customers in mediation, and by extending the use of the situated knowledge concept to explain performance beyond the contexts to which it has earlier been applied. The remainder of this paper is organised as follows. First, we review the theoretical building blocks of our argument. Second, we develop hypotheses that link knowledge of inter-customer relations to value creation and customer commitment. Third, we employ LISREL (Linear Structural Relations) to examine the hypotheses in a sample of 253 small firms surveyed about their bank relationships. Fourth, we present and discuss results from the statistical analysis. Finally, we discuss our findings and the resulting implications, both for future research on firms using the mediating technology, and for management practice.
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THEORY
Value creation [Porter, 1985] and customer commitment [Lawler and Yoon, 1996] are important aspects of organisational performance. Understanding sources of organisation performance and their implications for organisational action is a wellestablished line of research in organisation theory and strategic management [Rumelt et al., 1994; Thompson, 1967]. The value added that customers obtain, and the efficiency with which value creation can be performed, are important determinants of firm performance [Brandenburger and Stuart, 1996; Porter, 1985]. In his seminal book, Organisations in Action, Thompson [1967] develops propositions relating properties of the underlying technology of organisations, i.e. long-linked, intensive and mediating, to organisation action, structure and relationship with the task environment. Thompson [1967] viewed rational organisational action, i.e. actions aimed at increasing organisational performance, as being determined by (performance disturbing) contingencies that arise, both from properties of the technology and from the relationship between the organisation employing the technology and its environment. The mediating technology is used by ‘organisations that have, as a primary function, the linking of clients or customers who are or wish to be interdependent’ [Thompson, 1967: 16], e.g. banks, telephone companies, postal service organisations, and employment agencies. Such highly specialised transaction organisations in trade and finance, and other coordination of economic and social exchange, e.g. communication and transportation, involve an increasing portion of the labour force [North, 1991]. This increase occurs because efficient economic exchange requires organisations that create and enact laws, norms and standards, as well as organisations that provide transaction services, i.e. services that directly reduce their customers’ costs of transacting. Mediators, short for the firms that use the mediating technology to create value [Stabell and Fjeldstad, 1998; Thompson, 1967], provide virtual space for flows of many different types in the global economy [Castells, 1996]. They enable social and business related exchange across time, space and social boundaries in society, where they support the vast network of interconnected parts that make possible the multitude of goods [North, 1991]. Mediators improve their customers’ inter-actor relations by removing constraints to exchange, i.e. lower the transactions costs [Williamson, 1975]. Although such objectives are fundamental to banking, the above case illustrates how a lack of knowledge of actual customer network relationships can hinder bank value creation. Thompson [1967] states that firms employing the mediating technology must operate extensively and in standardised ways in order to accomplish their objective of linking customers. Stated in modern economic terms, there are increasing returns to scale [Arthur et al., 1987] in institutions and the corresponding transaction organisations, e.g. banks [North, 1991]. Customers are a main source of performance disturbing contingency in the mediating technology [Thompson, 1967] because successful service provisioning, e.g. enabling a sales transaction, requires an ability to connect the relevant actors. There are increasing returns to scale in the banking system because an increase in the number of affiliated customers increases the number of links that can be serviced
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by banks. This occurs in the same way that large voluntary organisations generate more potential acquaintances for their members [McPherson and Smith-Lovin, 1982]. In many cases, customers value the opportunity to exchange with particular other customers. When the identity of other customers is important to the utility that customers obtain from being affiliated with a particular mediator, then the network effect is local [Rohlfs, 1974], and the composition of the mediator’s customer set is a determinant of the network effect [Stabell and Fjeldstad, 1998]. Network effects provide mediators with incentives to invest in building networks of customers committed to affiliation with a particular provider [Katz and Shapiro, 1985, 1992, 1994], and hence to create a strong interdependence between mediators and their environments [Barnett and Carroll, 1987] that determines both value creation and inter-mediator competition [Stabell and Fjeldstad, 1998; Thompson, 1967]. In order to realise the gains from network effects, organisations using the mediating technology must be compatible across both internal segments and organisation boundaries [Thompson, 1967]. Therefore, transaction services are typically standardised. In order to facilitate inter-mediator exchanges, most transaction organisations have agreements to accommodate exchanges between customers that are affiliated with separate transaction organisations. Banks Creating Value with the Mediating Technology The role of banks in linking customers who are or wish to be independent is twofold. First, in the role focused on in the financial literature, banks intermediate funds between investors and entrepreneurs. Contemporary banking theory conceptualises the existence of banks as a response to the inability of market-mediated mechanisms to efficiently resolve informational problems. Taking a largely dyadic view of bank – customer financial relations, and predominately utilising agency theory, banking theory conceptualises banks as institutions that mediate solely between atomistic and independent borrowers and depositors [Bhattacharya and Thakor, 1993; Diamond, 1984; Leland and Pyle, 1977]. Second, following Nobel Laureate Douglass North’s reasoning, banks also have an institutional role of enabling trade and exchange between highly specialised actors in the global economy. Such services are of particular importance to the viability of smaller firms because, in the absence of well functioning institutions and transaction services, firms will choose vertical integration [Williamson, 1975]. It follows that mediators are of particular importance in facilitating the exchange relationships of small and medium sized enterprises, which, in the absence of the facilitating institutions, would be far less feasible. In their capacity as mediators of inter-firm exchange between small and medium sized enterprises, banks can act to promote inter-firm exchange and growth in two ways. First, the banks can take care of financial transactions such that the firms can devote time and energy to their own value creation. Second, the banks can strengthen the connectedness of small and medium sized enterprises to their present and latent business networks. In utilising the links that banks have to networked economic actors, banks can improve the effectiveness of inter-customer relations by providing more and better payment, financing and risk management solutions. Facilitation of inter-customer
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exchange requires that banks (individually and collectively) recruit the customers between whom the exchange is to be facilitated. In the process of building their networks of affiliated customers, banks have the opportunity to facilitate existing and developing business networks. Accordingly, we conceptualise the value created by banks, for their customers, as being related both to building effective affiliation networks of committed customers, and to using bank competencies to support efficient and effective inter-customer exchange. The latter involves using bank knowledge about the solution to financially related barriers to inter-customer exchange, thereby creating value for customers.
HYPOTHESES
Adding Knowledge-based Value to Inter-customer Relationships Both customer base scale and customer base composition determine what and how many links can be facilitated, but the quality of bank services determines how effectively the links can be serviced. Private knowledge, that can provide opportunities for innovation and cost savings, is a potential source of competitive advantage in banking [Uzzi and Lancaster, 2003]. In general, knowledge resources have been found to enable superior products and processes [Benner and Tushman, 2003; Grant, 1996; Itami, 1987; Kogut and Zander, 1992; Miles et al., 1997], and efficient creation and exchange of knowledge has been shown to enable superior firm performance [Nonaka and Takeuchi, 1995; Schulz, 2001]. While technical [McEvily and Chakravarthy, 2002] and procedural [Eisenhardt and Martin, 2000] knowledge are clearly important sources of competitive advantage that enable the frequently complex technical solutions and processes of mediators, we propose that knowledge about the inter-customer relationships serviced is fundamental to effective mediation. Combining two lines of reasoning, we argue that specific inter-customer relationships constitute the relevant context for situated knowledge [Tyre and von Hippel, 1997] in mediation. First, Thompson’s [1967: 16] definition of the mediating technology as being ‘[employed by] . . . organisations [that have] as a primary function, the linking of customers who are or wish to be interdependent’ clarifies that actual and latent [Haythornthwaite, 2002] inter-customer links form the context of mediators. Second, whereas the idealised economic model is well established and assumes that actors are atomistic and independent, we argue that a number of the inter-customer relationships serviced are persistent. In the idealised economic model, exchange takes place through arm’s-length relationships among arbitrary and ever changing actors. Correspondingly, the network economics literature, and the literature on the economics of banking, adhere predominantly to the idealised economic model, and implicitly assume either that interactions among the parties to the exchange, i.e. bank customers, occur arbitrarily, or that the structure of interactions is simply negligible [cf. Diamond, 1984; Haubrich, 1989; Katz and Shapiro, 1985]. On the contrary, there is a growing body of research showing that inter-actor relationships in the economy are structured, persistent and embedded in networks [DiMaggio and Louch,
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1998; Granovetter, 1985; Uzzi, 1997]. Therefore, exchange frequently takes place in networks that have been shown to help firms innovate [Powell et al., 1996], gain new knowledge [Ahuja, 2000], detect and exploit opportunities [Burt, 1992] and facilitate change [Greve, 1995]. Hence, bank customers maintain exchange relationships composed of both arm’s length and embedded ties. This implies that some of the exchanges to be serviced by banks are systematic rather than arbitrary, and that the local context in which banks and other mediators facilitate exchange consists of both arm’s length and semi-stable networks of embedded relationships rather than merely arbitrary arm’s length relationships. The bank is a special form of actor within these networks. It facilitates flows of goods and services between the actors in a system of fragmented distributed knowledge [Hayek, 1945]. Uncertainty reduction is central to bank value creation and in such a system of interconnected parts, information about related activities is a source of uncertainty reduction [Arrow, 1975]. Hence, from an economics perspective, knowledge of the vertically related activities linked by the inter-firm relations between bank customers is a potential source of value creation in banking. From cognitive and organisational perspectives, local knowledge has been shown to impact on the effectiveness of problem solving, learning and knowledge transfer [Brown and Duguid, 1991; Greeno, 1998; Kogut and Zander, 1992; Tyre and von Hippel, 1997; von Hippel, 1998]. Research shows that situated knowledge draws attention to the particulars of what problem solvers actually do as they investigate problems and correct errors and how they use the resources available to them in the process [Tyre and von Hippel, 1997: 71]. Firms invest both in enabling [von Krogh et al., 2000] use of specific knowledge about the customer context, e.g. managing longterm client relationships [Eccles and Crane, 1987] and in developing flexible systems that allow user configuration and product development [von Hippel, 1998]. The bank is a third party to the business transactions in which its customers engage. It provides services that enable relationship coordination. Inter-firm relationship coordination is time and resource consuming, and may involve adaptations in logistics, product and production processes [Tyre and von Hippel, 1997]. Such adaptations have significant financially related implications for the parties involved, e.g. new payment models, new financing models and new risk management models. Relationship coordination frequently requires firms to coordinate not only within the relationship, but also across other relationships in a network [Bensaou and Anderson, 1999; Dyer and Nobeoka, 2000]. Banks that have specific knowledge of the links that they service should be in a better position to assess the customer needs and provide solutions by linking their customers in new ways. We therefore posit that knowledge of the relationships between the specific actors to be linked is an important resource for firms employing the mediating technology that can be used to add value for customers. Increased knowledge of the customers’ networks should improve the bank’s ability to offer relevant knowledge in solving customer problems. H 1: The greater the bank’s knowledge of inter-customer relationships, the greater the knowledge-based added value in the bank –customer relationship.
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Customer Commitment Commitment is a fundamental concept in organisational theory, economics and marketing [Blau, 1964; Cook and Emerson, 1978; Macaulay, 1963]. Increased commitment is usually associated with: increased information sharing and knowledge development [Anderson and Weitz, 1992; Blankenburg Holm et al., 1999; Williamson, 1975], the development of trust and the ability to communicate effectively [Macaulay, 1963], positive long-term performance outcomes [Kalwani and Narayandas, 1995], and a greater propensity for relationship continuance [Levinthal and Fichman, 1988]. From the perspective of the mediating technology, understanding why customers commit to a mediator is of particular importance because the set of committed customers2 determines both what and how links can be facilitated. Network economic theory, economic theory of banking, and organisation theory provide different arguments for why customers should commit to an intermediary or an organisation. The economics literature assumes that commitment to a network is the result of a rationalexpectation, self-fulfilling process through which customers form expectations about network size. The expectations are assumed to be formed by the network provider’s reputation, its signalling of credible commitment to a network size [Katz and Shapiro, 1985] and early events through path dependencies [Arthur, 1989; Arthur et al., 1987]. Banking economists, who usually equate the length of the relationships with commitment, argue that customers commit to a bank in order to partially resolve problems of asymmetric information [Jensen and Meckling, 1976], which in turn confers benefits to customers. Amongst the motivations to commit are: lower likelihood of being liquidity constrained [Cole, 1998; Petersen and Rajan, 1994; Weinstein and Yafeh, 1998], lower costs in overcoming periods of financial distress [Hoshi et al., 1990], higher safeguarding of proprietary information, [Campbell, 1979] and, in some circumstances, lower loan rates to corporate customers [Berger and Udell, 1995]. Finally, organisation theorists argue that commitment is a consequence of specialisation resulting in resource dependency between organisations [Pfeffer and Salancik, 1978], especially knowledge resources. Drawing upon the organisation theory argument, we suggest that the motivation for a customer to commit hinges on whether the bank makes knowledge that is perceived as value creating available for the customer. To the extent that it is useful in solving customer problems, the knowledge-based value addition should result in increased customer commitment. Small and medium sized firms typically lack both financial competencies and surplus resources. The lack of financial competencies makes small and medium sized enterprises dependent on external input to financial problem solving, and banks have been shown to transfer financial know-how to longterm customers [Uzzi and Gillespie, 2002]. We argue that effective knowledge-based problem solving arrangements reflect an investment by the bank in the customer relationship, i.e. the bank invests its effort and its knowledge, and that such investment increases the customer’s commitment to the bank. Thus, we argue that knowledge that is value creating for customers is a source of customer commitment in banking. H 2: The greater the knowledge-based added value for the customer, the greater is the customer’s commitment to the bank.
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Customer Commitment in Response to the Bank Offering Value Added Service Products or services for which the quality is learned after use are referred to as experience goods [Nelson, 1970]. Several researchers have characterised bank services [see Johnson et al., 1996; Weigelt and Camerer, 1988] and knowledge [Hansen and Haas, 2001] as experience goods. Therefore we argue that adding value by enabling problem solving for bank customers is a complex experience good, and that simply offering value added services, e.g. having an advisory service available to customers, is insufficient to induce commitment. The frequently promoted strategy for experience good suppliers is to provide the potential customers with a free ability to gain experience, for example by demonstration [Shapiro and Varian, 1999]. However, inducing experience is non-trivial because, in information rich contexts, the customer’s attention is a scarce resource for which suppliers compete [Hansen and Haas, 2001]. Furthermore, ensuring an appropriate experience is hampered by the fact that bank services are frequently contingent on future economic development that cannot be forecast with great precision [Eriksson and Sharma, 2003]. As a result, simple demonstration of bank services is often difficult to induce, hypothetical and laborious. Instead, banks wanting to increase commitment by providing knowledge-based value added service must develop strategies that induce customers to actually experience such service by offering knowledge that is useful in solving particular problems. For example, the bank can induce such customer experience by having its representatives take part in solving business problems for their customers, e.g. by visiting customers to set up routines for handling wage payment, currency exchange or pension investment. In the introductory carpet case, Mattbolaget did not approach the bank concerning its customer credit problem because it did not realise that the bank could solve this problem. However, if the bank had learned about the credit problem that Mattbolaget faced in dealing with its customers, and the bank had provided Mattbolaget with a customer credit solution, then Mattbolaget would have experienced that the bank could help it solve problems with its customers. In general, banks’ business customers have a number of unique customer and supplier relationships for which they could gain value through the use of different types of bank services. The introductory carpet retailer case illustrates how experience good properties hinder the bank’s ability to make its knowledge available, and thus to add value to the customer beyond merely providing standard transaction services. Customers who have experienced knowledge-based value addition should be better positioned to assess the value of bank added value services, e.g. advisory or information services. Therefore, they should be more likely to want to commit in response to the bank offering such value added services than customers who have not experienced knowledge-based value addition. In order to make a special investigation of the experience good properties of bank services, we consider the customers’ stated commitment response to the bank offering value added services. H 3: The greater the knowledge-based value added that customers have experienced, the greater is their desired commitment response to the bank offering value added services.
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METHOD AND DATA
Data on firm –bank relationships were gathered from small enterprises operating in the Stockholm area in Sweden. A questionnaire was sent to all firms in this area employing 10 –50 employees. The total number of dispatched questionnaires was 569, and the number of replies was 265. Twelve respondents failed to complete the questionnaire, leaving 253 usable responses. The ratio of mailed questionnaires to usable responses was 44 per cent. Bias, due to non-response of certain groups, was checked for by comparing non-respondents to respondents using key statistics, such as industry, size and age. No such bias could be detected. The sampled firms’ relationships with their banks are characterised by exclusivity and long duration. Most of the respondents have been customers with one bank for a long time. The portion of respondents using one bank is 95 per cent, and the portion of respondents that have been customers of the same bank for longer than ten years is 50 per cent. The hazard rate for professional service firm –client relationships reaches its peak after two years [Levinthal and Fichman, 1988], and only 9 per cent of the respondents in the present sample have been with their bank for a period of less than three years. We utilised LISREL [Jo¨reskog and So¨rbom, 1993] to build a structural equation model to test our hypotheses. LISREL makes it possible for several variables to be indicators of a higher order variable that is assumed to represent the underlying, or latent, commonalities of the indicators. A latent variable often represents a variable at the construct level, whereas the indicators are observed variables. The validity of the structural model is measured by both the validity of the entire model (nomological validity) and the validity of the separate relations within the model. The validity of separate relations may be judged by the degree of separation between constructs (discriminant validity) and the degree of homogeneity of these constructs (convergent validity). Following Jo¨reskog and So¨rbom [1993: 15– 20, 111 –31], the validity of the entire model is measured both by x2 and by probability measures (e.g. RMSEA, GFI and CFI) which are indicators of the match between model and data and of the significance of the model. Provided that the model’s key statistical measures are acceptable, each relation within the model can be analysed in terms of t-values and R2-values. In reviews of structural equation modelling, it is suggested that LISREL is better suited than PLS for theory development and testing in the form of structural relations [Baumgartner and Homburg, 1996; Shah and Goldstein, 2006; Shook et al., 2004]. LISREL has been found to be robust to non-normality [Mattsson, 1998]. Still, we examined normality of our variables by the computation of normal scores of ordinal variables, and then analysed skewness and kurtosis. There were no significant indications of the distributions not being normal. Construct Validity For a construct to be valid, it must be a part of a valid model, and its indicators must be valid constituents of the construct (i.e. the latent variable). Factor loadings and the coefficients for causal relations are other measures of construct validity. The validity
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KNOWLEDGE OF INTER-CUSTOMER RELATIONS FIGURE 2 THE RESULTING STRUCTURAL MODEL
of the constructs used in a structural model may be further investigated by making a measurement model with no causal relations. The validity of the constructs used in our structural model was tested in a measurement model with no causal relations between latent variables. The structural model is depicted in Figure 2 below. Means, standard deviations and correlations are reported in Table 1, and the key statistics for indicators are displayed in Table 2. The wording of the indicators listed in Table 2 mirrors the questionnaire used in the survey. Customer Commitment We operationalised the customer commitment construct with a two-item construct. The items capture the degree to which a customer’s demand for financial services is increasing both in terms of requesting new services and in terms of the ability to TABLE 1 MEANS, STANDARD DEVIATIONS, AND CORRELATIONS
1 2 3 4 5 6 7 8 9
Variable
Mean
S.D.
1
2
3
4
REQUEST CCKNOWLEDGE CSKNOWLEDGE SEE OPPORTUNITY PARTNERING SOLVING TRANSFERRING UNDERSTAND USE MORE
4.012 3.709 3.664 3.976 3.895 4.680 3.887 3.903 3.664
1.695 1.674 1.573 1.689 1.671 1.706 1.537 1.715 1.502
0.100 0.145 0.288 0.101 0.238 0.040 0.044 0.153
0.770 0.334 0.627 0.541 0.507 0.212 0.364
0.341 0.542 0.433 0.447 0.185 0.304
0.375 0.439 0.328 0.278 0.312
5
6
7
8
0.630 0.557 0.546 0.234 0.238 0.270 0.349 0.359 0.417 0.516
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Construct/indicator Customer commitment We are aware of increased business opportunities made possible as a result of services provided by our bank. Our relationship with our bank is characterised by an open dialogue in which we request services based on our specific needs. Customer’s commitment response We respond to our bank offering value added services by requesting further information about bank services. We respond to our bank offering value added services by specifically requesting additional bank services. Knowledge-based added value Our bank actively teaches our firm about relevant bank service offerings. Our bank assists in solving our business problems by adapting bank services to accommodate our business needs. Our bank acts as our partner in joint problem solving. Bank knowledge of inter-customer relationships Our bank has knowledge of our suppliers, and understands our business needs with respect to these suppliers. Our bank has knowledge of our customers, and understands our business needs with respect to these customers.
Label
Parameter
Factor loading
t-value
R2-value
SEE OPPORTUNITY
ly4
0.76
4.81
0.58
REQUEST
ly5
0.41
9.67
0.17
UNDERSTAND
ly6
0.97
6.96
0.92
USE MORE
ly7
0.62
TRANSFERRING
ly1
0.82
21.89
0.67
SOLVING
ly2
0.90
25.17
0.81
PARTNERING
ly3
0.85
CSKNOWLEDGE
lx1
0.88
28.46
0.78
CCKNOWLEDGE
lx2
0.99
43.50
0.98
0.37
0.72
Note: Wording of indicators is the same as in questionnaire.
recognise the role of bank services in the customer’s business. The indicators are indicative of the customer investing time and resources in the development of a deeper exchange relation with the bank. Such unilateral acts of resource investment represent commitment [Cook and Emerson, 1978; Lawler and Yoon, 1996]. The customer’s commitment construct thus refers both to the investment in learning about the opportunities provided by the bank, and to the cognitive intention to use the bank more. Key statistics indicate convergent validity for the commitment construct (Request: t ¼ 9.67; R 2 ¼ 0.17; See opportunity: t ¼ 4.81; R 2 ¼ 0.58).
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Customer Commitment Response Customer commitment response refers to the customers’ reported response to the bank offering value added services, in terms of both an expressed desire to learn more about bank services, and a direct request for additional bank services. This construct is distinct from the customer commitment construct, since it captures customer response to the bank offering value added services, e.g. advisory services or extra information. The customers’ responses reflect their perception of the value of such services. Two indicators, one the customer’s understanding of the bank’s ability to add value, and two the customer’s desire to increase business with the bank, capture the construct. The indicators represent how a firm perceives a bank’s value added services in its wider business development context, and the intention to invest in coordination with the bank by doing more business [Blankenburg Holm et al., 1999]. The construct exhibits convergence validity [Understand: t ¼ 6.96; R 2 ¼ 0.92; Use more: R 2 ¼ 0.37]. Knowledge-based Added Value The construct, knowledge-based added value, captures the bank’s ability to enable the use of knowledge in innovative problem solving for the customer. Solving customer problems requires knowledge transfer. It requires either that the bank transfers pertinent financial knowledge to the customer, or that the customer transfers local knowledge to the bank. Knowledge transfer is difficult either because knowledge may be sticky [von Hippel, 1994] and tacit [Nonaka and Takeuchi, 1995], or because the actors involved in the transfer may have insufficient absorptive capacity [Cohen and Levinthal, 1990]. Transferring non-codified knowledge is less difficult when the parties to the transfer understand one another [Hansen, 1999]. The first value creation indicator, transferring, focuses on how the bank adds value to the firm by teaching the firm about relevant bank service offerings. The second value creation indicator, solving, captures greater adaptation to customer needs in bank activities. The third value creation indicator, partnering, captures the level of bank competence in the bank’s role as a partner to the customer in joint problem solving [Uzzi, 1997]. To display such abilities, the bank has to be able to co-create value through matching resources with the customer. Key statistics indicate convergent validity for the knowledge-based add value construct, (Transferring: t ¼ 21.89; R 2 ¼ 0.81; Solving: t ¼ 25.17; R 2 ¼ 0.81; Partnering: R 2 ¼ 0.72). Bank Knowledge of Inter-customer Relationships The construct, bank knowledge of inter-customer relationships, reflects the bank’s knowledge of the customer firm’s inter-firm relations, i.e. its ego-network. The bank’s knowledge of the customer firm’s customers and suppliers is key to linking the resource flows of the bank with those of the customer firm. The indicator represents how well the bank understands the business that its customers have with their respective customers and suppliers. Key statistics indicate convergent validity for the construct (CS-knowledge: t ¼ 28.46; R 2 ¼ 0.78; CC-knowledge: t ¼ 43.50; R 2 ¼ 0.98).
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By including both network size and the duration of the bank – firm relationship, we control for two alternative explanations of customer commitment, namely, expected greater utility from affiliation with a mediator with a larger customer base, and reduced information asymmetry due to long-term bank –customer relationships. Network size was measured, in terms of bank assets, for each bank reported by our respondents as being their main bank. In accordance with the economic banking literature [e.g. Berger and Udell, 1995; Petersen and Rajan, 1994], the duration of the bank –customer relationships was measured in terms of the number of years in which a responding firm had maintained a relationship with its main bank. We also apply the same control variables to the explanation of the knowledge-based added value construct because bank size has been argued to improve information processing efficiency [Diamond, 1984], and duration has been argued to improve transfer of customer knowledge to the bank [Uzzi, 1999].
RESULTS
Figure 2 displays a model where knowledge-based added value is an intermediary between bank knowledge of inter-customer relationships, customer commitment and customer commitment response. The model is valid [x2 ¼ 46.22, with 24 d.f., p ¼ 0.004, RMSEA ¼ 0.06, CFI ¼ 0.99, GFI ¼ 0.99) in this Swedish data set; therefore, we can proceed to interpret the results. We argued in hypothesis 1 that the greater the bank’s knowledge of inter-customer relationships, the greater the knowledge-based added value in the bank–customer relationship. This hypothesis is supported (g1 ¼ 0.79; t ¼ 18.50). Furthermore, the predicted validity of this relationship is very high (R 2 ¼ 0.62). The results also indicate that the greater the knowledge-based added value for a customer, the greater the customer’s commitment to the bank (b1 ¼ 0.79; t ¼ 5.03); hence, confirming hypothesis 2. Hypothesis 3 predicts that the greater the knowledge-based value added that customers have experienced; the greater is their commitment response. This hypothesis is confirmed (b2 ¼ 0.62; t ¼ 6.16). We added network size and the duration of bank relationships as control variables to our model in order to test for effects on the two commitment constructs, and on the knowledge-based value creation construct. Network size had no significant impact on customer’s commitment (b3 ¼ 0.11 and t ¼ 1.65), customer’s commitment response (b4 ¼ 0.12 and t ¼ 1.95) or knowledge-based value added (b5 ¼ 0.06 and t ¼ 1.43). The duration of the bank – customer relationships did not have a significant effect on the customer’s commitment (b6 ¼ 0.01 and t ¼ 0.22) or the customer’s commitment response (b7 ¼ 0.05 and t ¼ 0.75); nor did it provide additional explanatory value when added as an indicator of customer commitment and customer commitment response. The duration did not significantly impact on knowledge-based added value (b8 ¼ – 0.02 and t ¼ – 0.35). The finding that neither of the control variables tested had a significant effect on the constructs, strengthens our argument. A bank’s ability to offer knowledge for customer problem solving is enhanced by the bank’s understanding of inter-customer relations. Such knowledge-based added value can increase bank customers’ commitment to the bank.
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LISREL is especially suitable for studying intermediating variables. Bollen [1989: 38] points out the following: ‘In the typical regression analysis the regression coefficient is an estimate of the direct effect of a variable. If we ignore the indirect effects that a variable may have through other variables, we may be grossly off in the assessment of its overall effect.’ Mediation is identified if: one, the independent construct has a significant effect on the dependent construct in the absence of the mediating variable; two, the independent construct also has a significant effect on the mediating variable when there is no effect from the mediating construct to the dependent construct; and, three, full mediation occurs when the direct relationship of the independent construct on the dependent construct is insignificant, and partial mediation occurs when the direct relationship of the independent construct on the dependent construct is decreased [Baron and Kenny, 1986]. It follows that knowledge-based added value can be considered as a variable that provides full mediation if these three conditions are satisfied. First, there is a significant effect from bank knowledge of inter-customer relationships to customer’s commitment (coefficient ¼ 0.55; t ¼ 2.96) and customer’s commitment response (coefficient ¼ 0.51; t ¼ 3.95) in the absence of knowledge-based added value. Second, if we add direct effects from bank knowledge of inter-customer relationships to customer’s commitment and customer’s commitment response to the model in Figure 2, then the effect from bank knowledge of inter-customer relationships to knowledge-based added value is significant (coefficient ¼ 0.78, t ¼ 18.10). Third, adding an effect from bank knowledge of inter-customer relationships directly to customer’s commitment and customer’s commitment response yields insignificant results (coefficients ¼ – 0.04 and 0.17; t ¼ – 0.38 and 1.17). Apparently, a bank having knowledge of the customer’s relationships leads to customer commitment only through knowledge-based added value. This mediation or indirect effect can be estimated, and it is quite strong since the coefficient is 0.49, with t-value of 6.09 for customer’s commitment response, and 0.63, with t-value 4.76 for customer’s commitment. DISCUSSION AND CONCLUSIONS
This study shows how banks can use knowledge of inter-customer relationships to add value and increase commitment in the bank – customer relationship. We found that increased bank knowledge of inter-customer relationships assists the bank in adding value to its customers. The results of this study in Sweden also provide support for the notion that the greater the added value for a customer, the greater the customer’s commitment to the bank. Customers who have experienced knowledge-based value added in their banking relationships are more inclined to respond with increased commitment to their bank offering value added services. Finally, we find support for the argument that knowledge-based added value mediates the relationships between bank knowledge of inter-customer relationships and customers’ commitment to the bank. In the role of supporting inter-customer trade, banks have a greater potential to offer value-creating knowledge if they understand the customer’s important relationships. Understanding the customer’s relationships with buyers and
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suppliers means that the bank can relate its own financial knowledge resources, not only to the customer alone, but also to the relationships to which the bank actually provides services. Our findings support the theory that situated knowledge is important for value creation and that inter-customer relationships constitute an important context of situated knowledge in banking. Previous studies have found the positive effect of situated knowledge in products and software [von Hippel, 1994], but there are no studies that have examined situated knowledge relative to the inter-customer relations that constitute the fundamental context of the mediating technology. Such knowledge is valuable and not easily imitable or substitutable [Barney, 1991] because it requires investment in learning about specific customer relationships [Das and Nanda, 1999] to which access is limited. Levinthal and Fichman [1988] argue that an important question for organisational theorists is how inter-organisational commitments develop, mature and end. We contribute to the understanding of inter-organisational commitment by finding that, in the context of mediators operating under conditions of uncertainty, relationship-specific investment in relationshipspecific resources, i.e. developing and acquiring knowledge of inter-customer relationships, is reciprocated by increased commitment. Our findings are consistent with a theoretical perspective of banks as mediators, i.e. facilitators of customer networks. Banks mediate multiple types of financial transactions related to payment, liquidity, risk and information between businesses and other organisations, consumers and governments. Financial transactions arise in support of real economy transactions including trade exchange of goods and services, and investments made by firms, governments and individuals. Consumption and investment require mediation of payment transactions and frequently create the need for liquidity. Furthermore, the motivation for insurance against risks is closely linked to changes in ownership. A large number of these real economy transactions take place in embedded networks [Granovetter, 1985]. The rationale for bank services is ultimately found in their contribution to the exchanges taking place in the networks that they service. Banks that have ample knowledge of the relationships between several interdependent actors should be better positioned to offer financial knowledge that can be used in solving problems related to interactor trade and give the customer a means to profitably pursue business opportunities. Bank knowledge of inter-customer relationships is a potential source of superior value creation and hence competitive advantage [Barney, 1991] of banks. First, it is a source of knowledge-based added value in the bank – customer relations that enables banks to build more effective networks of committed customers. Second, there are potential network effects in this process. To the extent that customers’ relations form semi-closed networks, bank investments in knowledge creation about members in the network should, all else being equal, benefit other network members. The above findings are preliminary in nature and call for further research. Although based on a relatively small sample that is both banking industry and geographically specific, we argue that the theory developed, and the constructs applied, should be, to some extent, generalisable to other firms using the mediating
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technology [Thompson, 1967]. We have tested the impact of a mediator having knowledge of a portion of the customer’s network on value creation and commitment. Our findings suggest potential network externalities by which actual bank membership could matter if bank learning is a function of customer affiliation. Future research should develop theories of banking that could explain how network knowledge is acquired, whether there are actual network externality effects in this process, how such network externalities may arise, and how embeddedness within the customers’ ego-networks impact on bank knowledge acquisition and value creation. Furthermore, combinations and mutual adaptations of multiple financial services may be required in solving customer financial flow-related problems. Potential demand side economies of scope associated with providing multiple financial services through the same branch infrastructure should therefore be investigated because banks may seek complementarity effects with respect to the benefits that customers could receive from bundled services. The dyadic focus of the economics of banking literature should be supplemented with a true network perspective. Incorporating global and local structural embeddedness may provide insights into the unresolved issues in the banking literature with respect to scale and scope decisions and ultimately bank performance. Future research should investigate whether network firms make their scale and scope decisions partially based on the impact of the structural composition of their customer sets, in order to increase knowledge of their customers’ relationships. Network firms, after all, assist their customers in their inter-firm relationships. With the above limitations in mind, the findings also have significant implications for managerial practice. The dominant segmentation practices found in banking group customer firms according to size, geography and industry [see Uzzi, 1999]. It is likely that other network industry firms follow similar practices. Our findings call for a revisit of both the theory and the practice of segmentation and positioning applied to network-industry firms because our findings indicate that network-industry firms increase their ability to create value in their dyadic customer relationships by being embedded in the broader networks of their customers. From this follows significant organisational implications with respect to both customer relationship management and service management. Product segments are frequently the basis for organisation and market activities. Organisations group related activities to minimise coordination costs [Thompson, 1967]. Local network effects, manifest in the value of knowledge about specific inter-customer relationships, imply that grouping of activities related to similar customers will require extensive inter-segment coordination when intercustomer relationships cross traditional segment boundaries. Furthermore, the product segment organisation in banking and other mediation industries is frequently broken down into customer relationship managers. The impact of inter-customer relationship knowledge on knowledge-based value added suggests a particular need for inter-relationship manager knowledge transfer in mediation industries. More generally the service of inter-customer relations calls for segmentation practices and corresponding organisational structures and practices that can provide service to inter-customer relations rather than to atomistic independent customers.
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1. The authors contributed equally to the research reported. 2. The committed set of customers refers the union of the customer sets of all perfectly inter-operable banks, or to the customers of a specific bank if one customer benefits by having the same bank as specific other customers. Some services are fully inter-operable. Many financial services are imperfectly inter-operable, e.g. there are extra charges for inter-bank transactions, while others are totally incompatible, e.g. credit card can only be used with vendors that have a service agreement with a particular provider.
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