Relationship Marketing and Sustained Competitive ... - Springer Link

Journal of Market Focused Management, 2, 281–297 (1998)

c 1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands. °

Relationship Marketing and Sustained Competitive Advantage W. GLENN ROWE

[email protected]

Assistant Professor of Strategic Management, Faculty of Business Administration, Memorial University of Newfoundland, St. John’s Nfld, Canada, A1B 3X5 [email protected] Professor of Marketing, Faculty of Business Administration, Memorial University of Newfoundland, St. John’s, Nfld, Canada, A1B 3X5

JAMES G. BARNES

Received July 7, 1997; Revised September 9, 1997; Accepted September 9, 1997

Abstract This paper examines four perspectives of relationship marketing that have been discussed in the marketing literature in recent years and which are being touted as sources of longterm profitability for organizations. We examine each of the four perspectives (“locking in” customers, customer retention, database marketing, and building strong, close, positive relationships) to assess their potential for achieving a sustained competitive advantage. Our analysis suggests that only those organizations that build strong, close, positive relationships with their customers have the potential to develop a sustained competitive advantage that may lead to above normal performance. Keywords: Customer retention, “locking in,” database, relationship marketing

Understanding the competitive and performance implications of an organization’s realized strategies (Mintzberg, 1973) is critical to the long-term success of that organization. A realized strategy is a pattern of resource allocation that enables an organization to maintain or improve performance (Barney, 1991, 1997). One realized strategy that has recently generated considerable interest among practitioners and scholars alike is relationship marketing (Barnes, 1994). Relationship marketing is emerging as a new focal point for research and reflects “a shift in emphasis from discrete, ad-hoc transactional exchange between buyer and seller organizations to ongoing long-term relational exchanges” (Madhaven, Shah and Grover, 1994a:183). It would appear that virtually every business is trying to develop relationships with customers, suppliers, and other stakeholder groups (Barnes, 1994). In particular, consumers are being invited to have relationships with telephone companies, banks, auto dealers, hotel chains, airlines, and other suppliers of products and services. Unfortunately, there is little consistency in how relationship marketing has been defined and even less in how it is practised in businesses and other organizations (Barnes, 1997)

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which provide products and services to consumers. Currently, there are several views regarding how relationship marketing should be practised (Madhaven, Shah and Grover, 1994b). In this paper, we examine four perspectives as they apply to consumer products and services: relationship marketing as “locking-in” the customer (Turnbull and Wilson, 1989), relationship marketing as an approach to all-encompassing customer retention (Gr¨onroos, 1994), relationship marketing as database marketing (Petrison and Wang, 1993; Treacy and Wiersema, 1993), and relationship marketing as strong, close, positive relationships that organizations have with their customers (Barnes, 1994, 1995). Each of these perspectives has been utilized by organizations, but there has been little or no assessment of their impact on an organization’s competitive advantage and subsequent performance. Therefore, the purpose of this paper is to theoretically address the question, exactly what kind of relationship marketing leads to sustained competitive advantage? In addition, we assess the impact on organizational performance of each of the four perspectives of relationship marketing and develop appropriate propositions using Barney’s (1997) VRIO (Value, Rarity, Imitability, Organization) Framework from the field of strategic management. In answering our research question, we examine more than the “obvious” and “intuitive” benefits of relationship marketing and investigate whether relationship marketing makes strategic sense. In addition, we argue that relationship marketing is not a monolithic strategy, but that it exists in many forms: therefore, one needs to ask which of these forms is best in the long-term. Finally, we leverage some of the current thinking from strategic management into the area of relationship marketing.1 In the next section, we differentiate among the four perspectives of relationship marketing. In the third section, we describe Barney’s (1997) VRIO Framework. In the fourth section, we assess each of the relationship marketing perspectives using Barney’s (1997) VRIO Framework and develop propositions. In the final section, we discuss the implications of our assessment for practising managers.

Relationship Marketing Relationship marketing is being touted as an effective strategy to provide companies with the competitive edge they need to succeed in the future. Some authors (e.g. Barnes, 1995; Berry, 1983) suggest that establishing long-term positive relationships with one’s customers provides an organization with a stream of profits in perpetuity. The strategy of relationship marketing has been successfully practised by smaller firms for several hundreds of years. However, the recent wave of relationship marketers are generally from larger firms. They are drawn to the idea of cultivating relationships in a market environment characterised by intense competition and by core product and service offerings which are rendered by technology to be similar, if not identical, to those of the competition. The rush to embrace relationship marketing is reasonable; especially in markets where a differentiation strategy is appropriate. Before examining whether relationship marketing is beneficial to organizations, it is important to differentiate among the four perspectives of relationship marketing we examine in this paper.

RELATIONSHIP MARKETING

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“Locking Customers In” When resources and capabilities are allocated to creating structural bonds between an organization and its customers that make it difficult for them to change organizations, customers are locked in, and become captive (Barnes, 1994; Turnbull and Wilson, 1989). The motivation here is to keep control of the relationship and, in doing so, exercise indirect control over potential competitors by keeping them out of a particular market (Madhaven, Shah and Grover, 1994a). “Locking in” customers could have a negative connotation in that customers may be in a relationship against their will, particularly in the latter stages of the relationship.

Customer Retention Allocating resources and capabilities to an all-encompassing customer retention strategy is another perspective of relationship marketing. Unfortunately, organizations embracing this perspective expend unnecessary resources in trying to be all things to all possible customers. While this may be commendable on one level, it suggests that an organization’s strategists have not considered that some customers may require more resources from the organization than the benefits they generate for the organization. This perspective is different from the “locking in” perspective in that you want all possible customers under the customer retention perspective while you may only want those who are profitable for you under the “locking in” perspective. The motivation behind this perspective is similar to the previous perspective in that the organization wants to control the marketplace as much as possible.

Database Marketing Organizations which expend resources on suitable technology to develop databases on their customers expect that the information they gather will enable them to accomplish several objectives. Copulsky and Wolf (1990) suggest that the establishment of a database of current and potential customers enables organizations to deliver a differentiated message to these customers based on their characteristics and preferences and to monitor the cost of acquiring customers and their lifetime value to the organization. Treacy and Wiersema (1993) argue that a strategy of using information technology to maintain detailed information on customers allows marketers to differentiate and to direct marketing programs to customers on an individualized basis. The motivation is to know one’s customers intimately and to be able to target them more effectively. This perspective is different from the previous two in that the emphasis is on gathering as much information about your customers as possible; whereas, the “locking in” perspective is mostly concerned with keeping the customers one has “locked in”, and the customer retention perspective emphasizes retaining all customers no matter the cost to the organization. All three perspectives are different from building strong, positive, close relationships and we turn our attention to those differences in the next paragraph.

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Building Strong, Close, Positive Relationships The three perspectives described above miss two important characteristics that make them pale shadows of relationship marketing as a strong, close, positive relationship between two consenting entities—a consumer and the organization that serves the consumer. These two aspects are: mutuality and special status. Czepiel (1990) argues that a marketplacebased relationship must be based on the mutual recognition of a special status between two partners in an exchange. This means that for a relationship to exist it must be acknowledged to exist by both partners. In addition, it means that a relationship does not merely imply some level of contact but a special status in the minds of the partners—a special status that could develop on the basis of a very few but meaningful contacts or on the basis of many contacts. It is clear from our previous discussion that the concept of “locking in” customers, the concept of all-embracing customer retention, and the building of a database to permit differentiated contact with customers suffers from the lack of mutuality and special status in that they are all oriented one way—from the organization to the customer. Another major difference is that in the three previous perspectives the prime motivating force is to benefit the organization, while in the last perspective the motivation is to benefit consumers. Kotter (1997) argues that having as its prime motivation the benefitting of consumers is one of the reasons Matsushita Electric has become a world force in the consumer electronics industry. Konosuke Matsushita’s mission “. . . was to benefit humankind by producing more and more necessary goods and services at lower and lower costs . . . ” (Kotter, 1997). Matsushita mostly emphasized serving society by making goods that people could afford, not about developing his company or retaining customers (Kotter, 1997). We are not arguing that some aspects of these perspectives cannot be used together. For example, selectively retaining customers is an important cost reduction strategy and developing databases to get to know one’s customers is a necessary, albeit not sufficient, condition for building strong, close, positive relationships. However, we are arguing that one’s emphasis, or prime motivation, does differentiate these four perspectives conceptually and that is important to examine them under the lens of the VRIO framework to assess which of the four has the greatest potential for sustained competitive advantage and above normal performance in the long-term. The VRIO Framework Barney (1997) defines strategy as the pattern of resource and capability allocation that enables an organization to maintain or improve its performance. How organizations do relationship marketing is a strategy that results from a pattern of resource allocation. We need to understand which of the four relationship marketing perspectives suggested above may be a pattern of resource allocation that results in a source of sustained competitive advantage.2 In order to achieve this understanding it is necessary to discuss the VRIO Framework (Barney, 1997). The VRIO Framework has developed within the resource-based view of competitive advantage (Barney, 1997; Penrose, 1958; Rumelt, 1984; Wernerfelt, 1984, 1989). The resource-based view assumes firm resource heterogeneity within an industry and less than


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perfect mobility of these resources across firms. It then examines the role of these idiosyncratic, immobile firm resources in creating a sustained competitive advantage (Barney, 1991). A competitive advantage exists when an organization has implemented, and organized to be exploited, a value-creating strategy that is currently not being implemented by an organization’s competitors or potential competitors. A sustained competitive advantage exists when the value-creating strategy is currently not being implemented by an organization’s competitors or potential competitors and when these other organizations are not able to imitate, either through duplication or substitution, the benefits of the value-creating strategy. It is important to note that whether a competitive advantage is sustained depends on the possibility of competitive imitation, not on the length of time an organization has had a competitive advantage. This means that the existence for a long time of a competitive advantage that is imitable does not mean that an organization has a sustained competitive advantage. It is the inability of other organizations to imitate that strategy that helps an organization achieve a sustained competitive advantage. In addition, having a sustained competitive advantage does not mean that it will be sustained forever. It only means that it will not be competed away through the imitation efforts of other organizations. For example, “Schumpetarian Shocks” (Barney, 1986b, 1991; Rumelt and Wensley, 1981; Schumpeter, 1934), or structural revolutions in an industry, may make sources of sustained competitive advantage no longer valuable, rare, or costly (difficult) to imitate. If any one of the conditions of value, rareness or inimitability is violated by a structural revolution, a source of competitive advantage is no longer sustained. To assess whether a strategy is a source of sustained competitive advantage, Barney (1991, 1997) suggests asking four questions. First, is the strategy value creating? Second, is the strategy rare? Third, is the strategy costly to imitate? Finally, are the organization’s formal reporting structures, management styles, explicit management control systems and compensation policies designed to exploit the full competitive potential of its strategy? We now examine each of these four questions in detail.3

Value and Competitive Parity

For a strategy to be valuable means that it enables an organization to increase revenues by taking advantage of opportunities in the organization’s environment, to reduce costs by neutralizing threats in the organization’s environment, or to do both. If this necessary condition is not met, the strategy will be a source of competitive disadvantage and this could lead to below normal performance. If this condition is met but the strategy is not rare, it will be a source of competitive parity and lead, at best, to normal preference. The potential for competitive parity and normal performance may be decreased if the organization is not organized to exploit valuable resources and capabilities.

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Rareness and Temporary Competitive Advantage A strategy is rare when the number of organizations which possess, and/or are capable of possessing, the strategy are less than the number of organizations that is required for perfectly competitive conditions among a set of competitors or potential competitors. When a strategy is valuable and rare, it will be a source of temporary competitive advantage and may lead to above normal performance. This above normal performance will persist until the strategy is imitated by enough competitors to create perfectly competitive conditions and reduce the temporary competitive advantage to competitive parity. The potential for temporary competitive advantage and above normal performance may be lessened if the organization is not organized to exploit resources and capabilities that are valuable and rare.

Imitability and Sustained Competitive Advantage Strategies that are valuable and rare can only be sources of sustained competitive advantage if other organizations that do not possess these resources are unable to imitate them through duplication or substitution. In other words, these strategies are imperfectly imitable (Barney, 1991; Lippman and Rumelt, 1982). Strategies may be imperfectly imitable for one of, or a combination of, three reasons: the strategy depends on the unique history of the organization, the link between the organization’s strategy and the organization’s source of sustained competitive advantage is causally ambiguous, and/or the strategy creating an organization’s sustained competitive advantage is the result of socially-complex (Dierickx and Cool, 1989) relationships. In the interest of brevity, and because it is the most applicable for this study, we only discuss social complexity.

Social Complexity One reason that a strategy may be imperfectly imitable is that it “. . . may be [a] very complex social phenomenon, beyond the ability of firms to systematically manage and influence.” (Barney, 1991:110). Some examples of socially-complex phenomena that are difficult to imitate are: the interpersonal relations among managers in an organization (Hambrick, 1987), an organization’s culture (Barney, 1986a), an organization’s reputation among suppliers (Porter, 1980), and an organization’s reputation among customers and consumers (Barney, 1997; Klein and Leffler, 1981). Barney (1991) suggests that it is possible to detail how these socially-complex phenomena add value to a firm. Consequently, there is no causal ambiguity with respect to the link between the phenomena and competitive advantage. However, having the understanding that these phenomena may give an organization a sustained competitive advantage that leads to above normal performance does not necessarily mean that organizations without them can engage in systematic efforts to create them (Barney, 1989, 1991; Dierickx and Cool, 1989). Several researchers (e.g., Barney, 1986a; Porras and Berg, 1978) have argued that the social engineering required to create socially-complex relationships may be beyond the capability of most firms. Given that


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these socially-complex relationships may not be subject to direct management, they are imperfectly imitable. Strategies that create value for an organization, are possessed by a number of organizations that is less than that required for perfect competition, and are imperfectly imitable may be sources of sustained competitive advantage and above normal performance. However, a final condition is necessary to achieve sufficiency. It is necessary to be organized in a manner that fully exploits an organization’s strategies.

Organization and Competitive Advantage “Is a firm organized to exploit the full competitive potential of its resources and capabilities?” (Barney, 1997:160). As alluded to above, this question needs to be asked in conjunction with each level of competitiveness previously discussed. First, if a strategy is value creating but not rare it may lead to competitive parity, but only if the firm is organized to fully exploit this competitive potential. Second, if a strategy is value creating and rare it may lead to a temporary competitive advantage, but only if the firm is organized to fully exploit this competitive potential. Finally, if a strategy is value creating, is rare and is imperfectly imitable it may lead to a sustained competitive advantage, but only if the firm is organized to fully exploit this competitive potential. Saying no to the question of organization may mean that the strategy is a source of competitive disadvantage. In this paper, we assume that organizations are organized to exploit sources of competitive parity, temporary competitive advantage and sustained competitive advantage. Consequently, the rest of the discussion will concentrate on the questions of value, rareness, and inimitability. The conditions of value, rarity, imitability, and organization may be combined into a framework to comprehend more fully the performance potential associated with the exploitation of any of an organization’s strategies. This framework is shown in Table 1. We will now examine each of the four relationship marketing perspectives, and subject each of them to review, using the VRIO framework.

Relationship Marketing and the VRIO Framework The consumer marketplace of the 1990s is dramatically different from that which organizations have faced in the past (Barnes and Cumby, 1993). In this new marketplace, consumers are less inclined to maintain loyalties; they are seeking value from organizations, and are demanding that organizations provide a good reason for customers to deal with them. In consumer marketing, the result has been a greater emphasis on developing relationships with customers. This means less emphasis on the elements of the traditional marketing mix and much more on creating a situation where a customer is satisfied with everything an organization has to offer, to the point where the customer wants to do business with the organization well into the future. Increasingly, the attitude in customer-driven organizations is that the marketing mix is a given (and at best only a source of competitive parity in the long-term) and that the really successful organizations are those which can satisfy their

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Table 1. The VRIO framework. Is a strategy . . . Valuable?

Rare?

Costly to Imitate?

Exploited by the Organization?

Competitive Implications

Economic Performance

No

----

----

No

Competitive disadvantage

Below Normal Performance

Yes

No

----

Yes

Competitive Parity

Normal Performance

Yes

Yes

No

Yes

Temporary Competitive Advantage

Above Normal Performance

Yes

Yes

Yes

Yes

Sustained Competitive Advantage

Above Normal Performance

∗

Source: From J. B. Barney, Gaining and Sustaining Competitive Advantage, 1997, Addison-Wesley Publishing Company. Adapted with permission.

customers, as much through how they treat them as through the products and prices that are offered (van Waterschoot and Van den Bulte, 1992), and develop relationships with them. “Locking Customers In” and Sustained Competitive Advantage One aspect of this new marketing paradigm is “locking customers in.” As mentioned earlier, this strategy consists of allocating resources and capabilities to creating structural bonds between an organization and a customer that makes it difficult for the customer to change organizations (Barnes, 1994; Turnbull and Wilson, 1989). The buyer is locked in, a captive customer, because the costs involved in making a break to another organization cannot be justified. The structural bond which supports the relationship becomes, therefore, a “barrier to exit,” and customers are trapped in relationships from which they may prefer to be extricated. Turnbull and Wilson (1989) suggest that the establishment of structural bonds is important to an organization’s long-term health as these bonds create substantial barriers to competition when important customers are bound to the organization. Several ways have been developed to lock customers into a relationship with organizations. One way is to increase the switching costs (Jackson, 1985) of changing to another organization. This was a successful strategy for IBM for many years. Another approach involves the use of tools such as long-term mortgages with penalties for reopening (Barnes, 1994). Frequent-buyer programs, such as those operated by most airlines, hotel chains and by many large retailers, perform essentially the same function by trying to keep customers returning to the same company in order to accumulate “points.” The question that needs to be answered is: Can such a strategy be a source of sustained competitive advantage? Certainly, the strategy is valuable as long as customers are willing to remain with the


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organization. The opportunity for customers to accumulate points increases the availability of revenue for an organization as customers buy their products or services. In addition, it may be rare for a brief period and lead to a position of temporary competitive advantage. However, we would argue that this strategy cannot be a source of sustained competitive advantage because it is easily duplicated. For example, there are few, if any, automobile dealerships that do not now lease cars. What is interesting is that in Canada, this strategy for locking in customers is now being substituted for by banks offering buyback loans. One bank is offering to loan an amount of money calculated after assessing the residual value of the car and then subtracting that residual from the principal a customer would borrow. It is a strategy designed to lock customers in and keep them from leasing cars through the dealerships. In addition, and as mentioned earlier, it is conceivable that while a “locking in” strategy may grant a temporary competitive advantage, it is possible that it may be a source of competitive disadvantage. For example, we agree that switching costs could give an organization a temporary competitive advantage in the short-term, but as soon as customers find an alternative they will flee for freedom. To explain this possibility, we will examine what happened to IBM. For years IBM used switching costs to retain customers. This was find as long as IBM’s customers were satisfied with IBM’s service. In fact, it gave IBM a temporary competitive advantage. Unfortunately, there came a period in IBM’s history when some customers were no longer satisfied with IBM’s service and products, but were still “locked in” by the switching costs. These customers became very dissatisfied and frustrated. Consequently, when IBM’s competitors developed duplicates and substitutes at a cost that was equal to or less than the switching costs that existed between IBM and its customers, they deserted IBM. The result was a dramatic drop in IBM’s market value from $106 billion in 1987 to $30 billion in 1993 (Loomis, 1993). Clearly, IBM had tapped into a source of competitive disadvantage as a result of its strategy of high switching costs. Subjecting the strategy of “locking in” customers to the VRIO Framework (Barney, 1997) suggests that in the short-term organizations may gain a temporary competitive advantage and the above normal performance associated with a temporary competitive advantage. However, it is also obvious that in the long-term this strategy is only a source of competitive parity and normal performance at best and possibly a source of competitive disadvantage with below normal performance at worst. PROPOSITION 1 A relationship marketing strategy of “locking-in” customers will, at best, lead to competitive parity in the long-term. Customer Retention and Sustained Competitive Advantage Retaining customers is more profitable in the long-term (Reichheld and Sasser, 1991) than devoting high levels of marketing effort to replacing customers who leave. Berry (1983) treated relationship marketing as keeping, not just getting, customers; the implication being that customer retention and relationships are one and the same. Unfortunately, while the retention of customers is a good idea, few have discussed which customers should be retained or how a retention-oriented relationship should be established and maintained

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(Barnes and Cumby, 1993). Even fewer have examined whether a broad-based customer retention strategy can be a source of sustained competitive advantage. As alluded to in the previous paragraph, having a broad-based strategy of retaining customers is not appropriate for most organizations. It is better to retain long-term profitable customers and not spend money on retaining non-profitable customers such as those who do not pay their bills or who command an inordinate amount of staff time. Clearly, when more is spent on retaining customers than the revenue being generated, a customer retention strategy is not value creating; therefore, it will not be a source of sustained competitive advantage. In fact, it may be a source of competitive disadvantage and may lead to below normal performance. Would a selective customer retention strategy be rare? This is really an empirical question; but assuming that only a few organizations pursue such a strategy, we can argue that these firms have a source of temporary competitive advantage in that it is rare and valuable. Would it be imperfectly imitable and a source of sustained competitive advantage? The answer is no. Obviously, once other organizations see one of its competitors pursuing such a strategy, they could very easily shift their resource allocations to pursue such a strategy. Therefore, a strategy of selective customer retention at best could only lead to a temporary competitive advantage in the short-term and a position of competitive parity in the long-term. PROPOSITION 2 A relationship marketing strategy of retaining all customers will lead to competitive parity in the long-term. Database Marketing and Sustained Competitive Advantage Relatively few companies which deal with end consumers have historically maintained detailed records of all customer purchasing. Those which have kept such records include financial institutions, telephone companies and other public utilities. Most others maintained purchase histories only on those customers who purchased on credit and therefore had accounts. The majority of transactions for most businesses which deal with end consumers were conducted on a cash basis with “anonymous” customers. Even where detailed customer accounts were maintained, these were used mainly for accounting and billing purposes and rarely to plan marketing strategies. As technology has become more widely available and as companies have recognized the value of tracking and understanding the behavior of their customers, the use of databases has become accepted as a means of knowing more about customers and their purchase behavior. Several researchers (Goldberg, 1988; Petrison and Wang, 1993) suggest that the availability of database technology gives organizations the ability to know their customers and their customers’ likes and dislikes on an individual basis, thereby enabling them to “target” their customers more effectively. Can a strategy of database marketing be a source of sustained competitive advantage? The ability to tailor products and services to the individual tastes of customers may increase revenues but it would also increase costs. The revenues would have to be more than the costs for this strategy to be valuable. Assuming this is the case, the next question would be “is the strategy rare?” This is an empirical question; however, it is possible that only a few


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organizations would have this capability. Assuming this to be true, we need to ask if database technology is imperfectly imitable. To this we would argue that it is not. Barney (1991, 1997) argues that technology is perfectly imitable. Consequently, even if the number of organizations with database technology were few enough to be rare, once the above normal performance was noticed by competitors, it would be substituted for or duplicated. This suggests that the competitive advantage, if one exists, is only temporary and would revert to competitive parity in the long-term. Therefore, having a strategy based on technology such as database marketing is not a source of sustained competitive advantage. PROPOSITION 3 A relationship marketing strategy based on database marketing will lead to competitive parity in the long-term. Building Strong, Positive, Close Relationships and Sustained Competitive Advantage The three perspectives of relationship marketing presented above miss the mark in terms of defining when a relationship with a customer truly exists, or when one can even be expected to exist (Barnes, 1994). Suggesting that “locking in” customers through a continuous series of interactions because of the erection of barriers to exit develops a relationship misses the deeper meaning of what a relationship really is. When a customer who wants to leave a relationship continues in a “relationship” with an organization because switching costs are too high, that customer is trapped in a relationship against his or her will. Retention of customers has several advantages such as the lower costs of serving returning customers, the positive effects on profits and the creation of organization advocates who spread positive word of mouth (Congram, 1991). However, the broad-based or selective retention of customers does not mean that an organization has developed a strong, close, positive relationship with them. A customer may deal with a particular organization because it is convenient or because the organization is the only one that has a particular product wanted by the customer. The perspective of database marketing is devoid of any caring for customers (Barnes, 1994). The establishment of a database is considered necessary to collect pertinent information about customers, usually related to their demographic and psychographic characteristics and their buying behavior, and then using this information to direct appropriate targeted messages to them. Hogg et al. (1993) referred to this strategy as “what we do to customers.” The relationship is viewed simply as contact, or as knowing as much about customers as possible so that we can market at them, with little concern for whether they are willing participants in this relationship or whether they even view it as satisfying. As mentioned earlier, these perspectives of relationship marketing are missing two important characteristics: mutuality and special status. It is clear from our previous discussion that the concept of “locking in” customers, the broad concept of customer retention, and the building of a database to permit differentiated contact with customers suffers from the lack of mutuality and special status in that they are all oriented one way—from the organization to the customer. What is necessary to achieve a strong, close, positive relationship that is likely to endure? Duck (1991) identified several essential elements for a relationship to exist. These are

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caring, support, loyalty, placing priority on the other’s interests, honesty, trustworthiness, trust in the other, giving help when needed, and working through disagreements. Argyle and Henderson (1985) identified several universal rules of relationships: respect privacy (something the database perspective may not do if it allows intrusive marketing to customers); keep confidences; and do not criticize publicly. Gupta (1983) concluded that stable, friendly relationships are characterized by communication, trust, liking, respect, reciprocation, affection, influence and understanding. Rushbult and Buunk (1993) observed that there must be commitment in a relationship; defined as a subjective state involving both cognitive and emotional components, and being long-term in nature with a desire to maintain the relationship. These authors all suggest a sense of mutuality and a special status are necessary for a strong, close, positive relationship. Will having a strong, close, positive relationship between an organization and its customers be a source of sustained competitive advantage for that organization? Having customers who trust and respect you as an organization and who, consequently, continuously return to your organization for their products and services means that revenues are secure for the long-term and that the costs of marketing to these customers is lower. This suggests that this strategy is value creating. Whether or not this strategy is rare is an empirical question; however, given how difficult it is to maintain a relationship between two people built on trust and respect, we suggest that it is even more difficult to do so between an organization and individual consumers. Therefore, we suspect that organizations that have built strong, close, positive relationships with its consumers are rare. Would these relationships, if they exist for a few, rare organizations, be imitable? We believe that it would be very difficult. Several researchers (Barney, 1986a; Dierickx and Cool, 1989; Porras and Berg, 1978) argue that even if the link between socially-complex relationships and competitive advantage are understood, it does not mean that organizations lacking in these relationships can find low-cost substitutes for them or that they can engage in a systematic effort to create them. Barney (1991, 1997) argues that such social engineering is beyond most firms and if it is not, it is much more costly than socially-complex resources that have already been developed. In addition, several researchers (Barney, 1997; Klein, Crawford and Alchain, 1978; Klein and Leffler, 1981) suggest that an organization’s reputation among its customers is a socially-complex relationship. Similarly, we argue that a relationship between an organization and its customers characterized by mutual trust, respect, affection, communication, etc. is a socially-complex phenomenon that would be very difficult and costly to imitate. Therefore, we suggest that a strong, close, positive relationship could be a source of sustained competitive advantage. PROPOSITION 4 A strong, close, positive relationship built on the concepts of mutuality and special status has the potential to lead to a sustained competitive advantage. Discussion and Implications The discussion of the four perspectives of relationship marketing and sustained competitive advantage has several implications for organization. Cumby and Barnes (1996) argue that it has been generally accepted that organizations can strengthen their financial performance


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by forming lasting relationships with their customers, rather than having to court new ones. The effort expended to ensure that customers are satisfied with their relationship in the longterm is rewarded by an increase in financial performance through repeat business, referral sales, decreased customer maintenance costs, and reduced exposure to price competition. However, what has not been addressed is which of the four perspectives of relationship marketing may be strategies that could lead to sustained competitive advantage and which may be strategies that could lead to competitive parity when a temporary competitive advantage is competed away. The fact that a strategy leads to improved financial performance in the long-term does not mean that it is a source of sustained competitive advantage but only that there are not enough competitors to compete away above-normal performance, especially if the strategy is imitable, as is the case with the “locking in”, customer retention, and database marketing strategies. The analysis of the four strategies and their association with sustained competitive advantage suggests several implications for managers. First, it is important that strategies create value. Second, it is important that these strategies be rare. Third, it is important that these strategies be very difficult and costly to imitate. Assuming that an organization is organized to exploit the full potential of each economic condition, these three conditions are necessary for a strategy to be a source of sustained competitive advantage. However, the analysis does not suggest that organizations should have, or search for, only those strategies that are sources of sustained competitive advantage. If a firm’s competitors have a source of temporary competitive advantage, it may be reducing that firm’s revenues and/or increasing its costs. In this situation, not pursuing this strategy may be a source of competitive disadvantage and it would be necessary to imitate a competitor’s source of temporary competitive advantage to at least achieve competitive parity. This suggests that it is important to have strategies which are sources of competitive parity and temporary competitive advantage, in addition to sources of sustained competitive advantage. This means that even if the product or service is only a source of competitive parity and it is the relationship between a firm and its customers that is the source of sustained competitive advantage, not having that same product or service may be a source of competitive disadvantage. This argument suggests that even though database marketing may only be a source of competitive parity in the long-term, without database marketing it may not be possible to have the knowledge to build a strong, close, positive relationship with one’s customers. In addition, while a selective customer retention strategy may at best only be a source of competitive parity not having a customer retention focus may not allow an organization to develop a strong, close, positive relationship. Another question that managers should answer is whether or not it is worthwhile to expend the resources needed to develop strong, close, positive relationships with customers if it is determined that the firm does not have such relationships but a competitor does, and that these represent a source of sustained competitive advantage for that competitor. To answer this question, two different points must be addressed. First, will developing this relationship strategy cause the condition of rarity to be violated? If it does not, then we would argue that an organization should develop this strategy. Second, will developing this relationship strategy be costly and difficult? This point should be examined in a relative sense. It may be that, relative to one competitor, it will be costly and not achieve competitive parity;

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however, if there are several other competitors over whom it would give the organization a sustained competitive advantage, then we would argue for developing strong, close, positive relationships with customers. Although it is outside the scope of this paper, it would be inappropriate if we did not briefly discuss when and how strong, close, positive relationships should be developed, given that it is appropriate to do so to achieve a sustained competitive advantage. Organizations should develop strong, close, positive relationships when they are wanted by their customers. What one customer may find to be a close, strong, positive relationship may be considered intrusive, stifling or unnecessary by other customers. The latter customers will prefer a more distant relationship, one characterized by much less warmth. In one focus group, a bank customer indicated that he has an ideal relationship with his bank; “I don’t call them, and they don’t call me.” Some authors (Lovelock, 1983; Oldano, 1987) have suggested the segmentation of markets on the basis of the type of relationship desired by consumers. Barnes (1995) has proposed that the same consumer may wish to engage in quite different types of relationships with different service providers or with service firms in different industries. A supplementary question is when it is conducive for a relationship to develop? Conventional wisdom suggests that certain conditions should apply for a relationship to develop. Such conditions would include regular contact between the customer and the organization. In addition, face-to-face contact, or even hands-on contact, might be expected to contribute to the establishment of close relationships. Barnes (1997) found that highly emotional relationships may contribute to the development of strong lasting relationships even in the absence of regular contact. Research conducted by him in the funeral services industry revealed that more than 60 percent of adults interviewed had a particular funeral director in mind to whom they would turn in the unfortunate event that they required funeral services, even though many had not had any dealings with a funeral director for almost 20 years. In addition, in a study on the banking industry, he found that the emotional tone of the relationship was the best predictor of closeness, strength and satisfaction, and that other affective dimensions of the relationship contributed significantly to the ability to explain differences in these variables (Barnes, 1997). To develop, strong, close positive relationships requires several conditions to be satisfied. First, there should be a strong, selective customer retention strategy permeating the organization. However, this strategy should not be one that tries to retain customers by structurally “locking them in.” Second, there should be a database which contains qualitative and quantitative data on each individual customer. This database should be available to all who interact with customers. This implies that all who have access to the database need to have a strong sense of confidentiality with respect to the information to which they have access. This sense of confidentiality should be a shared value that permeates the organization from the top management team (TMT) to the front-line service providers. For this shared value to exist means that the TMT and the front-line service providers need to be working together. The responsibility for achieving this togetherness rests with the TMT. Third, the TMT is responsible for developing a strong, close, positive relationship with the organizations customer service providers. We believe that employees (the customer service


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providers) in a strong, close, positive relationship with their TMT will emulate this in their relationships with the organization’s customers. It should be noted that the conditions described above regarding when and how strong, close, positive relationships should be developed are only necessary not sufficient conditions. This means that having met these conditions does not necessarily mean that a strong, close, positive relationship will develop. On the other hand not having met these conditions means that a strong, close, positive relationship will not have the potential to develop. Finally, we need to address the concept of performance in the context of a developed strong, close, positive relationship marketing strategy. As we mentioned earlier in the paper, Barney (1997) defines strategy as the pattern of resource and capability allocation that enables an organization to maintain or improve its performance. In addition, we described, from Barney’s (1997) research, that it is possible to have strategies which may lead to below normal performance, normal performance or above normal performance. What does it mean to have above normal performance associated with a strong, close, positive relationship marketing strategy? Barney (1997) argues that above normal performance occurs when the actual value created is greater than the value expected to be created by those who have voluntarily given resources to the organization, such as customers. This implies that those who voluntarily give resources to an organization should be surprised in a positive sense in their dealings with that organization in that the value created is greater than the value expected. This means that a relationship marketing strategy that leads to above normal performance is one where the customers are occasionally being surprised in a positive sense by the products and/or service they receive from the firm. Such a strategy will retain customers and, in the long-term, the organization will be rewarded by an increase in financial performance through repeat business, referral sales, decreased customer maintenance costs, and reduced exposure to price competition (Cumby and Barnes, 1997) because it has a strategy that is a result of allocating resources in a manner that surprises its customers. The strategies of blanket customer retention, “locking in” customers, and database marketing may lead to above normal performance, but only temporarily. The extra value created will be competed away when these strategies are imitated by enough competitors to achieve perfectly competitive conditions or, in other words, when the rarity condition is violated. In addition, it is possible that the organization may be surprised by below normal performance. This could be possible when a “locking in” strategy is utilized and customers leave the “relationship” when switching costs are no longer a barrier to exit. Notes 1. We wish to thank one of this journal’s anonymous reviewers for pointing out these three benefits of our study into relationship marketing and competitive advantage. 2. In this context, we are suggesting that how one allocates resources to build relationships is a strategy and that we are using the VRIO framework to examine these strategies. This may seem inappropriate to some readers who could argue that the VRIO framework applies to resources or capabilities rather than to strategies per se. However, in Barney’s (1997) later work, he does use the VRIO framework to examine strategies. Consequently, we consider the VRIO framework appropriate for our examination of the four strategies organizations use to pursue relationship marketing. 3. The discussion of value, rarity, imitability and organizational ability to exploit is based on Barney’s (1991, 1997) research. To enhance readability, this is acknowledged here rather than by citing Barney (1991, 1997) throughout this section.

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