UNIVERSITY OF VAASA FACULTY OF BUSINESS STUDIES DEPARTMENT OF MANAGEMENT Mariia Kreposna STRUCTURING PRODUCT VALUE CREATION AND DELIVERY PROCESSES TO DEVELOP QUALITY BUSINESS RELATIONSHIPS. Case study of metal processing machinery company from Finland Master’s Thesis in Strategic Management VAASA 2015 1 TABLE OF CONTENTS LIST OF TABLES ...........................................................................................................7 LIST OF FIGURES .........................................................................................................7 LIST OF ABBREVIATIONS .........................................................................................9 ABSTRACT ...................................................................................................................11 1. INTRODUCTION ....................................................................................................13 1.1. Background of the research .................................................................................13 1.2. Research problem ................................................................................................14 1.3. Research questions and objectives.......................................................................16 1.4. Scope of the research ...........................................................................................17 1.5. Structure of the research ......................................................................................18 2. LITERATURE REVIEW ........................................................................................21 2.1 Relationship marketing theory ..............................................................................22 2.1.1. Business relationship marketing ................................................................22 2.1.2. ARA Model................................................................................................23 2.1.3. Levels of business relationships ................................................................24 2.1.3.1 Episode level ................................................................................25 2.1.3.2. Relationship level........................................................................26 2.1.3.3. Network level ..............................................................................26 2.1.4. Business relationship marketing management...........................................27 2.1.5. Relationship quality ...................................................................................28 2.1.5.1. Trust ............................................................................................30 2.1.5.2. Commitment................................................................................31 2.1.5.3. Satisfaction ..................................................................................31 2.1.6. Complementary dimensions of relationship quality ..................................32 2.1.6.1. Communications .........................................................................32 2.1.6.2. Service quality.............................................................................33 2.1.6.3. Cooperation. ................................................................................34 2.1.7. Summary ....................................................................................................34 2.2. Product value .......................................................................................................36 2 3 2.2.1. Customer perceive benefits........................................................................38 2.2.2. Customer perceive sacrifices: ....................................................................39 2.2.3. Product value drivers .................................................................................39 2.2.4. Summary ....................................................................................................43 2.3. Theoretical justification of empirical research ....................................................44 2.3.1. Value creation process in business relations..............................................45 2.3.2. Product value dynamics in business relationships .....................................47 2.3.3. Summary ....................................................................................................50 3. METHODOLOGY ...................................................................................................51 3.1. Role of theory ......................................................................................................51 3.2. Research design ...................................................................................................53 3.3. Time horizon ........................................................................................................56 3.4. Research method ..................................................................................................57 3.4.1. Data collection ...........................................................................................57 3.4.2. Criteria for choices.....................................................................................59 3.4.3. Buying center .............................................................................................60 3.4.4. Data analysis and interpretation.................................................................61 3.5. Quality of the research .........................................................................................62 4. EMPIRICAL FINDINGS .........................................................................................66 4.1. Within-case analysis ............................................................................................66 4.1.1. Customer Company A. Episode level. .......................................................66 4.1.1.1. Summary .....................................................................................70 4.1.2. Customer Company B. Relationship level.................................................72 4.1.2.1. Summary .....................................................................................75 4.1.3. Customer Company С. Network level. ......................................................77 4.1.3.1. Summary .....................................................................................81 4.2. Cross-case analysis ..............................................................................................82 4.2.1. Value system evolution. Manufacturing personnel ...................................83 4.2.2. Value system evolution. Engineering personnel........................................85 4.2.3. Value system evolution. Purchasing personnel .........................................87 4.3. Building the logic model......................................................................................89 4.4. Explaining the logic model ..................................................................................90 4.4.1. Predecessors of trust ..................................................................................90 4 5 4.4.2. Predecessors of commitment .....................................................................93 4.4.3. Predecessors of satisfaction .......................................................................94 5. SUMMURY AND CONCLUSIONS ........................................................................96 5.1. Summary of the research .....................................................................................96 5.2. Theoretical and practical implications .................................................................97 5.3. Limitations and suggestions for future research ..................................................98 LIST OF REFERENCES............................................................................................100 APPERNDIX 1. Interview questions. ........................................................................111 STATEMENT OF ABIDING BY GOOD SCIENTIFIC PRACTICE ...................114 6 7 LIST OF TABLES Table 1. Dimensions of relationship quality (RQ) …………………………………… 29 Table 2. Definitions of product value …………………………………………………37 Table 3. Conceptualizations of value drivers ………………………………………… 40 Table 4. Components of product value drivers ………………………………………. 42 Table 5. Focal value in levels of relationships ……………………………………….. 49 Table 6. Data collection process through interviews ………………………………… 58 LIST OF FIGURES Figure 1. Structure of the research …………………………………………………… 19 Figure 2. Outline of the theoretical study ……………………………………………. 21 Figure 3. Roots of relationship marketing …………………………………………… 22 Figure 4. Levels of business relations ……………………………………………….. 25 Figure 5. Customer value creation …………………………………………………… 27 Figure 6. Directions for developing quality buyer-seller relationships ……………… 35 Figure 7. Customer perceived benefit – sacrifice matrix …………………………….. 38 Figure 8. Linking product value theory to relationship quality theory ………………. 44 Figure 9. Process of product value creation …………………………………………. 46 Figure 10. Product value dimensions ………………………………………………… 48 Figure 11. Value dynamics in business relationships ………………………………... 49 Figure 12. Systematic combining ……………………………………………………. 53 Figure 13. Basic types of designs for case studies ………………………………….. 55 Figure 14. Structure of the embedded single and multiple case study ………………. 56 Figure 15. Value attributes of different roles in byuing center ……………………… 60 Figure 16. Empirical data analysis structure ………………………………………… 62 Figure 17. Product value characteristics on the episode level of interactions ……….. 71 Figure 18. Product value characteristics on the relationship level of interactions …… 76 Figure 19. Product value characteristics on the network level of interactions ………. 82 Figure 20. Value system evolution for manufacturing personnel …………………… 84 Figure 21. Value system evolution for engineering personnel ………………………. 86 Figure 22. Value system evolution for purchasing personnel ……………………….. 88 Figure 23. Logic model process ……………………………………………………… 89 Figure 24. Value system. Logic model ………………………………………………. 91 8 9 LIST OF ABBREVIATIONS ARA actors, resources, activities B2B business-to-business B2C business-to-customer IMP Industrial Marketing and Purchaising Group NC numerical control R&D research and development RQ relationship quality TCS trust, commitment, satisfaction VS value system 10 11 ____________________________________________________________________ UNIVERSITY OF VAASA Faculty of Business Studies Author: Topic of the Thesis: Name of the Supervisor: Degree: Bachelor’s/Master’s Programme: Year of Entering the University: Year of Completing the Thesis: Mariia Kreposna Structuring product value creation and delivery processes to develop quality business relationships. Case study of metal processing machinery company from Finland Anne-Maria Holma Master of Science in Economics and Business Administration Strategic Business Development 2013 2015 Pages: 114 ______________________________________________________________________ ABSTRACT Purpose – in the era of common application of relationship marketing as a strategy to succeed in business-to-business markets, there is a tendency to neglect the proper management of business relationships and as a result – discontent with the prevailing cooperation routines. Thus, this paper is aimed on developing guiding principles to create and maintain successful buyer-seller relationships. Design/methodology/approach – the paper is built upon linear-analytical structure with minor application of systemic combining approach in corresponding empirical findings to theoretical knowledge. Since qualitative data, collected through embedded single- and multiple-cases, embraces a comprehensive study of the product value phenomenon, methodology is concentrated on finding links between variables to reveal the control arms of business relationships. That is why data is interpreted in form of logic model based on within- and cross-case analysis. Findings – A pledge of quality relationships lies in keeping constant contact between buyers and sellers through formal and informal communications, provision of sufficient service support as well as cooperation resulting in trust, commitment and satisfaction. Research limitations/implications – the paper is limited in several dimension. First – the study takes place in clearly outlined time frames. Second – the research design limits methodological approaches to only corresponding tools. Finally, data collection sample is limited in number – 3 customer companies and geography – customer companies represent Finnish and Danish markets. Originality/value – although the unit of analysis - business relationships, is a broad concept that may lead to fuzzy results, it has been studied as a phenomenon, with emphasis on causal relationships between the elements. This opens clear perspectives on what they consist of, how they emerge and develop, what activities are involved and most important – how to manage the relationships in a desired way. ______________________________________________________________________ KEYWORDS: business relationships, product value, value drivers, quality of business relationships 12 13 1. INTRODUCTION Introduction provides key insights of the research including justification of the study, explanation of the research problem and delimitations within which the study takes place. Starting from the general background of the main theories, it proceeds with specific description of research problem, pointing at certain gaps in the literature that motivate setting up the research. After that, the aim, research questions and research objectives that are considered through ought both theoretical and empirical parts, are presented. Scope of the study includes the related theories and approaches that help answering the research questions. Finally, structural consequence of the research steps will guide through the following chapters of the thesis. 1.1. Background of the research Nowadays understanding business relationship lies at the heart of understanding business marketing (Ashnai et al., 2009). Relationships between buyers and sellers have always existed but have gained a significant interest by both theorists and practitioners when marketing traditions switched from transactional to relationship approach (Veloutsou et al. 2002). The first introduction of ‘business-to-business relationship marketing’ notion from theoretical perspective was published by Jackson (1985), where he describes it as a proper way to get closer to the customer. A great contribution to the development of industrial marketing management theory with relational emphasis has been provided by service marketing school (Grönroos, 2004) and Industrial Marketing and Purchasing (IMP) Group (Pettersen, 2001). According to Pels, Möller, & Saren (2009: 323), the focal point of investigations is mutually beneficial relationships between buyer and seller: “Understanding the dynamics of relationships and advocating mutually rewarding relationships, often invoking a marriage metaphor, became the core of the normative program of the Relationship School.” 14 Constantly increasing interest in building successful relationships with customer, especially in industrial concept is twofold. First, it is explained by a variety of additional values that both buyers and sellers obtain in the process of long-term communications and cooperation (Grönroos, 2004). From customer perspective, benefits provide sense of trust, confidence in the supplier, reliability, decreased level of purchasing risks and eventually – client cost reduction. From product/service provider perspective, successful relations represent client retention, rational and emotional fidelity, customer loyalty etc. (Luigi & Mihai, 2000). Second, building relationships with customers is a complicated and challenging process (Jackson, 1985), which requires constant monitoring of value dynamics, adaptation in due course as new customer trends arise, that are all overlapped with quickly changing environment, technological development and competitor advance. Nowadays adhering to relationship approach of building marketing strategies in industrial markets does not seem to be a novelty. This is rather a conventional norm of handling business customers’ communication processes that many managers believe will provide prosperous development and increasing performance to their firm. However, it is also commonly noticed that many customers are not fully satisfied with some methods that their product/service providers undertake and even start complaining about obsessive redundant marketing messages. Unfortunately, the reason for that is hidden under a lack of understanding nature and complexity of business relations and neglecting their proper management. This topic created interest in digging into the research with the aim to understand the logic of communication system in industrial markets and develop successful business relationships. 1.2. Research problem Current theoretical vast provides extended literature on relationships with consumers, but relationship on business level is less disclosed. Although a lot of work in this sphere has been already done, it still needs further qualification and elaboration. The majority of the existing studies aims at conveying importance of relationship marketing, its connection to firm performance, customer satisfaction, loyalty etc. It has been 15 established that relationship marketing is a strategy to go in today’s business environment. However, the body of knowledge is weak to answer ‘how’ questions: how to best design it for implementation? How to implement the relationship marketing strategy effectively? How to define relational practices? Olkkonen et al. (2008) claim that on business-to-business markets the relationships with key customers is a necessary condition to survive rather than a sufficient condition to succeed. Based on the above- mentioned considerations, critical questions arise – is it possible to build a competitive relationship marketing strategy in network-like markets? Is it possible to distinguish between ‘good’ and ‘bad’ relationships? And eventually, how to develop quality business relationships that ensure the probability of continued exchange between buyers and sellers where both parties are pleased with the affairs (Woo & Ennew, 2004)? Speaking of quality in business relationship, it is generally conceptualized as a higher- order construct composed of three primary dimensions including trust, commitment and satisfaction (TCS) (Ulaga & Eggert, 2006). Additionally, every relationship can be characterized by subsequent indicators of relationship quality. There are two problems associated with the relationship quality literature. First, it is concentrated mostly on the trust, commitment and satisfaction; however, these concepts indicate only the fact that prevailing relations are qualitative, but they do not define company actions that lead to gaining quality in buyer-seller relations. The antecedents of TCS or their building blocks have been neglected. The second problem refers definition of the role of subsequent indicators of relationship quality, because they are generally treated as secondary dimensions that have minor contribution to relationship quality construct. However, in fact they are the predecessors of TCS and thus – relationship quality concept. Speaking about the process of developing business relationships, it appears to be practically impossible to aim trust, commitment and satisfaction features without a proper scrutiny of their precursors. Apparently, secondary dimension of relationship quality or TCS predecessor are context specific, they can vary significantly from industry to industry and therefore, are difficult to determine promptly. Identification of complementary dimensions of relationship quality construct requires thorough study of particular relationships’ background, diversity of actors, patterns of relationship development etc. Nevertheless, clarification of TCS predecessors is extremely important to answer “how to?” questions. 16 1.3. Research questions and objectives Based on previous considerations, the aim of this paper is to overcome the gaps in the research by building the bridge between relationship quality and companies’ intension to reach the feelings of trust, commitment and satisfaction from their customers as factors of relationship quality. In other words, the aim of the research in to provide a sufficient explanation answering the question “how to develop quality business relationships” on the example of a Finnish company in metal processing machinery industry that would serve as an applicable plan of actions for the case company and would contribute to strategic business management theoretical knowledge. One of the central concepts of relationship marketing, especially in business context, is product value (Tzokas & Saren 1999; Mandják & Durrieu 2000; Walter et al. 2000; Veloutsou et al. 2002; Eggert et al. 2006; Arslanagic-Kalajdzic & Zabkar 2015). Creating superior product value to customers is a key to company’s long-term survival and a pledge of success in business relationships (Eggert et al., 2006). However, the notion of product value is a complicated phenomenon; it needs a comprehensive approach to understand the structure, constructing elements, conditions in which value creation is organized, different roles by different actors who participate in the process of value creation etc. Although product value embraces an extensive area of research with various concepts and processes under it, the intent is to study it as a system and define causal relations within the system and connections with customers’ perception of delivered values. In this paper, product value theory serves as a material to build the assumed bridge, the material that constitutes companies’ actions on the way to successful buyer-seller relationships. The challenge consists in placing these actions in the right order, in undertaking a certain logic behind to achieve the intended results as efficiently and as fast as possible. The research questions of the research is composed as follows: RQ: How a company should organize a fruitful product value creation and delivery processes that enable development of quality buyer-seller relationships? 17 In order to make the research process more clear, several objectives have been constituted on the way to answering the research question. Since investigation takes place in frames of a certain industry, the first objective deals with describing defining characteristics of product value creation and organization of delivery processes within customer companies. RO 1. Define the activities: to study and to analyze existing and desired value drivers in prevailing relationships between Prima Power and its customers. Given the set of product value related activities, the next step lies in categorizing them into groups of influence with the aim to follow cause-effect chains within the activities. This procedure will eventually lead to linking the formed groups of activities to targeted indicators of relationship quality – trust, commitment and satisfaction. RO 2. Link the activities: to reveal predecessors of trust, commitment and satisfaction concepts by analyzing customer behavior, preferences and perceptions. The final task is to merge combined results into a single structure und explain why certain activities have been assigned to corresponding categories and how they contribute to each of three initial dimensions of relationship quality. RO 3. Structure the value system: to justify the role of secondary dimensions of relationship quality as predecessors and qualifiers of trust, commitment and satisfaction constructs. 1.4. Scope of the research Taking into consideration the requirements of a Master’s Thesis, this paper is limited to certain time frames and a vast of theories. First, relationships between buyers and sellers are studied only on Finnish business-to-business level what means that the results of the study may not be applicable to companies operating on overseas markets or on 18 business-to-customer markets. Conceptual framework is based on the knowledge from business relationships theory on one hand, because it represents the unit of analysis of this paper. On the other hand – product value theory as a constituting body of developing business relationships. Since this paper implies that product value concept serves as the main instrument of creating successful business relationships, the concept has to be studied comprehensively. That is why literature review concentrated on full analysis of product value phenomenon including its nature, constituting elements, development patterns etc. In academic world, researches commonly choose to study one element of the concept and link it to some external factors which results in a lack of a single comprehensive explanation of product value concept. For that reason, foundation of product-value literature review in this paper roots to various studies and contexts. Empirical investigation is limited in different dimensions. Since it is completed on an example of a Finnish company in industrial sector, practical implications may not correspond to other companies on similar markets that are characterized by different cultural, political and economic conditions and customer base. Second, the study takes place at a certain point of time, which means that validity of the findings has a tendency to decrease in course of time. What is more, since structure of the market or customer base changes significantly, the results of the research may not be applicable to new arising conditions any more. 1.5. Structure of the research The research is built upon linear-analytic structure, which implies gradual transition from exploration of theory to identification of research questions based on gaps in theoretical knowledge with further empirical testing of theoretical findings. According to this structure (figure 1), the research starts with searching through background literature to gain understanding of the topic and to define gaps in the research that need to be revealed in order to better understand the topic. This stage is characterized by finding related journals that are specialized on the area of the research topic. After finding the problems in the research, the aim, research questions and research objectives that guide through the paper are formulated and explained. When the topic has need defined, the efforts concentrate on 19 finding specialized articled in chosen sources of literature that reveal clearly defined topics. These topics compose findings that contribute to answering the research questions. Thus, theoretical part is built upon knowledge base of two milestones: business relationship as a marketing approach in industrial markets and theory of product value creation in business relationships. Figure 1. Structure of the research. Speaking of business relationship theory, it covers such dimensions as understanding the nature of relationships, communications with customer on different levels of relationships that indicate endurance of cooperation and variety of transactions experienced, critical aspects of business relationship management as well as exploration of relationship quality notion and its constituent elements. On behalf of product value theory, the research expands significantly with the aim to provide a comprehensive analysis and identify specific value creation characteristics that contribute to gaining higher order dimensions of relationship quality, namely trust, commitment and satisfaction. The following constituent elements of product value concept are studied in detail in frames of the literature review. First, the nature of product value phenomenon and constructing elements. Second, value drivers (different sources provide different Introduction Literature review Methodology Empirical research Results and discussions Conclusions Business relationship theory Product value theory 20 names such as attributes, determinants, performance drivers, action variable (Wimmer & Mandják, 2002). Third, common ground for both theories was identified and conclusions were made. The paper proceeds with explaining methodology for further exploration of theoretical findings practically. Methodology also explains logic of building theoretical study and how it explains the need for empirical study. After that strategy of completing practical investigation of research question is described including time horizon, chosen research methods, sources of data collection and data analysis. Empirical part itself represents a case study – an investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence (Saunders, Lewis, & Thornhill, 2009). The choice of the method is explained by importance of context and diffused boundaries of the studied phenomenon. Moreover, this approach helps to explain causal relations between variables, which are critically important to answer research questions of this paper. Chapter 5 explains the results of the issue investigation in practical world and discusses related topics. The paper is finished by conclusions part including theoretical and practical implications and ideas for future research. 21 2. LITERATURE REVIEW The outline of the theoretical literature review is presented on figure 2. The research starts with relationship marketing theory and proceeds with product value theory. Stratification of the findings from these milestone theories indicate the core idea of value system utilization: Process of product value creation and delivery to different roles in buying center during the evolution of business relationships at the origins of business relationship quality. Figure 2. Outline of the theoretical study. Relationship marketing Business relationship marketing Levels of business relationships Managing business relationship marketing Relationship quality Product value Customer perceived benefits Customer perceived sacrifices Product value drivers Process of value creation Levels of relationship Different roles in buying center Episode Relationship Network Customer needs Value creation Value appropriation Purchasing Manufacturing Engineering Complementary dimensions of relationship quality Trust Commitment Satisfaction Complementary dimensions of relationship quality Theoretical justification of empirical findings 22 2.1 Relationship marketing theory Relationship marketing is not a new phenomenon; its roots go as far as the beginning of any trade relationships (Möller & Halinen, 2000). In course of time, the notion had acquired theoretical justification and thus – establishment in the present body of knowledge. The idea of relationship marketing encompasses establishing, maintaining and enhancing relationships with customers by a mutual exchange and fulfillment of promises (Ravald & Grönroos, 1996). Relationship strategies have been implied in different industries and on different levels of marketing. Möller & Halinen (2000) provide four roots of relationship marketing (figure 3). Figure 3. Roots of relationship marketing. The major differentiating factor between various types of relationship is the level of interdependence between buyer and seller (Möller & Halinen, 2000). According to this, two primary categories of relationship marketing can be identified: producer-consumer (B2C) and inter organizational (B2B) relationships. In this paper, the unit of analysis is business relationship marketing. 2.1.1. Business relationship marketing Business relationship marketing encompass relations between companies, individuals and different types of organizations. Business relationship theory is aimed on R el at io ns hi p m ar ke ti ng Business marketing (Interactions and networks) Services marketing Marketing channels Database & direct marketing 23 understanding the following key questions: “How to explain exchange behavior and as a result - relationship development?”, “How do networks of relationships evolve?” and “How do markets emerge and develop from network perspective?” (Pels et al., 2009). Attractiveness of business relationship lies in extra benefits that both parties receive besides products and/or services. Thus, over time, partners gain trust and security, minimize risks and even reduce costs of being a customer/supplier (Grönroos, 2004). For that reason, all actors are active, resulting in a high level of interdependence (Möller & Halinen, 2000). Resources can represent a unit of exchange what gives business relationships functions of accessing, controlling as well as creating new resources. What is more, resource heterogeneity makes substitution difficult and thus relationships – long-lasting (Pels et al., 2009). Key notions include resource ties, actor bonds, activity chains, interaction routines, relationship dynamics, networks, network dynamics etc. (Möller & Halinen, 2000: 42; Veludo, Macbeth, & Purchase, 2006: 200). The before mentioned characteristics indicate that business relationships is a complex and generalized phenomenon by its nature (Schurr, 2012). Effective management of business relationship requires its further understanding and sorting. 2.1.2. ARA Model The content of the relationship construct can be described by outcomes of the interaction processes within actor bonds, activity links and resource ties (Ford, Gadde, Håkansson, Snehota, & Waluszewski, 2008). This system has been refined in Actor- Activities-Resources model (ARA model), which has become a strong tool to understand business relationship phenomenon by both students, practitioners and researches (Axelsson, 2010: 14). The Actor Layer represent individuals who develop interpersonal bonds in the process of interactions. Based on their experience, trust in other actors and perception characteristics, they use available opportunities to take the most advantages of these interactions (Håkansson, Havila, & Pedersen, 1999). 24 The Activity layer relates to various activities that evolve during interactions between actors. They include manufacturing, logistics, legislation, deliveries, information distribution, etc. Systemic integration of activities between companies leads to tight links, which in their term, affect the involved actors (Ford et al., 2008). The Resource Layer. In order to perform activities, actors utilize available resources that are tightening together during interactions processes. The resources can be either tangible, like manufacturing equipment or intangible, like knowledge and experience. Initially confront resources evolve into resource ties as actors mutually adapt their capital over time (Ford et al., 2008: 89). The importance if resource adaptation lies not only in their efficient usage, but also in a possibility to create new resources during cooperation. As it was mentioned in the beginning of the chapter, all three layers of the ARA model are interconnected and most importantly – they depend on each other. However, it does not necessarily mean that interactions between the layers always stimulate the activities, they can also be limited by certain circumstances. For example, actors can limit activity link to some companies in favor of other companies that appear to be strategically more attractive. Similarly, resource ties can either stimulate activity links between concerned actors or restrict them to unpromising opportunities. These and other different scenarios are steadily defined by actors’ perception of existing opportunities. 2.1.3. Levels of business relationships There is no tandard state of relationships, they vary in their structure, frequency, object of exchange and how each party perceives the values and communications in general. Although every business relationship develop in different way, they are all embedded in their atmosphere and comprise a part of the environment where interactive exchange actions take place (Håkansson, 1984). What is more, business relationships can be described by their development stages and levels of relationships (Mandják & Durrieu, 2000). Development stages, which define whether actors will engage in relationship or not, include, for example, pre-relationship, exploratory, developing and stable phases 25 (Ford 1980). Levels of relationships comprise episode, relationship and network – consistent and interconnected levels (figure 4) (Mandják & Durrieu, 2000). Figure 4. Levels of business relations (adapted from: Schurr, Hedaa, & Geersbro, 2008). 2.1.3.1 Episode level An episode level is defined as an event of interaction, which has a clear starting point, ending point and represents a complete exchange (Ravald & Grönroos, 1996). In an episode there can exist several interactions that are usually short-term, dynamic and are associated with adaptation between firms (Schurr, 2012). The goal of interaction on this level is to fulfill customer needs and expectations as they define the likelihood of exchange episodes continuity and the overall level of satisfaction (Mishra, 2000). The risks associated with episode exchange concerns different perception of interaction outcomes. Different actors can evaluate the same conditions in different ways. Thus, an individual episode can have positive, negative or neutral estimation with the appropriate impact on further relationships. That is why some authors treat interactions episodes as building blocks of business relationships (Schurr et al., 2008). Some of the relations are critical because they can significantly change further development of relations. Episode • Interactions • Events • Actors Relationship • Trust • Norms • Commitment Network • Actor bonds • Resource ties • Activity links 26 2.1.3.2. Relationship level Relationships evolve because of positive experience on episode level what stimulates repurchasing activities and so – builds relationships. On this level interactions are characterized by safety, credibility, and security which build trust between buyer and seller (Mandják & Durrieu, 2000). Interaction is a more generalized concept that is characterized by enhanced mutual adaptation, close distance between actors and increasing commitment (Fernandes & Proença, 2005). The core concept and the strongest governance mechanism of any business relationships is trust. First, it motivates actors to invest in long-term relations instead of short-term. Second, actors feel reduced level of risk and third, trust leads to cooperative behavior from both buyer and seller. The most widely accepted notion of trust refers a feeling of confidence in exchange partner’s reliability (Morgan & Hunt, 1994). 2.1.3.3. Network level Finally, network level represent a set of independent firms that work together closely to manage the flow of goods and services along the whole value-added chain (Mandják & Durrieu, 2000). Networks arise because of repeated exchange actions within interconnected dyads. Over time the number of connections between different actors such as customers, regulatory authorities, strategic alliances and even competitors, increases. This results in establishing a network. However, it is important to understand that every separate actor is embedded in his own network, forming in such a way extended networks (Biggemann & Buttle, 2007). This makes it difficult to analyze and draw any boundaries of a network as such. However, in buyer-seller perspective, network-like relations are characterized by numerous benefits, including collaborative closeness, operational excellence, standardization of operations and transferability & complementarity of resources (Mandják & Durrieu, 2000). In another research, authors name the relations on network level as partnering, which implies such characteristics as trust, win-win outcomes, long-term orientation, co-ordination, problem solving and flexibility (Veludo, Macbeth, & Purchase, 2006: 200). To better understand relationships in network context, it is important to consider embeddedness of activities in production, recourse and social dimensions (Anderson, Hskansson, & Johanson, 27 1994: 308) that represent three cornerstones of ARA model: actor bonds, resource ties and activity links (Hakansson, Snehota, 1995). 2.1.4. Business relationship marketing management Given the introduction of business relationships nature, sources and construct, the problem of their management arises. As it is known, managing business relationships is a function of marketing department of a firm. However, unlike in consumer case, in firm operating on business-to-business markets, it is difficult to draw outlines of marketing function. Indeed, marketing is not a function of its own, it rather becomes a part of many functions, it is instilled in the organization (Grönroos, 2004). Does it make managing marketing objectives more difficult? It is different. In managing business relationship, the main focus of activity is concentrated around the customer, his needs and his individual perception of received values. Thus, the formula of successful relationship marketing management is represented in a simple consequence of actions (figure 5) Figure 5. Customer value creation (Jalkala, Anne, Keränen, 2013). In nowadays dynamic world customers have a possibility to choose between a tremendous number of suppliers, every one of which claims to provide high-quality, high-performance, novelty etc. of their product. Thus, in order to attract customers they need to provide additional benefits, deeper level of understanding customer needs and ability to provide unique solutions developed and created exactly according to specific conditions and needs. Thus, understanding customer needs is a starting point of building business in prevailing conditions. Depending on the sphere of operation, a firm can develop standard products or propose individual solutions ensuring customer’s interest and desire to start buyer-seller relations. With the aim to keep them long-lasting and Understand customer needs Develop appropriate products/services Deliver products/services to the customer 28 mutually beneficial, the values delivery action requires as high standards as the product/service. These practices have led to emergence of networks-like markets where alliance building and resource sharing relations are treated as an indicator of success (Coviello, Brodie, Danaher, & Johnston, 2002). However, building and maintaining cooperative interaction strategies is a common practice in network society. Some authors even came the conclusion that the relationships with key customers is a necessary condition to survive rather than a sufficient condition to succeed (Olkkonen et al., 2008). In other words, it means that being in relations with key customers as a fact is not enough to overcome competition; it is a complicated system that needs proper planning, building and continuous management. Recent literature have provided the notion of overall assessment of relationship conditions - relationship quality. 2.1.5. Relationship quality If somebody would be interested whether there can be good or bad relationships and how to distinguish between them, there exists an established construct of relationship quality as a general measure or the strength or closeness of relationships (Brun, Rajaobelina, & Line, 2013). The notion has been defined by many researchers as a higher order construct consisting of distinct but connected various dimensions (Woo & Ennew, 2004; Ulaga & Eggert, 2006; Myhal, Kang, & Murphy, 2008; Song, Su, Liu, & Wang, 2012). Although many authors agree on trust, commitment and satisfaction as higher constructs, the whole set of dimensions is not yet clearly defined (Čater & Čater, 2010). Difficulties in stating relationship quality construct are associated with a wide variety of relationships across different markets and the nature of every relationship is context–specific (Woo & Ennew, 2004). That is why literature brings various complementary dimensions that are implied in certain frameworks (Table 1). It is important to remember that quality of business relationships is matter of constant monitoring, improvement and proper management. In other words, the fact of long-term relationship existence does not indicate the quality of these relations (Hutchinson, Wellington, Saad, & Cox, 2011). 29 Table 1. Dimensions of relationship quality (RQ). RQ dimension Author T ru st C o m m it m en t S at is fa ct io n C o n fl ic t C o m m u n ic at io n S er v ic e q u al it y C u st o m er o ri en ta ti o n C o n fl ic t O p p o rt u n is m C o o p er at io n A d ap ta ti o n A tm o sp h er e M u tu al g o al s P o w er P ro fi t B o n d s C o o rd in at io n In te rd ep en d en ce Kuruzovich, Han, Koukova, & Ravichandran, (2013) ■ ■ ■ ■ Myhal, Kang, & Murphy, (2008b) ■ ■ ■ ■ ■ Ulaga & Eggert, (2006) ■ ■ ■ Rauyruen & Miller, (2006) ■ ■ ■ ■ ■ ■ ■ Čater & Čater, (2010) ■ ■ ■ Brun et al., (2013) ■ ■ ■ Storbacka, Strandvik, & Grönroos, (1994) ■ ■ ■ Song et al., (2012) ■ ■ ■ Storbacka et al., (1994) ■ ■ Ulaga & Eggert, (2006) ■ ■ ■ Lages, Lages, & Lages, (2005) ■ ■ ■ Woo & Ennew, (2004) ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ Naude & Buttle, (2000) ■ ■ ■ ■ ■ Hutchinson et al., (2011) ■ ■ ■ ■ ■ ■ ■ ■ ■ 30 Instead, a sense of trust and reliability as well as confidence in the future performance based on satisfactory previous experience in exchange negotiations is an example of quality relationships between buyer and seller. Based on the existing theoretical findings, this paper concentrated on trust, commitment and satisfaction as higher order constructs of business relationship quality. Considering the difficulty of choosing complementary dimensions due to their extended variety, they will be identified during the research corresponding to prevailing conditions. 2.1.5.1. Trust One of the most necessary requirement of business relationships is trust which many authors name as a fundamentals cornerstone of co-operation (Ashnai et al., 2009) and relate it to different benefits such as customer loyalty (Rauyruen & Miller, 2006), safety (Ulaga & Eggert, 2006), determinant of sound business relationship (Ashnai et al., 2009) etc. The most frequent reference in defining the notion of trust refers confidence in partner’s reliability. Thus, according to Rauyruen & Miller (2006), trust in buyer- seller relations is “firm’s belief that another company will perform actions that will result in positive outcomes, and that the other company will not take unexpected actions that result in negative outcomes for the firm”. Čater & Čater (2010) define trust as “the extent to which a firm believes that its exchange partner is honest and/or benevolent”. Similarly, Ulaga & Eggert (2006) claim that trust is “a willingness to rely on an exchange partner in whom it has confidence”. Studies of trust in industrial contexts distinguish two dimensions: credibility and benevolence. Credibility focuses on an expectancy that the partner’s word or written statement can be relied on; benevolence, in its turn, means interest of one partner in other’s welfare and motivation to seek joint gains (Ulaga & Eggert, 2006). Based on the previous notions, it is possible to assume that availability of trust relates directly to commitment. In other words, trust is a predecessor of partners’ will ingness to cooperate and build relationships. To prove this, a study by Čater & Čater (2010) concludes that social dimension of business relationships as trust contributes to gaining commitment more than other factors like knowledge transfer or adaptation. As stated by 31 Caceres & Paparoidamis (2007), trust is a major determinant of relationship commitment. 2.1.5.2. Commitment It has been argued that similar to trust, commitment is a vital ingredient of successful relationships and core dimension of relationship quality construct. It has gained such a high recognition because numerous studies have proved the links between commitment and customer loyalty, positive world-of-mouth communications, regular exchange episodes and future purchase intensions (Rauyruen & Miller, 2006). Commitment is typically explained as willingness of both partners to stay in relationships. Brun et al., (2013) explain commitment as “the consumer’s psychological attachment toward the online service provider, along with his/her willingness to maintain the customer-firm relationship”. Representatives of the IMP group define the notion as “the extent to which the company is dedicated to the maintenance of a relationship with another company” (Robbe, 2012). In business-to-business literature, commitment serves as a pledge of relational continuity. Since researchers claim the commitment is a psychological sentiment (Rauyruen & Miller, 2006), it serves as a sort of motivation to maintain healthy long-lasting buyer-seller relations. When customer is confident in his product/service provider and is interested in further cooperations, he is satisfied with the state of relationships. As a result of trust and commitment, customer satisfaction is a next consistent dimension of business relationship quality. 2.1.5.3. Satisfaction Satisfaction is a notion that refers to experience and is illustrated as a ratio of customer expectations to what he has received in the result of exchange episode. Confirmation or disconfirmation of the expected benefits provide satisfaction or dissatisfaction – a general assessment of relations from customer perspective. (Storbacka et.al., (1994) provide the following definition: “Satisfaction is customers’ cognitive and affective evaluation based on the personal experience across all service episodes within the 32 relationship”. Since this concept deals with positive past practices, researchers relate satisfaction to customer retention (Rauyruen, Miller, & Barrett, 2007). When it comes to customer retention management, it is important to understand ambiguous approaches to satisfaction nature. Thus, researchers distinguish between cognitive and effective dimensions (Ulaga & Eggert, 2006). Cognitive nature explains satisfaction as a comparison of perceived performance to standard accepted norms, while effective nature deals with individual assessment of received benefits what different people can treat in different ways. Both approaches seem to be relevant to understanding the concept of satisfaction, however, it is important to consider different antecedents and consequences accordingly. 2.1.6. Complementary dimensions of relationship quality According to IMP group interaction model (Håkansson, 1984) cooperation between two parties takes place in a certain environment of four basic levels that that describe and influence the interaction between buying and selling companies: 1. The interaction process. 2. The participants in the interaction process 3. The environment within which interaction takes place 4. The atmosphere affecting and affected by the interaction (Hakansson 1982). All of the four components are interrelated and in certain way contribute to develop relationships. Thus, environment conditions influence single interactions and their outcomes build the atmosphere and vice versa. This indicated that business transactions do not exist in isolation and cannot be understood if taken as individual events (Song et al., 2012). For that reason, besides initial trust, commitment and satisfaction, every relationship needs individual examination of additional relevant factors that comprise relationship quality. 2.1.6.1. Communications Communications play very important role in business relationships (Lages et al., 2005). Surprisingly, but difficulties in communication compose a main source of problems between parties. There is a big difference between communication and information 33 sharing, although they sound similar. Communications is a bilateral way of information exchange, which is followed by shared understanding of the content of every massage (Lages et al., 2005). According to Bleeke and Ernst (1993: 14), “even the most carefully designed relationships will crumble without good, frequent communications”. There is a notion of communication quality in business relationship literature, which implies existence of permanent contact of both formal and informal nature in buyer-seller dyad (Lages et al., 2005: 1045). Myhal, Buttle, & Murphy (2001) prove that communications is an intrinsic element of relationship quality construct, operating by relative empirical evidence. 2.1.6.2. Service quality. Quality of the provided services contains strategic importance in business-to-business context. Storbacka et al., (1994: 24) claims that service quality is a predecessor of relationship strength, which is expressed by trust in the supplier. The study confirms direct connection between service quality and customer confidence that consequently motivates relationship health and longevity. Theoretical body of knowledge offer four schools that conceptualize service quality notion as an indicator of relationship quality. Early attempts to formulate the service quality notion were made by a famous representative of Nordic School - Christian Grönroos. The model implies three constituting elements that shape the relationship quality. They include technical side of service product, functional side of service delivery and service environment (Chumpitaz & Paparoidamis, 2004). In other words, the Nordic Model is aimed on answering the questions: “What does the customer receives?” and “How the processes are organized?” Service quality is evaluated by comparing perceived values to expected ones. In Parasuraman’s (1986) opinion, the Nordic Model was not sterling enough to measure the service quality. He proposed an improvement to the Grönroos’s model by adding different dimensions of service quality. Thus, the new model, which is called SERVQUAL, was based on the initial perceive-expect paradigm, but the gap between expectations and reality is related to five different dimensions: reliability, responsiveness, assurances, empathy, and tangibility. Although some authors criticize 34 this model to be irrelevant in some conditions (Dabholkar, 1996), it still remains one of the most acceptable by researches (Ghotbabadi, Baharun, & Feitz, 2012: 6). In any case, service quality, as an indicator of trust in the supplier, is a useful tool to observe clients’ behaviors, needs, wants and perception characteristics. By keeping high-level service quality, a firm can contribute to customer happiness with the provider, relationship quality and the overall performance of the firm. 2.1.6.3. Cooperation. Since any firm does not act in isolation, there is a need to deal with dependence on external resources or people. Referring to the ARA model interactions, activities performed by joint efforts, allow efficient use of existing resources, faster achievement of goals as well as access to new opportunities for the future. Thus, (Song et al., 2012: 290) define that “all activities undertaken jointly that direct towards common interests or achieving rewards represent cooperation.” In the context of business relations, cooperation implies pursuing common or mutual goals, aimed besides others on developing and maintaining existing relations (Woo & Ennew, 2004: 1257). For example, such characteristics as: reciprocity, joint problem solving, cooperative changes, united investments, etc., can describe cooperation between business partners (Håkansson, 1984). Taking into consideration the fact that cooperation is based on interaction between people, it is important to remember sentiments and behavioral elements. This implies that cooperation is possible as long as the relationships are characterized by a high level of trust and commitment between both sides (Woo & Ennew, 2004). Apparently, it means that cooperation is a guaranteed indicator of commitment in business relations. 2.1.7. Summary Conceptualization of theoretical findings designate that managing business relationships towards high-quality system is a complicated multistage process that requires continuous monitoring of customer behavior and adjusting firm’s marketing activities 35 accordingly. It has been discovered that nearly every customer needs a unique approach to manage the relations. By studying the components that constitute high-quality business relationships, it becomes clear what a firm should do to implement them into realty. If we divide customer base into three groups according to the relationship experience, every group will value certain characteristics more than others (Figure 6). Thus, for the episode level representatives, a beneficial offer that is more competitive comparing to other suppliers will ensure customers’ willingness to purchase and experience advantages. For the firms that are involved in relationships, the seller should establish itself as a reliable, highly committed provider, able to offer sufficient service quality and satisfy all the needs of its customers. Later on, when actors build the network around the relations, a supplier firm should try to involve the partners into cooperative activities aimed on developing and maintaining the prevailing relationships. Figure 6. Directions for developing quality buyer-seller relationships. In recent decades, a shift towards building relationships as an approach to manage buyer-seller interactions is getting more common. However, not all relationships do require high involvement or long-term orientation. It is important to remember that developing and maintaining relationships requires certain costs. If a firm has thousands actors in the network, it does not mean that everybody without exception should be involved in close relations. Based on balance of interest and economic consequences, a supplier firm may decide which companies should become lifetime partners and which should stay on low level of interdependence (Gadde & Snehota, 2000). This paper is aimed on finding ways to develop long-lasting mutually beneficial relationships 36 between the case company Prima Power and its customers. Even if Prima Power does not strive to develop such relation with every customer, understanding of the relationship managing tools will help to choose the most appropriate strategy toward every particular customer. 2.2. Product value Product value is a cornerstone of business relationships and a key to building successful long-lasting relationships. O’Cass & Ngo (2012) explain that value offering is a pledge of gaining competitive advantage because it can cover two different, yet important aspects of customer satisfaction: performance and relationship benefits. Customers estimate performance through product characteristics (quality, innovativeness, design, sustainability as well as delivery related benefits) and gain additional interest from relationship values (trust, responsiveness, loyalty, commitment). By attempting to combine both types of values, a firm is likely to yield a superior positional advantage (O’Cass & Ngo, 2012): “In particular, firms need to understand customer expectations and transform these expectations into a bundle of value deliverables in the form of product advantage (product performance value) and relational advantage (relationship and co-creation value)”. Value is multidisciplinary term having various approaches and backgrounds to description. That is why different authors tend to use different names of the same notion across scientific literature. Olaru, Purchase, & Peterson (2008) highlight 18 different names to the similarly-described notion. In this paper, the notion product value is chosen, because all of the variations are associated with the main product offering. The concept of product value is generally defined as the ratio of individually perceived aggregate benefits to aggregate sacrifices made by the customer (Olaru et al., 2008). However, there are different explanations available in the literature. Table 2 contains the most explanatory examples: 37 Table 2. Definitions of product value. Snoj, Korda, & Mumel, 2004 Product value is composed of all actors: qualitative and quantitative, objective and subjective that jointly form a customer’s buying experience Slater & Narver, 2000 Product value for a customer is created when the benefits a customer gets with a product are greater than the long-term costs a customer is expected to have with a product Ulaga & Chacour, 2001 Perceived worth in monetary units of the set of economic, technical, service and social benefits received by a customer’s firm in exchange for the price paid for product offering and taking it into consideration, the available alternative of supplier’s offering and price Robert B Woodruff, 1997 The customer’s assessment of the value that has been created for them by a supplier given the trade-offs between all relevant benefits and sacrifices in a specific-use situation Snoj et al., 2004 Product value to a customer is a comparison of tangible and intangible benefits from the generic as well as the supplementary levels of a product and total costs of production and usage of a product Based on the above-mentioned definitions, it is possible to draw common characteristics of value concept. First, product value is a multi-dimensional construct. Second, it is often associated with perception what means a subjective individual evaluation of the utilities of the product and therefore, it can vary among customer. Different customers in different conditions may evaluate the received value in various ways. This makes conceptualization challenging and needs further detailed investigation of value constructs to be able to compose the wright set of values for particular customers. Finally, it is a concession of benefit to sacrifices experienced by customer. There can be various dimensions of benefits starting from positive communication episodes and finishing with increase of total firm performance. That is why benefits are often described as total benefits that contain certain subcategories such as functional, economic, emotional and strategic benefits. Total sacrifices are composed of money, time, energy and physical costs (figure 7) (Chen & Han, 2009). 38 Figure 7. Customer perceived benefit – sacrifice matrix. 2.2.1. Customer perceive benefits As mentioned in previous chapters, value is a set of various benefits that in sum generate customer’s opinion about received advantages in the result of exchange practices. Customers can obtain benefits in two ways: directly through functional and economic (tangible) values and indirectly through emotional and strategic functions (intangible values). Functional benefits are associated with ability of the obtained product/service to solve existing problems by its innovativeness, quality standards, performance, power etc. Economic benefits emerge from the opportunity costs if alternative similar product is available (Prior, 2013). Emotional construct carries a vast majority of additional benefit starting from satisfaction with the purchase and finishing with social status identification. Strategic benefits, as explained by Wimmer & Mandják (2002), provide partners with opportunity to gain competitive advantage, force their core competencies or create market position. Prior (2013) also claims, “a considerable proportion of value is intangible”. While the majority of researches concentrate on product value attributes, the power of intangible (or relationship) value is underestimated. However, value evaluation by customer is a continuous process lasting throughout the complex solution delivering process. Customer benefits functional economic emotional strategic Customer sacrifices price time/effort/energy conflict 39 2.2.2. Customer perceive sacrifices: Sacrifices requires a thoughtful attention because they tend to have stronger negative impact on value comparing to the positive impact of benefits (Ravald & Grönroos, 1996). Generally sacrifices include price, time/effort/energy and conflict. According to different authors, the most influential indicator of sacrifice can be price and related monetary expenses (Olaru et al., 2008) or time issues (Lapierre, 2000) because there are companies that count time as a more important asset that money. An increase of any costs whether price of time leads to increase of customer sacrifices and eventually – to reduction of total perceived product value. However, in industrial markets, it is not always true. For example, price and conflict can have indirect positive influence in some conditions. It is generally believed that higher level of price means higher quality and performance of the product. Thus, by purchasing high-priced products/services, a company indirectly contributes to increasing its benefits from having a high-class product (Teas & Agarwal, 2000). Another example is described by Guenzi & Troilo (2006) in their empirical study which claim that conflict can be positive in business relations, because it may help to motivate people and get the most from each person involved into communication processes. 2.2.3. Product value drivers Knowledge of customer needs stimulates creation and delivery of appropriate values, which is a fundamental construct of building successful business relationships. Companies want to ensure that customers perceive values to the same extend as companies design and create them. If it does not coincide, the seller should reconsider the approaches of value communication processes. With the aim to ensure maximum level of customer satisfaction with provided products/services, researchers identify certain drivers that positively influence customers’ experience and hence, overall perception of delivered goods – product value drivers. Constant monitoring of factors that drive customer satisfaction should be an essential activity of every firm (Chakraborty, Srivastava, & Marshall, 2007). 40 Since business relations are long-term oriented, close and involve complex patterns of interactions (Håkansson, 1984), there is no doubt that value drivers is a multi- dimensional construct by its nature (Homburg & Rudolph, 2001). Thus, a proper structuring of value attributes needs a comprehensive approach as well. Across literature, authors have studied value drivers from different prospective. Table 3 presents findings in the area of value drivers investigation. Table 3. Conceptualizations of value drivers. Author Focus of study Drivers of product value Möller & Töorröonen, (2000) Indicators of Supplier’s Value Production Capabilities Capability Delivery Capability Incremental Innovation Capability Relational Capability Networking Capability Radical Innovation Capability Capability for Mastering Customer’s Business Helgesen, (2007) The most influential (antecedents) of customer satisfaction Exporter’s range of offered products Exporter’s answers to inquiries Information regarding order progress Promptness of deliveries Quality level of products Terms of deliveries Competitiveness of prices Homburg & Rudolph, (2001) Valid customer value measure for industrial customer (INDSAT) Product features Product-related information Services Order handling Complaint handling Interaction with sales people Interaction with internal staff Richards & Jones, (2008) Value drivers in customer relationship management Improved sales force efficiency and effectiveness Individualized marketing messages Customized products and services Improved customer service Efficiency and effectiveness Improved pricing 41 Ulaga (2003) Relationship value drivers Product performance Product reliability Product-related services Customer information On-time delivery Accuracy of delivery Knowledge of supply market Improvement of existing products Design task Product testing and validation Communications Problem solving Mutual goals Price above, below, at competition Order-handling Chakraborty et al., (2007) Drivers that influence customer satisfaction in a business-to- business context. Reliability of the supplier Adherence to delivery schedule Breadth of product line Competitive prices Warranty coverage All of the mentioned drivers are relevant to conditions of business relationships and should be properly treated. However, as it was stated earlier, business relationship is a context specific phenomenon, so the set of the most relative value drivers is unique and context-specific for every relationship. What is more, Wimmer & Mandják (2002) emphasis that every company is obliged to find her own factors that are adjusted to its own objectives and processes, through which the value creating process is influenced in the most efficient way and thus – competitive advantage is achieved. Different value drivers presented in the table 3 have been studied to prove their impact on customers’ perception of obtained value. Depending on revealing conditions, they can all serve to some extent, as benefits of relations and thus have potential to improve their experience and consequently – intensions for further cooperation. Some of the attributes are repeated across different studies indicating that they are relevant for various customers in different industries. Although the set of best fitting drivers may vary from company to company, awareness about less important drivers is still important to understand the potential areas of influence or room for improvement in case of dynamic changes. 42 In order to facilitate understanding of value drivers in business relationships, they can be divided into categories based on their nature. Table 4 integrates value drivers into separate categories for ease of allocation and navigation. Table 4. Components of product value drivers (adapted and supplement from Ulaga, (2003). Name of the category Included value drivers Product quality Product performance Product reliability Breadth of product range Customized products and services Service support Product-related services Customer information Warranty coverage Availability of product-related information Delivery On-time delivery Accuracy of delivery Supplier know-how Knowledge of supply market Improvement of existing products Time-to-market Design task Product testing and validation Personal interactions Communications with sales personnel Interactions with internal personnel Problem solving Mutual goals Direct product costs Price above, below, at competition Cost reduction programs Reliability of supplier Process costs Order handling Complaint handling Manufacturing 43 2.2.4. Summary If in the previous section it was discussed “what?” should be done to develop quality business relationships, in this section it was investigated how to do it. Given the basic components of product value – ratio of benefits to sacrifices, it becomes clear that by increasing potential benefits and decreasing sacrifices, a supplier firm own a chance to increase customer satisfaction and positive experience. Benefits in this context is a very broad and meaningful notion, which implies various areas of influence on one hand and dynamics of customer needs and preferences over time – on the other. Areas of influence relate to the functional, economic, emotional and strategic benefits , which represent actions across the whole cooperation processes, starting from provision of sufficient product related information, agreement of delivery conditions and finishing with availability of supportive after-sales cervices or informal communications. Dynamics of product value can be examined in macro- and micro-senses. By macro- sense it is implied that fast changing conditions of the metal industry in Finland require manufacturing firms comply with them and constantly modify their technologies and equipment. Thus for a supplier firm it is vital to follow the dynamics of the market generally and satisfy customers’ up to date requirements appropriately and on time. In micro-sense it means that customers’ needs change with the flow of the relationships. Thus, a supplier firm should concentrate on and promote economic and functional benefits for the potential customers, while existing members of relations will value professional service support, prompt responsiveness as well as regular communication sessions. Speaking about partners in the network, the most wanted values would include mutual willingness to share existing resources for common projects, maintaining regularity of contact and developing new opportunities for joint implementation etc. In order to navigate within the vast amount of possible value drivers and choose the most efficient ones, a clear understanding of customers’ needs, wants, perception characteristics is required. Because customers own the precious knowledge, which suppliers should derive in order to satisfy their needs in a best way and provide in such a way sustainable, mutually beneficial relationships. 44 2.3. Theoretical justification of empirical research Analysis of background literature shed light on links between quality of business relations and product value creation (figure 8). They include: 1. Different value characteristics on three levels of business relationships. 2. Processes of understanding, creation and delivery of value for customers. 3. Appropriate value attributes for different roles in buying center caused by complexity of business relations. It concludes that value creation and business relationships are entwined concepts (Rocca & Snehota, 2014). In business relations, value creation is indeed a centric concept around which interactions are developed and relations accrue. Since business relations are long-term oriented, value creation is a continuous and dynamic process respectively, which needs a comprehensive approach. In order to develop quality relations, a lot of attention, knowledge, and cooperation has to be devoted to the process of value creation starting from studying the specifics of how the customer conducts his business and finishing with availability of convenient ways to sharing customer feedback and experience. Figure 8. Linking product value theory to relationship quality theory. Value creation through the lenses of business relationships Levels of business relationship Value creation process Episode Relationship Network Understand needs Develop values Deliver values 45 Imposition of the theories can be explained by the following example. A firm in industrial sector has a customer company that needs regular fast deliveries of quality high-tech goods. In respond, the provider is required to: 1. Ensure high-quality standards of manufacturing products. 2. Put effort into standardizing delivery processes 3. Provide 24/7 technical support and flexible training possibilities. As a result, the customer is likely to experience trust in the reliability of supplier, commitment to continue exchange episodes and satisfaction with both the object of exchange and accompanying services. In addition, complementary dimensions of relationship value may develop, for instance, joint problem solving, resource ties, investments etc. 2.3.1. Value creation process in business relations The question of value creation in industrial markets is a point of great interest in existing literature (Mele, 2007). It is a complicated continuous process of alongside relationship development process that is characterized by involvement of multiple actors including supplier form representatives, customer firms, partners, third parties etc. Value creation cannot be assigned to a single unit at the organizational boundary as, for instance, sales or marketing (Rocca & Snehota, 2014). Webster (1992) reminds that every person in an organization should be to some extend responsible for the process of value creation that consists of the following stages: understand customer needs, develop the appropriate values and deliver created value to the customer. Similarly, Bower & Garda (1985) saw the process in three stages: identify customer needs, divide customer groups by different characteristics of value and design and produce the right products/services for the defined customer groups. However, nowadays, in the age of relationships, nature of production is different from previous ages. Product / services are characterized by more individual approach, indeed customization and personalization (Galbreath, 2002). That is why, the process of value creation is best described by the following stages: choice of value proposition, value production, Value delivery and communication and finally, value audit (figure 9) (Mele, 2007). This process echoes with the already mentioned process of relationship management in business relationship 46 literature: understand customer needs, develop appropriate products/services, deliver (communicate) products/services to the customer. Choice of value proposition. In business relationship markets, the choice of value proposition is a vitally important step that first of all, identifies the development path of further steps of the process and second, represent firm’s future differentiation, positioning and potential competitive advantages. Choice of value proposition has gained such a great importance because it is the customer who identifies value, meaning that characteristics of the product/services are based on customer s needs and preferences. Taking into consideration customers’ individual perception of values, it is concluded that value proposition is not a fixed truth, it is rather a dynamic concept that requires constant rethinking and permanent improvements (Mele, 2007). ↓ ↓ ↓ Figure 9. Process of product value creation. Value production. Value production serves as a facilitator of value proposition, representing a bridge between what the customer wants and what the firm produces. It is the process of implementation of value proposition in form of product/service technical and functional characteristics. Value delivery and communication. On this stage, a great role of successful delivery and communication of value belongs to the function of marketing as such since it attempts to ensures the fact of transaction and maximize the number and quality of these transactions. As Mele (2007) describes, value delivery is the ‘moment of truth’ for both customer and provider in which expected quality and delivered quality meet together. Understand customer needs Develop appropriate products/services Deliver products/services to the customer Choice of value proposition Value production Value delivery Value audit 47 What is more, communication of value to customers reduces the risks of misperception due to lack of information. According to Salomonson, Åberg, & Allwood (2012), sertain communicative skills can contribute to building trust and satisfaction in buyer-seller relations and thus – have impact on product value creation processes. Attentiveness, perceptiveness, and responsiveness – are the behaviors of interaction involvement that help to increase the descriptiveness of communications with customers. These skills help firms to learn as much as possible about customer preferences, specific needs or concerns with the aim to provide appropriate products and services to meet those needs (Salomonson, Åberg, & Allwood, 2012). Attentiveness – show involvement in customers’ problems/issues. Perceptiveness means assigning meaning to the verbal and nonverbal messages. Responsiveness stands for demonstrating understanding of the message a customer intends to convey (Salomonson et al., 2012). Value audit. Value audit as a conclusive stage of value creation process in business markets, has a twofold function. First, it is important as a measure of effectiveness of the marketing strategy. Second, evaluation of value in use leads to better understanding of customers, identifying of strong and weak sides and of the firm and provides useful insights for the future improvements of value creation and delivery processes. 2.3.2. Product value dynamics in business relationships Product value, as mentioned previously, is a ratio of perceived values to sacrifices (Lapierre, 2000) a customer experiences in the process of building relations in general and during exchange episodes in particular. Mandják & Durrieu (2000) distinguish two dimensions of value in industrial markets: intrinsic and extrinsic, both of which are composed of economic and non-economic values. Intrinsic elements come from the product itself and economically represent product performance, functionality, price, innovativeness etc. Non-economic intrinsic elements reveal image side of the product, for example, famous name of the brand, modern design of products, unique packaging etc. At the same time, extrinsic elements are associated with additional pre- and after- sales services. They include maintenance programs, technical support, warranty, 48 trainings for the personnel as economic aspect; and reputation, reliability, responsiveness, dyad relations, service etc. as non-economic aspects (figure 10). The process of building business relationship is a process of constant exchange of values between the parties. Values have different nature at different stages of cooperation, meaning that product value is a dynamic phenomenon because it tends to change as relationships switch to new levels: from episode to relationship to network levels (Ravald & Grönroos, 1996). Figure 10. Product value dimensions. Speaking about episode level, which is characterized by exchange processes of products and accompanying services between two parties, tangible or economic values play a more important role because customer has to choose the best in his opinion value among various propositions. In episode level, the most favorable ratio of benefits to costs is highly likely to be preferred by the customer. Moreover, if a firm provides something unique and valuable to the customer, there is a high probability of repeated purchase intention (Ravald & Grönroos, 1996). Usually after a couple of successful purchase episodes, when communications start to transform into relationships and then networks, other values such as safety, continuity, security and credibility evolve, pushing thus tangible values to the sideline (Mandják & Durrieu, 2000). This takes place when customer is satisfied and knows that this firm is able to understand and fulfill his needs, organize proper delivery processes and provide Value creation through the lenses of business relationships Levels of business relationship Value creation process Episode Relationship Network Understand needs Develop values Deliver values 49 sufficient aftersales services – in other words, customer develops trust in his supplier. Availability of these values in business relationships contribute to decrease of sacrifices, retention of existing customers (Ravald & Grönroos, 1996) resulting in increased satisfaction on future exchange episodes. On table 5, the focal values on different levels of relationships are indicated: Table 5. Focal value in levels of relationships. Tangible values Intangible values Episode level ✓ ✓ Relationship level ✓ ✓ Network level ✓ ✓ Thus, on episode level the unit of exchange is products and accompanying services – tangible values are more important than intangible. Later on customers start appreciating non-economic (intangible) values like confidence, coordination, trust, safety etc., what ends up in joint problem solving and beneficial resources utilization for both parties (figure 11). Figure 11. Value dynamics in business relationships. Episode Relationship Network Increase benefits Reduce sacrifices Encourage continuation of exchange Credibility Safety Trust Commitment Satisfaction L ev el s V al u es 50 2.3.3. Summary Based on business relationships and product value theories exploration and analysis, important conclusion that contribute to answering the research question emerge. First, as it was stated, creating superior product quality ensures customer satisfaction and commitment in buyer-seller relationships. However, having sufficient product value attributes is still not enough to ensure quality of the relationships. It is critically important for the firm to be competent in proper delivery of particular values to particular actors at certain time and place. Second, it is critically significant to realize the importance of continuity in business relationships. Concentrating attention only on exchange episode does not open the full potential of relationships and unfortunately, does not guarantee the mutual benefits for the future relationships. Such values as trust, commitment and satisfaction do not evolve over night and are results of continuous cooperation where both parties are interested in further cooperation. Third, when trying to develop successful relationships, it is not enough to concentrate only on increasing benefits and decreasing costs. The meaning of relationships lies in firm’s sufficient responsibility to meet customer expectations in long run, gaining in such a way trust, loyalty, desire etc. Fourth, when customer perceived value is approved on relationship level, it will strengthen the network bonds on one hand, and increase perceived product value on episode level on the other hand (Ravald & Grönroos, 1996). Fifth, many theorists and practitioners mistakenly treat the decision-making people in customer firm as the most important and address all the values and attention only to them. Although they are responsible for financial issues, they are not as close to the product as operators and engineers who directly involved in product utilization and whose experience contributes significantly to the overall quality of perceived value. 51 3. METHODOLOGY This explanatory section provides detailed description of empirical research design. Since the need for empirical research is justified by theoretical findings, the role of theory is discussed first. This part includes logic of building theoretical findings and its influence on defining the research strategy, followed by design. After that, more detailed instructions of data collection and interpretation are explained including criteria for choices and time horizon. The chapter finishes with quality constructs of the empirical research. 3.1. Role of theory In academic world, most of the researches are based on theoretical findings that are being used to study various phenomenon and contribute to building new theories. The term theory can be explained in different ways but it is generally used as a way to explain observed regularities (Alan & Bell, 2011). One of the most common ways to build a bridge from scientific theory to practice research is to undertake deductive theory organization approach, which is employed in this paper. Deductive theory operates on the principle from general to specific. It means that in the base of the research lies a known domain and within the domain various theories are studied, analyzed, connected with each other what results in defining research questions that needs to be subjected to empirical scrutiny. Concepts that build the hypothesis need to be transformed into researchable entities with the aim to collect and analyze data from practical world. Results of the empirical study are then compared to the theoretical findings so that the research questions are answered and hypothesis is either confirmed or refuted. To sun up, the deductive research goes through the following stages: 1. Theoretical literature analysis. 2. Research questions designation. 3. Empirical data collection. 4. Results/findings of the practical research. 5. Answering research questions. 6. Revision of theory. 52 Although deductive research refers to theory testing approaches rather than theory building (for example, inductive approach), it still provides significant contribution to theoretical knowledge about relations within theories. It is evident from the final step of the approach – theory revision, which goes in the opposite direction from deduction – from practice back to theory. This step is important to review the theory and modify in light of the empirical results if necessary, so that these findings can lie in the base of future researches by other authors. Moreover, the paper can also be characterized as an inductive research to some extent. As it is known, the base of deductive review comprises various theoretical findings and approaches, however in this paper some of the sources for literature review represent inductive researches – practical issues that lied in the base of a theoretical investigation (Kovalainen, 2014). Combination of two methods, which is called abduction, helps to investigate the research phenomenon from a wider perspective. This in its term increases the likelihood of generating useful data on one hand (Saunders et al., 2009), and increases validity of the research on the other. When combining theoretical and empirical data, it is important to keep conformity of theory to practice. Although data collection practices is handled in line with present framework, it does not exclude the fact of discovery: in the process of data collection, not foreseen aspects or new dimensions of the research problem may arise (Dubois & Gadde, 2002). In order to meet the conformity, gathered data should not be forced to satisfy preexisting believes. Instead, going back and forth between framework, data sources, and analysis helps to develop comprehensive and acquitted study. This approach is named systematic combining (figure 12) and is widely used for case study researches (Dubois & Gadde, 2002: 556). Systematic combining is placed between deduction and induction in terms of theory development. If deductive approach implies confirmation or rejection of a formulated theoretical framework, inductive research is aimed on inventing contemporary new theory, which did not exist before. In contrast to these, systematic combining emphasizes on theory development, based on blending existing theories and new concepts obtained during empirical data collection. Although this paper is built upon a linear – analytical structure globally, the elements of systemic combining were implied 53 during matching initial theoretical framework and factual data from practical environment. Figure 12. Systematic combining (Dubois & Gadde, 2002). This approach opened an opportunity to discover new concepts and integrate them into existing theory, contributing in this way to development and extension of theoretical knowledge. Moreover, going back and forward between the sections help to describe in- depth structure of the studied phenomenon in context-specific situation and better understand causal relations between variables. 3.2. Research design Since this paper aims at investigation and understanding of causal relations between variables, it belongs to explanatory study (Saunders et al., 2009), which can be characterized by linking theories within one problem in order to understand this problem, operational principle, links and relations in specific context so that one can manage the problem in a desirable way. Although a combination of a deductive approach and explanatory study is often followed by a quantitative empirical research, the use of qualitative data can also be applicable. Qualitative research emphasizes meaning rather that frequency what is beneficial to investigation of relations between Matching Direction & redirection Theory Framework Empirical world Case 54 variables. According to Webb (2002), this method digs deeper in to the roots of the problem in order to create in-deep understanding, rather than just investigating the rationalized and superficial responses. There are multiple ways available to employ in an empirical study. They may differ by their complexity, required time horizons, availability of various sources of data etc. Moreover, the same issue can be studied using different research strategies, for example, human behavior in certain conditions can be tested either by an experiment or by a survey. For the purposes of this paper, the case study as a research strategy was chosen to conduct the empirical study. The main criteria for choosing the right approach was the possibility to answer the research questions and meet the research objectives. According to (Robson, 2011), case study is ‘a strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence’. What is more, case study is used when there is a need to explore causal relations between variables, in this case – between product value creation processes and quality of business relationships. Unlike other methods that are employed in a highly controlled context, a case study provides opportunity to gain a rich understanding of the context (Saunders et al., 2009) which plays an important role in business-to-business relationships. A case study approach aims at answering such questions as ‘Why?’, ‘What?’, ‘How?’ what makes it also suitable for the explanatory research. In order to implement a case study successfully, it is important to distinguish between variations of a case study. Thus, two discrete dimensions: multiple- and single-case, identify four different options (figure 13). Multiple-case studies are generally considered to be preferable to single-case studies because they provide opportunity to identify facts that occur across various cases and according to that – generalize findings (Saunders et al., 2009: 147). However, in some situations single-case study is more preferable. Yin (2009) provides five such rationales, among which the most widespread are critical cases, extreme and unique cases. In order to avoid repetition, it is also suitable for representative or typical case. If there is an opportunity to study a previously prohibited phenomenon, a single case study, which is called revelatory, is 55 applicable. Finally, a single-case is more pre