Maintaining positive returns in the value and supply chain: applying tomorrows marketing skills

Dennis A. Pitta Frank J. Franzak and Michael W Little .

The authors
Dennis A. Pitta is Professor at the Merrick School of Business, University of Baltimore, Baltimore, Maryland, USA. Frank J. Franzak is Associate Professor of Marketing at Virginia Commonwealth University School of Business and Department Chairperson and Michael W. Little is Associate Professor of Marketing and former Associate Dean of Graduate Studies in Business, both at Virginia Commonwealth University, Richmond, Virginia, USA.

Introduction
Business is changing. While that declaration will surprise no one, the key to success and ultimately survival is still in understanding the opportunities created by the changes. One of the biggest emerging changes in business today is the way rms link to other rms. To compete in todays world, rms must interact with other companies, not only as buyer and seller, but also as associates, partners, or allies, cooperating to provide a benecial outcome to each other and to customers. When this happens in the value and supply chain, a network of actors merges to transform raw materials into distributed goods (Handeld and Nichols, 2002). This is not business as usual, at least not yet, and the changes create opportunities for rms that can manage multiple relationships, simultaneously. Two descriptions of value and supply chain changes capture the magnitude and promise of this type of change. In describing the supply chain Diamler-Chrysler developed for its new Jeep model, Liberty, Siekman (2002) used a river system metaphor:
The supply chain is more like a great river system. Thousands of springs give rise to hundreds of creeks that ow into scores of streams that form Missouris and Ohios that then become a Mississippi. Near its end the river divides again into separate channels or in the case of the Liberty, into trains, ships, haul-away trucks, and the lots of over 2,800 dealers in the US and Canada, plus a few thousand more in other countries (T168[B]T168[L]).

Keywords
Supply chain management, Value chain, Customer orientation, Relationship marketing

Abstract
The value and supply chain is an emerging pathway to marketings emphasis on customers. It integrates a renewed focus on customer value and the economic and behavioral systems of the supply chain. Successful value chains can be developed with emphasis on the four practices that drive a customer orientation. These are: relationships, interactivity, valuing customers over time, and customization. When properly integrated, these practices help to form networks operating as a competitive unit. This paper claries the role of value in the value chain, discusses the use of the four major elements in the value chain, and draws implications for marketers.

Hagel (2002), views the situation in a more opportunistic manner. His leveraged growth model is offered as the path to higher sales and protability. The description addresses strategy for a manufacturer of stoves for the home market:
. . . youd nd independent home-product designers and encourage them to work with contractengineering groups to develop innovative oven designs. Youd also develop relationships with various manufacturers specializing in different stages of the production process and use them to actually make the ovens. Your role would be to manage the process network, facilitating the collaboration of these three groups of companies. They would go along with the arrangement because your broad distribution, sales, and marketing capabilities would speed the new lines acceptance into the market. By tapping into others assets rather than either building or buying your own, you reduce your nancial risk, break into markets more quickly, and stay responsive to future technological and market shifts (Hagel, 2002, p. 70).

Electronic access
The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/0736-3761.htm

Journal of Consumer Marketing Volume 21 Number 7 2004 pp. 510-519 q Emerald Group Publishing Limited ISSN 0736-3761 DOI 10.1108/07363760410568725

Both of these descriptions depict an underlying network of rms working together. They are examples of strategic thinking within the value and

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supply chain. They exemplify management where value across a network of rms gains importance, but this will happen only if the network of relationships is appropriately managed. Value and supply chains have been studied in a variety of disciplines including marketing, logistics, procurement, operations research, international business, and economics. Within these perspectives, the emphasis has typically been on how a rm works with others to gain competitive advantage. The objective has been reducing supply and/or distribution costs, minimizing delivery times, or managing functional responsibilities to smooth operations. Now the focus is shifting to how multiple rms, working in concert, continuously seek to add value and ultimately enhance the nal customer experience. This is a more complex situation. Managers need to understand what happens when sourcing becomes outsourcing, when signicant addedvalue up-stream activities are provided by rms in far-off locations. They need to know how to deal with a retailer who becomes the largest company in the world, in part by controlling the production decisions of many, many manufacturers. Much needs to be learned about how a network of companies can work together effectively to achieve common objectives. For marketers, the challenge will be integrating a focus on customer value with the economic and behavioral systems that dene value and supply chains. In particular, marketers should understand how the practices associated with delivering superior customer value relationships, interactivity, lifetime value measurement, and customization (Cron, 2004) apply in a supply chain context. The decisions implementing these practices are not new to marketing, but the convergence of technological, societal, economic and global forces suggests the time is right to emphasize using them in an integrated way. This interest coincides with renewed concentration on the value and supply chain as the setting where companies work together to deliver value to customers. The purpose of this paper is to examine the application of these practices across the value and supply chain. Each practice is described, its contribution to customer value is examined, and issues related to application in the value and supply chain are explored. A summary of implications for marketers is provided.

Customer value and the value and supply chain

Payne and Holt (2001) were among the rst researchers to highlight the relationship between

value and the value chain. They noted three distinct perspectives toward value in the literature: creating and delivering superior customer value, customer-perceived value, and value of the customer to the rm. Each perspective inuences the effectiveness of the value chain. In conjunction with its supply chain antecedent, the value chain is a competitive instrument. If it succeeds in delivering superior customer value, it may succeed in trumping its competition. However, the interplay of the three perspectives is complex. Delivering superior customer value is important but is bounded by customers perceiving that they are, in fact, receiving that value. Perception may be reality to consumers but it is often not accurate. Many products and services are simple to use but highly sophisticated and complicated to produce. Most consumers do not realize the complexity and engineering necessary to produce a modern product. For example, two modern automobiles, a Toyota Camry and a Nissan Altima may be direct class competitors. Each may have thousands of engineering improvements from previous models. They may, in fact, be basically equivalent and priced similarly. However, if consumers perceive that the Toyota is the more valuable product, Nissan will have difculty selling its product at an equivalent price point. What effects customerperceived value? It could be experience with a product. A highly satisfactory purchase and use of a Camry may create brand loyalty resistant to change. Alternatively, a proactive manufacturer may build obvious quality into the product that consumers will not miss. Honda took this strategy when it differentiated its Accord model from the lower level Honda Civic. While the engines were identical, the body styles differed. But the two models were not that dissimilar. To enhance the apparent differences, Honda added thicker door gaskets and more robust suspension to the Accord. The result was that when consumers visited showrooms to kick tires and slam doors, the doors on the Accord shut with a healthy sound that screamed quality. Honda was able to make the quality differences obvious and use them to differentiate the products more starkly. The result was healthy sales of each model and a premium price for the Accord. Other techniques can make the value delivered more obvious to customers and often take the form of public relations and advertising efforts. The last perspective, customer value to the rm, has been termed lifetime customer value. Calculating each customers lifetime value is vital in maximizing the long-term benet to the value and supply chain (Zeithaml et al., 2001). Organizations in the value and supply chain have come to recognize that not all customers are created equally. Some are more important since

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they contribute higher net revenue over their lifetime. It is important for rms in the value and supply chain to gauge the lifetime customer value of each of their partners. This includes the business-to-business linkages as well as the nal business to consumer link. By carefully selecting and nurturing value chain partners and customers, rms can avoid prot-sapping interactions that stunt their long-term prospects. Managing the lifetime customer value can make an entire value chain more competitive as it strives against alternative value chains.

Relationships
It is not surprising that value is the lifeblood of the value and supply chain. Some writers see it as a series of dyadic interactions beginning as interorganizational dyads and progressing ultimately to a business to consumer dyad. While the view is consonant with the exchange theory of marketing it overemphasizes the dyad and the transaction. The true nature of the value and supply chain is to transcend the transaction and deliver value. Thus, it is the function of the value and supply chain to build and transport value across the multiple relationships that exist within it. In fact, relationships are implicit in the value and supply chain literature. Researchers have investigated the connection between the sellercustomer relationship and value (Crosby et al., 1990). Crosby et al. (1990) emphasized the importance of understanding the components of quality in a relationship. That knowledge is important in the longer-term relationships sought by companies. This perspective underscores the interaction between parts of the value and supply chain and the consumer in creating value. Moreover, the relationship itself creates some value that is shared in the value and supply chain. How that value is shared can determine the effectiveness and longevity of a given relationship. Gummesson (2002) completed an extensive synthesis of the relationship literature, much of which focuses on the fundamental value in relationship marketing. Relationships are valuable if they engender inter-party collaboration and value generation. Gummesson presents the concept of total relationship marketing that underscores mutual benet, win-win relationships with customers and other partners. As Gummesson (2002, p. 15) phrases it, the core values of relationship marketing are found in its emphasis on collaboration and the creation of mutual value. This leads to viewing all the participants: suppliers, retailers, customers and others as partners in value creation rather than adversaries.

He goes on to describe the value and supply chain as a plus-sum game in which the parties increase value for each other. In contrast, a zero-sum game typies the win-lose situation in which one party can only gain at the expense of others. Moreover total relationship marketing takes the long-term view, avoiding the transaction as a framework. Freed from the transactional model, marketers can maximize the value producing efforts of a network of suppliers, customers, government agencies and other stakeholders. In order to produce cooperation and avoid the detrimental effects of self-interest, partners in the value and supply chain must recognize the advantages of cooperation. In essence, customer perceived value must apply to each of the chain partners. As long as the partners see more benet to cooperation, than to self-serving behavior, the win-win perspective will benet all. Gummesson (2002) stressed that all parties must be active and take responsibility. Relationship marketing represents a break from traditional company-oriented selling. In selling, the salesperson initiates the contact and controls the sales process. In relationship marketing, any party can interact to start and manage the marketing relationship. For example, in businessto-business marketing, the customer often sets specications and requests proposals. In this case the seller may react to the proposal and collaborate to complete the request. In another view, the customer can exert force on the seller to change products, delivery terms or other aspects of his business. A drawback in the traditional marketing situation is that often consumers will suggest product or service changes that are ignored. Under total relationship marketing, the goal would be to welcome and facilitate such information ows. Gummesson also cites the importance of values that enhance the relationship, product or service instead of those that preserve the bureaucracy. Companies fend off threats to their existence by elaborating rules, reacting rigidly and predictably, focusing on internal routines rather than results. This somewhat arrogant view leads to a self-image of the supplier as expert and the customer as ignorant. The view is persistent and can survive in a non-market environment. However, in any free market situation in which customers have choices, they will choose to support partners rather than dictators. There are growing examples in health care, in automobile repair and in other services where big bureaucratic organizations are losing some ground to smaller, exible more personable rms. Total relationship marketings contribution to the value and supply chain is three-fold. First, the

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long-term relationship view is a critical perspective if a value and supply chain is to succeed in delivering value. Second, it recognizes that over time, an ongoing relationship can develop and its interactions can improve the value delivered. Value is created over time and in well-managed relationships, that value can increase as a result of an ongoing series of individual transactions. Third, it acknowledges the inuences of stakeholders and parties not directly connected with the value chain. Thus it adds a dynamic character to the vision of value chains. Relationships in the value and supply chain What is the nature of the relationships in the value and supply chain? Many are business-to-business in character, typied by the supplier-manufacturer or manufacturer-middleman relationship in the channel of distribution. In the more limited channels approach, each rm has a vested interest in satisfying the ultimate consumer. In traditional channels that interest has been tempered with myopic, short-term self-interest. In the broader value and supply chain view, other relationships assume importance and may have a non-business organizational component. For example, The Dominion Lock Company makes key blanks and key making machines and is otherwise an ordinary manufacturing company. However, the rm makes tools that locksmiths can use to pick locks. This product line would be of interest to law enforcement agencies in the attempt to keep them out of the hands of burglars. Thus, external stakeholders can assume importance and inuence the value chain. Then too, in the electronic entertainment industry, the companies that produce movies protested vocally when some DVD recorders were able to break the DVD copy protection and produce illegal copies of the entertainment content. Equipment manufacturers and other companies had to remove that capability from their DVD recorders. Thus, external stakeholders, not directly involved in value delivery, have an impact on the value and supply chain. It should be emphasized that the marketing literature has not devoted much attention to managing long-term relationships with customers, partners, or external stakeholders (Morgan and Hunt, 1994). Logically, there is a need to manage these relationships to succeed and the management approach that is required is relationship marketing. In this respect, marketing can learn from lobbying and public policy. In that arena, numerous stakeholder groups can inuence any decision and can derail the best-intended initiatives. Lobbyists have learned to market to each stakeholder public to hear and react to their

concerns, gain their support and increase the chances of a successful action. As the developed world becomes more complicated and sophisticated, and stakeholders increase their involvement, managing the interrelationships becomes critical. For instance, Hennig-Thurau and Hansen (2000) argue that procient handling of stakeholder relationships is important for protability. Examples of stakeholder groups stopping or modifying new product introductions abound. When Anheuser-Busch introduced a nonalcoholic malt beverage named Chelsea, consumer groups protested that it was a transparent attempt to introduce teenagers to the taste of beer, to desensitize them to that taste and pave the way to beer consumption, when legal. Facing an onslaught from an unnoticed public, AnheuserBusch had to withdraw the product after spending funds to develop it. Anticipating the stakeholder groups concerns and either overcoming them or recognizing their persistence, might have saved the company money. Thus the lesson is that multiple stakeholders should be considered in the context of relationship marketing. To emphasize this point, there is research to show that interorganizational networks are strategic resources that can be shaped by managerial input (Madhaven et al., 1998; Ellis and Mayer, 2001). Gummesson (2002) has outlined a comprehensive relationship-marketing model that is based on some general properties of relationships, networks and interaction. The general properties include an emphasis on collaboration, longevity in a relationship as well as commitment, dependency and importance. He states that, If a relationship is important, we are dependent on it and we must then commit ourselves to making it work. In addition, there is an important role of trust in the face of risk and uncertainty. The old statement, Trust, then verify, probably really works as verify then trust. Trust between partners in the value chain is formed by success or at least by commitment and collaboration. Two other important general properties are power and adaptation. Power is implicit in a dyad or a network and it is usually not shared equally. Some element may have more power than others. As long as all the parties benet, that may not be detrimental. Adaptation is vital in any long-term relationship but especially in a value chain. Adaptation may take the form of customizing production or service facilities to the needs of the chain. Terminating a relationship can be costly since the investment may be wasted and it takes a long time to build another one. When Saudi Arabia built a network of military airelds to NATO specications, it gained the advantage of instant compatibility with any NATO force

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requirements that aided in defending the kingdom during the early 1990s. The cost was high but the benets were higher. Gummessons extensive treatment of relationships resulted in the 30R model, so-called because it elaborates thirty different relationships. It is so extensive that it includes a number of relationships not pertinent to marketing. Conversely, there are some that are especially relevant. They include descriptions of the classic dyadic relationship, triadic relationship and more elaborate network. A typical relationship is R11: The customer as member. In order to create a long-term sustaining relationship, it has become increasingly common to enlist customers as members of various loyalty programs. While the list of relationships is extensive, the key is to manage them to make the most valuable customers satised at a prot.

Interactivity
Marketing communications take many forms, but increasingly the focus is on interactive exchanges of information and persuasion, involving the exchange of multiple messages and meanings. The value produced in a relationship depends to a great extent on these interactions that take place during communication. But while interactivity provides opportunities, there are challenges to actively cooperating in the value and supply chain. At a minimum, technology systems and the processes that generate information sharing must be collectively designed and implemented for interrm teams to function properly. Interactivity in the value chain Over time, environmental forces alter supplierbuyer-customer relationships in the value and supply chain. Technology is one of those forces, and its impact on the interaction between rms has been profound. As management information systems evolve into enterprise-wide systems that grow into channel systems that expand to cover multiple continents, signicantly more information can be transferred over even greater distances. Information is the fabric of all the interactions inherent in these systems. Strategically, control of information is the mechanism large mass and category-killing specialty retailers, such as Wal-Mart, Target, Costco, and Best Buy, use to dominate their respective channels. Strategically, these rms use low prices to gain customer loyalty. Bargains seal the relationship with nal customers, but aggressive pricing requires reducing costs to maintain protability. Efciencies come through

management of interactions in the value and supply chain. These companies practice lean retailing, keeping less merchandise in stock by requiring suppliers to deliver orders weekly or even daily. Not satised with merely lowering inventory carrying costs, lean retailers strive to improve customer service levels, often with stock levels at 95 per cent or less of capacity. Downstream demand by lean or quick response retailers reverberates throughout the value and supply chain. Order fulllment demands by retailers place constraints on suppliers, increasing their inventory and reducing prot margins (Abernathy et al., 1999). Even in successful channels, where store loyal customers are satised, it may be difcult for upstream rms to avoid feeling like hostages (Wathne and Heide, 2004). Interactivity that involves sharing information, collaboration, and blending processes with partners and competitors is associated with operational efciency, cooperative behavior and development of supply chain innovations, such as continuous replenishment. When technology enhanced, these processes have been shown to reduce system costs and maximize joint prot (Bello et al., 2004). Correspondingly, the installation of enterprise resource planning software changes the scope of decision making and strategy from an internal to a system-wide orientation. Improvements include: attention to supply chain management operations; customer relationship management; and partner relation management. Chopra and Meindl (2003) argue a broader scope is needed. They recommend software developers and supply chain professionals jointly incorporate all of these processes, incorporating technology and attending to physical interaction. There are limitations to improving the performance and protability throughout the value chain. These systems are complex. The data must be understood and usable across rms. It is important to integrate application solutions. Joint training across the value and supply chain is important, but it is costly and time consuming. Carr (2004) suggests that too much focus on innovation and new investments for collaboration comes at the expense of reducing risks or reducing costs, and can severely undermine a rms distinctiveness and potential prot. If a rm has developed a distinctive use of information over time, value creation activities such as sharing information, collaborating and/or blending processes can jeopardize a rms competitive advantage. Perhaps there is a middle ground where the challenge will be to use information technology infrastructure to build business relationships that strengthen a rms competitive advantage, while nding helpful incentives for partners.

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A learning orientation involves acquiring and sharing information about the market, competitors and customers to create new products and/or services. Learning performance is the key to innovation, channel relationships, and leveraging strategies across rms in the value and supply chain (Calantone et al., 2002). However, collaboration may be threatened by short-range self-interests. In fact, different functional areas may be reluctant to share information about customers or processes, particularly across rm boundaries. Clearly, top management will need to emphasize the benets of over-coming crossfunctional barriers between marketing and other departments. As long as the partners see more benet to cooperation than to self-serving behavior, the win-win perspective will benet all. Dell epitomizes this approach through their direct-to-customer business model that continues to evolve. Lean manufacturers such as Dell are changing both their processes, the way they work internally through team learning, and externally through the nature of their collaborative relationships in the value chain. Improved management processes within its supply chain enables Dell to stock adequate inventory for two hours of production in its European plant. Dell achieves this by benchmarking its business processes daily with its Asian operations and by making sure adequate supply chain components are inventoried to carry enough material to allow for customer demand, be it Intel or the nal consumer. Next, teams are assigned ways to continually improve the process. Most importantly, Dell adopts a single person build in which one worker is responsible for assembling an entire unit. This entire process encourages workers to nd ways to make improvements and they are amply rewarded for doing so (Brown, 2004). Governance of marketing channels is an important strategic variable in relationship management (Heide, 1994). Institutional arrangements encourage cooperation and motivate rms to participate in their assigned activity sets and investments. Most prevalent of these arrangements is the use of contracts to outline complex responsibilities. Ownership, or vertical integration, can also be used to provide property rights that empower claims to residual income and rights to direct use of assets (Anderson and Weitz, 1983). Lastly, there are social norms that bind partners to their obligations when dealing with each other (Bello et al., 2004). The importance of social norms cannot be underestimated, as they tend to provide greater exibility than formal arrangements. Interactivity enhances understanding of social norms, including opportunistic behavior by members of the value

and supply chain. There are several ways to manage opportunism. These include monitoring, providing incentives, selecting partners and socializing partners through setting clearly dened goals and more intensied training (Wathne and Heide, 2000). For example, social actions such as sharing information and encouraging solidarity helped Levi Strauss adjust to its supply chain (Bello et al., 2004). The company recongured its complete design-sales-distribution value chain to accommodate Wal-Mart and other mass retailers to offer consumers a quality product at lower prices, reviving its oundering brand. The goal was to reduce excess stock and markdowns. This required Levi Straus to reduce the role of its factories and company owned distribution centers. They outsourced manufacturing to other companies and made use of Wal-Mart distribution centers for delivery of jeans to its own stores. Enhancing relational exchanges required exibility in response to changing customer demands. The need for interaction in the value chain may be greater than in the supply chain. Since the value component focuses on customer wants and needs, the inuence of fashion may arise. Fashion, less predictable than attributes like size, weight, materials and dimensions, may change frequently, based on some event. For clothing styles, the success of a new music group may instantly create a demand for a new style, forcing clothing manufacturers to rush new product lines to the market. If they outsource production, their interactivity burden will increase. Even in services, some event, perhaps an interview on Oprah, may cause viewers to consider comprehensive estate planning or the purchase of a ood insurance rider for a homeowners policy. Both of the examples show that there is in ongoing need to interact with customers. As events, economic policies and other inuences change, they may affect consumers wants and needs. For instance, knowing how $2 per gallon gasoline prices inuence consumers consideration of hybrid, fuel-efcient automobiles is important to manufacturers. A signicant change in consumer wants may come with the same rapidity as the recent boost in oil prices. This will raise the need to quickly develop new products, raising the interactivity burden with the value chain.

Lifetime customer value

Traditionally, performance measurement has focused on the monetary value of a transaction. The importance of the time dimension in managing customer relationships has not always

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been apparent. This is changing. Performance metrics such as sales, prot, and contribution margin are still useful for evaluating project feasibility, but strategic outcomes are often stated in terms of brand loyalty (Keller, 2003), customer retention (Rust et al., 2004), and customer recovery (Vavra, 1995). In all of these cases, the time dimension is an important determinant of customer value. New approaches for considering the nancial returns to marketing activities are being stressed. In a volatile world, with many rms involved, cash is king. As Srivastava et al. (1999) report, future emphasis will be on: accelerating cash ows; enhancing cash ows; and reducing the riskiness associated with cash ows. Application of these principles across the value and supply chain is important, but is complicated by presence of many rms, multiple accounting systems, and (in global systems) different currencies. Lifetime customer value in the value and supply chain Lifetime customer value (LCV) has gained considerable interest in the marketing literature (Zeithaml et al., 2001) and illustrates the shift from the transaction to the relationship. While the longterm perspective is helpful for companies as they move forward in energizing their value chains, LCV also involves a metric-based evaluation of each customer. The metrics have to be accurate and the decisions they prompt must be implemented without sentiment. For example, marketing has long recognized the cost of acquiring new customers outweigh those of retaining existing ones. As a result, loyalty programs have proliferated. The hard-pressed airline industry uses them to boost its ridership. The auto rental industry not only uses them to boost their auto rentals, but they partner with airlines to offer partnership incentives and benet customers, the airline and the auto rental rm. Loyalty programs exist in product and service industries and are almost a sine qua non of marketing. Despite their popularity, many marketers are happy to get some results and do not evaluate them in terms of company goals. For example, repeat customers who continue to visit hotels; stores or use services may get preferred customer status. That status may convey some benet that costs the company some money. The question is, does the company measure the protability of those customers? If they do, are the results worth the outlay in benets? Leading organizations perform this type of cost/ benet analysis. For example, Bank of America, one of the more successful banking institutions in the USA, has an extensive preferred customer program. For customers with mortgages, or large

savings deposits or certicates of deposit, the company grants some generous gifts. Depending on the amount of the mortgage or the deposit, a customer can get a free checking account. The bank has calculated that the value derived from the mortgage or deposit outweighs the cost of the account. Preferred customers also have access to free safe deposit boxes and can get money orders without charge. These incentives have boosted the volume of business measurably. Bank of America (BofA) has an advantage in that mortgages often have very large balances on which the bank earns money for years. That can make further relationship marketing efforts more effective. To exploit that relationship, BofA has developed the personal banker concept. Each preferred customer can access a personal banker for help in setting up retirement or trust accounts, consolidating loans or planning for childrens educational funds. Overall, BofA calculated the lifetime customer value and found that it could exploit its relationship with certain customers and increase its volume of business. For example, the young couple who buy their rst house, may soon start a college fund for the rst child, may require a home improvement loan, another mortgage, a retirement account and perhaps a home equity loan to fund the purchase of a vacation home or to cover the cost of a wedding. Conversely, it found that many customers were not valuable enough to warrant preferred status. The emphasis is on consistently reevaluating each customer. Longevity is not the critical factor. In contrast, it is protability. Customers with long standing relationships may be good customers but they may not be protable. Zeithaml et al. (2001) advocate a ranking system to categorize each customer from platinum to lead. The values are apparent. It is important to strengthen the relationship to the platinum clients to retain them and also to uncover opportunities for further business. Since customer circumstances can change over time, it is necessary to evaluate customers on an ongoing basis. If frequent iers stop ying, airlines like United Airlines stop granting them benets. If the volume resumes, the awards can be reinstated. For loyalty programs that grant discounts or free memberships to large volume purchasers, those rewards can be discontinued. The idea is not to give away anything that costs more than the customer generates. When applied to the value chain, the lifetime customer value concept takes on a different focus. It should really be applied to each partner in the value chain. Toyota Motors uses such an approach. To be a part of the Toyota value chain, rms must meet stringent requirements for total quality, capitalization, expertise, personnel and a host of

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other performance based criteria. Toyota is unwilling to risk its reputation or delivered quality by trusting suppliers of uncertain abilities. Moreover, Toyota requires continuous improvement over time. Firms that fail to keep up with the changes are dropped from the chain. As the value chain attempts to deliver superior quality and to make that quality perceived, many elements of the value chain may have to cooperate.

Customization
Customized products are designed to meet individual user needs. As dened by Peppers and Rogers (2004), the term is most often applied to designing a modularized offering, where customer feedback determines the nal delivered product. With physical goods, this strategy is economically feasible if technology and design permit mass customization, in which technology allows efcient differentiation of a standardized unit to meet a user request. Services, by nature, are always customized. Unique user and provider characteristics cannot be separated from the product at delivery and services are typically consumed at that time. For example, the patient is examined in a physical exam, resulting in a diagnosis. The customers car receives a tune up and oil change, after which it runs better. The unique traits of the service provider and customer the physicians specialty or the type of car driven differentiate the experience (and the price). As a strategic consideration, adding service components to an exchange provides a means to differentiate any physical good. Consider software, a product line instrumental in the return to prominence of IBM. Considerable expertise is needed to install an application that delivers benets in a customers information system environment. Attributes of knowledge and ability to provide an experience permit differentiation of any tangible component that still remains with the product. Vargo and Lusch (2004) maintain that all future products will emphasize specialized knowledge and mental skills, with physical labor relegated to background status. In other words, all products will be marketed as services, and customized offerings will provide unique solutions to individual users. Customization in the value and supply chain This scenario should have great strategic appeal to a value and supply chain that operates as a competitive unit. The relationships forged by interactivity allow for integration of pools of knowledge in ways that can lead to unique solutions to customer problems. One of the key areas for value and supply chain rms to interact is in the design and delivery of new products. Firms in

different positions in the value and supply chain have the potential to contribute unique insights based on their position and contact with customers. The pharmaceutical industry provides an example. As emphasis in medicine shifts to care systems, big pharma will have to coordinate treatment with physicians to insure that outcomes from complex regimens of drugs can be monitored, adjusted, and combined with therapy for effective use. Researchers in R&D will interact with doctors and a host of para professionals to customize service for an individual patient. Economics makes individualized care unlikely, but depositories of accumulated knowledge can be continuously updated, shifting the state of the art in real time. Iansiti (1998) described methods for combining technologies, suggesting that they add value only as integrated systems. While these insights help when combining knowledge across technical elds, there are bigger obstacles integrating disciplines such as marketing, logistics, and engineering. Cross-functional product development teams are generally used to provide direction and guidelines for collaborative work. The application of these methods to value and supply chain is only now starting to get attention (Hult and Swan, 2003). Many of the tools and techniques used to move the product development process forward will need adjustment as the unique situation of cooperative development (Co-dev) is studied. Petersen et al. (2003) examined problems associated with integrating suppliers into the development process. Their ndings emphasized the need to be very careful selecting suppliers for participation, with trust and experience important selection criteria. They recommend adding external rms to the team early in the product development process. This advice is counterintuitive, as the discovery phase tasks taken early on in new product development and is usually held close to the vest. But early participation allows value and supply chain partners to participate in setting objectives and operating guidelines, providing direction and structure for the phases that follows. Managing accumulated knowledge is another consideration. A development process is dynamic. Knowledge will grow and change as more interactive exchanges take place.

Implications for marketers

Taking the long-term view of the value chain is vital in maximizing its success and protability. While Western business has been criticized for emphasizing short-run prots to placate shareholders, its perspective is changing. The

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change will help rms in the value chain maintain their focus on the overall welfare of the system, rather than their own part of it. To be successful in the long run, value chain management will assume even greater signicance. Facing the future will require a versatile and responsive governance structure. That structure should be interactive since the communication and coordination burdens will be substantial. Interactivity will help increase communication accuracy and governance effectiveness. Since changes in the environment may change power relationships within the chain, rules that emphasize collaboration and shared rewards may foster continued success. If these attempts at control fail, value chain integration, in the sense of vertical integration, may become necessary. Viewing the value chain as involving three streams or perspectives: creating and delivering superior customer value; customer-perceived value; and value of the customer to the rm, can be helpful in maximizing the chains competitiveness and ultimate success. Marketers should keep each in mind when designing new products and services. It is not only important to delivery superior quality and value to customers, it is important to do so unambiguously. The thoughtful marketer will devote as much effort into multichannel communication of quality as to its design and engineering. Such communication will require effective communication with all of the value chain members, especially customers. Knowing what customers value and what value indicators they use will enable rms to design in the quality customers want as well as the indicators of that quality. Over time interactive communication will spur the renement of relationships. Those relationships will be based on a pattern of interactions that should further strengthen relationships. The lifetime customer value concept can be a key to success in exploiting the benets of a value chain. The practice is applicable to individual organizations or the wider network. Its advantages include a potentially more protable value delivery system. However, it yields more than just more lucrative customer targets. Applied to member rms, it can make the entire value chain more robust and competitive. If used proactively and publicly, the concept may help make the value chain more efcient by setting a performance standard the members will understand. In addition, using it can strengthen the relationships with target customers and increase shared knowledge that can bolster success. New products and services require an increase in interactivity within the value chain. Conversely, changes in the environment that effect consumers perceptions and wants must be monitored and veried and that requires interactivity also. For

companies that outsource some supply chain processes, the need for increased interactivity in the face of change is clear. In the value chain, it is possible for any company to sense a change in the markets needs. Communicating that change accurately and formulating the appropriate value chain response may take much iteration. In essence, interactivity can lead to more exible want satisers, higher customer value, and more success for a given value chain. The key may lie in the appropriate management structure that rewards focus and avoids non-productive interaction. Customization is the key to market segmentation and has been the basis for success in the face of competition. As the value chain partners work to delivery customized value, their need for collaboration and integration will rise. Managing the customization process will require increases in communication and rules to handle the information ow. Information technology will be valuable all along the product differentiation and production process. Thus information gleaned about customer wants must be shared usefully, with the new product development teams, the manufacturing experts as well as with nance and other functional areas. If one area misses the information, problems can arise. These practices cannot be applied independently. It is important for rms to act as part of a unitary whole, with a high degree of integration. Any actions within the value network will undermine the effectiveness of the entire unit, making it vulnerable to competitors.

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