A Measure For Companies' Customer Portfolio Management PDF

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A Measure for Companies' Customer Portfolio Management

Harri Terho a a Turku School of Economics, Department of Marketing, Turku, Finland Online publication date: 09 December 2009
To cite this Article Terho, Harri(2009) 'A Measure for Companies' Customer Portfolio Management', Journal of Business
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Journal of Business-to-Business Marketing, 16:374411, 2009 Copyright Taylor & Francis Group, LLC ISSN: 1051-712X print/1547-0628 online DOI: 10.1080/10517120902762542
1547-0628 1051-712X WBBM Journal of Business-to-Business Marketing, Marketing Vol. 16, No. 4, Oct 2009: pp. 00
A Measure for Companies Customer Portfolio Management

HARRI TERHO
Turku School of Economics, Department of Marketing, Turku, Finland
Customer H. Terho Portfolio Management
Purpose/Contribution: Customer portfolio management (CPM) is one of the key areas of customer-relationship and network management in business markets. However, there is scant research about the implementation of this concept in business. This article contributes to this conceptually rich but empirically nascent field of CPM research by (1) conceptualizing customer portfolio management, (2) forming a measure for it, (3) validating the suggested measure, and (4) suggesting implications for future research and management. Methodology: A CPM construct is proposed based on the synthesizing of the theory and the findings from a qualitative field study of companies management practices. The suggested construct is formative and consists of the following four dimensions: analysis efforts, analysis design, responsiveness efforts, and responsiveness design. Hence, this conceptualization takes into account both the strength and style of companies CPM practices. The measure is validated following Diamantopoulos and Winklhofers (2001) guidelines for developing formative measures. Together with the content validity established in the conceptual phase of the research, the results from a cross-industry survey of 212 companies give support to the construct validity of the suggested CPM measure. Partial least squares modeling is applied in validating the measure. Implications: This study gives an extensive, up-to-date review of customer portfolio management and provides measures for future research on companies CPM practices and performance. Further, the theory and the field study highlighted several central topics
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This study is part of the LIKE Research Program Finnish Companies and the Challenge of Globalisation, tunded by the Academy of Finland. Address correspondence to Harri Terho, Assistant Professor, Turku School of Economics, Department of Marketing, Rehtorinpellonkatu 3, FI-20500 Turku, Finland. E-mail: harri.terho @tse.fi 374
Customer Portfolio Management
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that should be addressed in future CPM studies. The resulting managerial implications derive from the discussion on the key aspects of developing CPM practices in business. KEYWORDS Customer portfolio management (CPM), customer relationship management (CRM), formative measurement, partial least squares (PLS)
Relationship marketing has been one of the main themes in marketing and industrial markets for over two decades. The main idea behind it is that relationship building and management are crucial success factors in current businesses (Grnroos 1994; Morgan and Hunt 1994). However, an increasing amount of research has been published in recent years indicating that stronger relationships are not always desirable. The profit distribution of companies customer relationships is remarkably heterogeneous (Mulhern 1999; Niraj, Gupta, and Narasimhan 2001), and various relationships represent various roles or serve different functions in the long term (Cannon and Perreault 1999; Wilson and Jantrania 1994; Walter, Ritter, and Gemnden 2001). Therefore, the myopic development of closer relationships, or a strict customer-retention focus, could be questioned. Many authors have suggested that the firm should adjust its relationship-management activities to the customers value and concentrate on managing its whole spectrum of customer relationships from transactions to strategic partnerships (Johnson and Selnes 2005). Since the 1980s, a large number of various customer portfolio models have addressed this essential managerial topic in the B2B context (see Appendix 1). The recent boom in customer relationship management (CRM) has made customer-relationship portfolio thinking highly topical for both companies and academic research (Eng 2004; Johnson and Selnes 2004; Rajagopal and Sanchez 2005). The starting point in customer portfolio analysis is the management of the whole portfolio of customers. Because firms have only a limited amount of resources to use on their customers, it is not rational to treat and develop all relationships in the same wayit is preferable to differentiate the allocation in relation to the value of the relationship. Instead of only managing individual relationships, a firm should manage its whole portfolio of relationships and consider whether it has the right kind of portfolio of customers to secure its long-term performance (cf. Turnbull 1990). Customer portfolio management (CPM), therefore, has a slightly different focus than the related CRM in terms of theory and research. Current CRM studies focus largely on business-to-consumer contexts, therefore, missing some central aspects of relationship management in business markets. Most research concentrates mainly on customer satisfaction or on customer value in strictly financial terms, such as profitability in its management instead of taking a broader perspective. Further, CRM studies concentrate
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largely on the treatment of individual relationships in management. Some studies address the issue of managing customer relationships in different lifetime cycles, but they do not focus on the future-oriented development of relationships and the whole portfolio of customers (cf. Bowman and Narayandas 2004; Reinartz, Krafft, and Hoyer 2004; Ryals 2005; Wilson, Daniel, and McDonald 2002). These are major issues in business markets in that companies networks of relationships form a context that both enables and constrains corporate performance (Ritter, Wilkinson, and Johnston 2004). Portfolio management has been identified as one of the four key levels in managing relationships and networks in business markets (Mller and Halinen 1999). Although there is considerable conceptual knowledge about customer portfolio analysis, there is almost no empirical research on the implementation of this concept (i.e., CPM) (see Leek, Turnbull, and Naud 2002; and Terho and Halinen 2007, for exceptions). Further, current studies offer highly contradictory views about the value of portfolio management for companies. Tests and simulations of theoretical models support the proposition that CPM is of great importance (e.g., Zolkiewski and Turnbull 2002), whereas other researchers argue that formal, simplified portfolio analysis may even be counterproductive in the long run (Armstrong and Brodie 1994; Dubois and Pedersen 2002). Clearly, new empirical research on CPM is needed. This article contributes to this crucial area of relationship management by forming and validating a measure for studying firms CPM practices in business markets. More specifically, it (1) conceptualizes customer portfolio management, (2) develops a measure for studying companies CPM practices in business, and (3) validates this new measure with empirical data. Finally, avenues for future research and management are suggested. Current knowledge about CPM is almost entirely based on various customer portfolio models representing the received viewin other words, ideals set out in the literatureand may differ from the reality of the business world. The CPM measure developed here is thus based on the logic behind the classic works of Kohli and Jaworski (1990) and Jaworski and Kohli (1993). In other words, this article starts from a theory-based definition of CPM followed by a field study of companies CPM practices. This synthesizing of the theory and the findings leads to the establishment of an operational definition. This definition and some additional interview material are then used to build up the CPM measure. Finally, cross-industry survey data from 212 companies acting in business markets are used to validate the measure.
THE CUSTOMER PORTFOLIO MANAGEMENT CONSTRUCT A Theory-Based Definition of Customer Portfolio Management
A large number of customer portfolio models have been developed since the early 1980s. All these models focus on analyzing customer relationships
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in order to help managers allocate scarce organizational resources and ensure the long-term profitability of the relationships (e.g., Eng 2004). Overall, the suggested models form a heterogeneous and complex entity, because portfolio analysis and management can be applied from various perspectives at various levels of aggregation and using different combinations of factors or portfolio components depending upon the purposes intended and the specific situations confronting the company (Turnbull 1990, 20). Consequently, the models vary markedly from each other in their central elements of customer analysis and resource allocation strategies (Eng 2004; Johnson and Selnes 2005; Turnbull 1990). For a detailed, analytic summary of all academic models, including the analysis dimensions and managerial implications, see Appendix 1. For the most part, the suggested models are matrix-type tools consisting of two- or three-dimensional axes with single, two, or three phases for analyzing the value of customers from the focal firms point of view (Zolkiewski and Turnbull 2002). The analysis criteria vary from a strictly financial focus (Storbacka 1997) to very broad views about customer value (Fiocca 1982). Moreover, the suggested resource-allocation strategies vary considerably from the allocation of sales-force time (LaForge and Cravens 1982) and the more general adjustment of marketing strategies to customer value (Shapiro et al. 1987), to strategies concerning which relationship to develop and in what direction (Zolkiewski and Turnbull 2002). Terho and Halinen (2007) have proposed the following theory-based definition of CPM based on a literature review of academic customer portfolio models: an activity by which a company analyzes the current and future value of its customers for developing a balanced customer structure through effective resource allocation to different customers or customer groups (721). This definition is adopted here as a starting point. However, it is problematic because it is based on theoretical models representing a relationshipmanagement philosophy. It is probable that corporate CPM practices are not perfectly similar to academic models, and indeed that they differ from them. An empirical field study may give a significantly clearer idea of the domain of a construct and hence enable a more precise definition. It could also help in forming an operational definition that is not only theoretically rigorous but also matches business reality and is relevant to practitioners. It is important for such a definition to explicate the CPM activities that translate the underlying philosophy into practice (cf. Kohli and Jaworski 1990, 3).
A Field Study of CPM Practices in Business

A qualitative field study of CPM practices was conducted in seven companies with the goal of developing an operational definition of CPM. The study was based on a theoretical sample of seven purposefully chosen firms assumed to represent as much variation as possible in terms of the business and the customer base, the aim being to obtain an adequate picture of various management
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practices (cf. Eisenhardt 1989, 537). A number of factors were taken into account in the selection of the companies: differences in their strategies (cost vs. value-added emphasis), main products and services (simple and standardized vs. complex and tailored), customer-base size (large vs. narrow), market concentration (many vs. a few potential customers), and in the industry dynamics (mature and stable vs. developing and dynamic). The companies involved are given a name based on the industry in which they are acting and a letter: energy A, insurance B, logistics C, paper D, E (two companies), and the information and communication technologies (ICT) businesses F, G (two companies). They were all among the 100 largest companies in Finland and were known to apply systematic portfolio management. The study was based on semistructured interviews with carefully selected senior managers responsible for customer management in each of the seven companies. This rather limited number of interviews was deemed sufficient because saturation was reached. The discussions revealed some clear patterns that contrasted with the theory-based definition of CPM. The interview themes included the companies CPM aims, the contents of the analysis, the managerial implications, the various responsibilities, any problems, and overall CPM-related experiences. The interviews lasted approximately 1.5 hours and the discussions were kept as broad as possible with a view to obtaining rich data about CPM practices. Yin (2003, 106108) proposes two general strategies for analyzing case study data: case descriptions and theoretical propositions. Even though this field study was not a genuine case study aiming at a thorough understanding, both of these analytical strategies were applied. First, it was possible to form a description, or a broad overall picture, of the companies CPM practices based on the interviews. Second, the interviews were analyzed by testing the theoretical proposition that the theory-based definition and the practice should be similar. In other words, the focus of the analysis was on finding differences between the theory-based definition and the companies management practices. Because the empirical data were not extensive, analysis programs such as NUDIST were not used. The findings of the field study are illustrated in the form of quotations from the interviews.
A Field-Based View of Customer Portfolio Management

A comparison of the interviews and the theory-based definition revealed three main patterns that are not present in customer portfolio models and, therefore, in the theory-based definition of CPM: the process nature of portfolio management, the design of CPM activities, and the role of the various organizational levels and functions involved. These three themes are discussed here. First, the theoretical customer portfolio models concentrate on the mechanical design of the portfolio analysis at one point in time, that is, they carry out the analysis and develop strategies for managing different kinds of
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customers. In practice this is a very limited view, however. According to the interview data, CPM is likely to be an ongoing, continuous process rather than a separate act of analysis or strategy development taking place at one point in time. Portfolio management is clearly a strategic issue, but it takes place largely in daily business dealings with customers. Several interviewers stressed the fact that the proper implementation of CPM into practice could take years, as illustrated here. Insurance B: Basically, analysis tools or models can be taken into use quite quickly. The standardization of practices is a bit more time-consuming. However, the implementation takes time. . . . To get the people in the field to understand what we are doing and to get them to act correctly can take years. . . . To make the results visible takes time: we dont act in a vacuumif we could change our customer-base structure right away then the results would soon be seen. It seems that the main aspects of CPM processes concern customer analysis, in other words, processing customer information and responding to the new knowledge. These two activities emphasize a process nature and they are somewhat present in the theory-based definition, although they are both more generally apparent here. In particular, the idea of responsiveness is at the core of portfolio management and emphasizes the need to move from customer-management strategies to their implementation in concrete daily actions. Logistics C: We have recently taken a new value-segmentation model into use. . . . The large [customer] mass is analyzed based on the numerical data. For the larger customers we have this more qualitative evaluation as well. . . . I think the implementation represents a major challenge in management. How to take the created operational models concretely into our daily practices. Paper D: There are two levels in our customer management: customerbase management, which is the responsibility of upper management, and operative customer management, when the plans are taken into practice. . . . These two levels interact the whole time through discussions, meetings, reports, and measurement. Paper E: It is crucial to move beyond the customer classifications and to use them as the basis of our operations. What relationships should we develop, where should we put our efforts? . . . The implementation of customer-base management involves constant cooperation between corporate management, divisional management, and employees in the field. This notion of CPM as customer-information processing and responsiveness to the knowledge gained is consistent with theories of organizational
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learning (Huber 1991), information processing (Sinkula 1994), and market orientation (Kohli and Jaworski 1990). Consequently, CPM in business could be regarded as an ongoing process involving two main activities: customer analysis and responsiveness to customer knowledge. Second, the interviews from the field study indicate that CPM practices develop over time as companies adjust their portfolio-management practices. This adaptation may be based on the explicit planning and development of portfolio-management activities. Even though many companies use consultants in building up their practices, they are not bound to ready solutions. On the contrary, most of the interviewees stressed the need to build and tailor the management practices in-house. Interestingly, the adaptation of practices is not necessarily in accordance with strict managerial planning or formal development, and could also be based on learning from feedback, new knowledge, insights achieved, and trial and error. Insurance B: We also quite often do ad hoc analyses when we notice some interesting issue or want an answer to a specific problem. When weve done it we wonder if it was just a single project or if we also want to monitor that issue in the future in our customer-base management. Logistics C: Our management practices are developing the whole time. . . There may be changes [to the CPM process] along the way to what we have planned if we notice that its not exactly what we wanted. Paper E: The customer-management IT technology and databases play a central role in management. . . . All our [customer management] software and the tools that we use have been tailored specifically for us. The interviews indicate that the adaptations in portfolio-management practices differed notably from company to company. Some firms had put lots of effort into formally planning and adapting their analysis and responsiveness activities. Others did not place as much emphasis on explicit, formal design and took a more informal approach to portfolio management through the management of individual customers and daily interaction. In other words, CPM activities may but do not need to be formally designed, as Leek, Turnbull, and Naud (2002) also noted. Energy A: We have standardized customer-treatment models for different types of customer relationships in our customer base. There are very clear-cut instructions for our staff regarding the smaller customers . . . . For the large ones the customer classification and the implementation of customer management are basically the responsibility of our very knowledgeable salespeople. Insurance B: Because of the nature of our business we need to have a formal management model for analyzing and treating our customers. . . . In [the] future we need to develop more thorough instructions for the
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sales people. . . . A key issue would be getting them to move from a volume to a profitability orientation in their actions. Paper E: You dont want to tie up your preferably innovative sales personnel with too strict instructions. But of course you must have some common frame or values for them. ICT F: We do a customer-base-level analysis once a year. Still, the focus in our customer-base management lies in the continuous monitoring and management of our customer relationships in our sales organization. ICT G: The customer base or portfolio level is not relevant for us. . . . In the end the customer classifications are not important. . . . Our customerbase analysis and management are realized fully through the management of individual customer relationships.
The concept of customer-portfolio-management design is a useful starting point for examining these differences in portfolio-management style. Design here refers to an explicit focus on the planning and adaptation of CPM activities. Theoretically, the notion of CPM design is connected to the concept of mechanistic and organic management styles or arrangements, which is discussed widely in organization and marketing theory (e.g., Burns and Stalker 1961, 96126; Chakravarthy 1982, 38). The so-called mechanistic organizational style combines the use of formal rules and procedures with limited participation in decision making, whereas organic decision making features few procedures, yet high involvement (Dahlstrm, Dwyer, and Chandrashekaran 1995, 43). Third, the theoretical models give the impression of CPM as a thoroughly managerial marketing practice. According to the interviewees, however, it is strongly cross-functional and multilevel. Instead of being an isolated marketing tool it is connected to other managerial decisions in marketing such as key account management (KAM), need-based segmentation and the development of offerings, and also to other functional areas of the company such as sales, accounting, production, supplier management, and R&D. Similarly, CPM decisions in one business unit are often linked to decisions in other related units or areas. Energy A: One great challenge for customer analysis is the separated databases in our different business units. Logistics C: Value-based and need-based segmentation must be used together. We cannot just look the value of the customerwe need to consider customer needs as well in managing customers of different value. . . . We work together with our customers in developing offerings for different customer groups. Paper D: We have started increasingly to take into account customers who are buying several product categories from different business units. A good customer in one product area must be serviced well in the other business areas even though it may be a bad customer for those units.
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Paper E: There are three main parties who are important [in CPM]. The sales personnel who are in contact with the customers, the production or its planning, and thirdly the accounting function, so that you can be certain of the profitability. Even though CPM is a managerial activity, it cannot be separated from other levels of the company. Its proper implementation often requires organizational changes that need the support of top management. Similarly, the implementation of portfolio management takes place at lower levels of the organization, such as the sales level, as illustrated in many of the previous comments. Logistics C: It [CPM] is like any other change in the organizationit requires the support of the top management. Some smaller changes that only affect a particular area, those you could implement right away, but as soon as their execution affects the whole organization you need the support of the management. Hence, CPM is heavily interconnected with other managerial questions that should be taken into account in the decision making. For a more thorough discussion on this topic, see Ritter (2000) on the interconnections between customers in a portfolio, Zolkiewski and Turnbull (2002) on the interconnections between customer and supplier portfolios, and Tikkanen, Kujala, and Artto (2007) on the interconnections between customer, project, network relationship, and offering portfolios.
Synthesis: An Operational Definition of Customer Portfolio Management

A synthesis of the theory and the field-study findings suggests the following operational definition of CPM: the companys activities in analyzing its portfolio of customers pertaining to their role in providing current and future value for the focal company, and its responsiveness to the analysis conducted. The core of portfolio management lies in learningcompanies gain new knowledge about the value and the role of various customers through the analysis processes, and this enables them to better allocate their limited resources among their customers. More specifically, CPM is a continuous process involving four main dimensions related to analysis and responsiveness activities. Given the goal of this study to form a measure for studying companies practices, the focus is naturally on their main CPM activities rather than on the overall longitudinal portfolio-management process. CPM is made up of four dimensions (see Figure 1) approximating both the efforts (i.e., strength) and the design (i.e., style) of the analysis and responsiveness activities.
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Analysis efforts
Analysis design
Customer portfolio management
Responsiveness efforts
Responsiveness design
FIGURE 1 Customer portfolio management construct.

This kind of conceptualization, which takes the design of activities into account, is rare in marketing, although some similar managerial constructs exist (e.g., network competence, Ritter 1999; see also Kohli and Jaworski 1990, 16). The different facets of CPM do not necessarily hang together. It is more likely that the different activities together form the CPM level, indicated by the direction of the arrows in Figure 1. Moreover, it should be noted that this conceptualization makes sense only when there is a reasonable amount of efforts present. The presence of design alone would indicate that a company plans carefully its CPM activities but does not implement them into practice. Clearly future studies need to take this issue into account. See the following section, Limitations and Implications for Future Research, for a discussion on how this issue should be solved. The key dimensions are discussed in more detail next, based on the theory and the field study. ANALYSIS EFFORTS CPM activities are aimed at obtaining a thorough understanding of the role of various customers in the customer base in order to ensure value for the focal company over the long term. The development of analysis activities may help firms minimize errors in understanding the value of different kinds of customers. This is essential, because such errors are likely to lead in certain cases to the under- or overspending of resources (cf. Reinartz, Krafft, and Hoyer 2004, 296). When the company has an understanding about the structure of its customer portfolio and the role of various customers in providing value, it is arguably also better able to develop resourceallocation strategies to achieve its long-term and effectiveness goals (cf. Turnbull 1990, 21; Johnson and Selnes 2005). Analysis efforts here refer to the focal companys efforts to analyze its whole portfolio of customers pertaining to their different roles in providing
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current and future value for the focal company. According to the literature and the qualitative study, it should be stressed here that customer value must be considered broadly in portfolio analysis, the activities being by no means restricted to assessing the direct, economic value (see also Appendix 1). Rather, the main focus is on the roles of different customers in the customer base in terms of providing current and future value to the focal company (cf. Johnson and Selnes 2005). The various customer relationships serve a variety of functions (Mller and Trrnen 2003; Walter, Ritter, and Gemnden 2001; Wilson and Jantrania 1994). Similarly, the value of a relationship may be realized through the customers broader role in the customer-base structure, for example, via economies of scale rather than directly (Johnson and Selnes 2004, 3). In addition, customer-relationship characteristics such as strength, commitment, trust, and mutuality influence its long-term development and success, therefore, affecting its future value. Because portfolio management is a heavily future-oriented practice, the customers future value potential (e.g., growth, customer shares) also represents a major aspect of CPM. It is not enough to understand the value of individual relationships, and the focus should also be on understanding how each relationship type fits into the larger portfolio (cf. Cannon and Perreault 1999, 457). Hence, activities such as comparing, grouping, and prioritizing customers based on their value are essential in analysis efforts. ANALYSIS DESIGN If the analysis activities miss some central aspects of the business of the focal firm, are of poor quality, or concentrate on the wrong issues they will produce unsatisfactory and possibly misleading outcomes (cf. Zolkiewski and Turnbull 2002, 578582). Hence, tailoring portfolio-management activities is crucial to companies CPM practices (cf. Terho and Halinen 2007; Salle, Cova, and Pardo 2000). This issue also arose in the field study, in which the analysis practices were found to vary strongly based on perceived CPM contingencies. The development of analysis activities may take place informally through learning in everyday business, and also through explicit, systematic development. Significantly, the activities may but need not be formally designed. The concept of analysis design refers to the focal companys continuous efforts to plan and adapt its customer portfolio analysis activities to company needs. In other words, design refers to how much effort a company has to put into planning its analysis activities; for example, establishing the criteria, methods, and procedures, as well as further developing its current activities. Clearly, the adoption of highly designed and sophisticated analysis practices is close to the use of the formal portfolio models suggested in the literature. This also implies more managerial planning in portfolio management. Therefore, high levels of design indicate mechanistic
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portfolio management with formal rules and procedures and more limited participation in the decision making (cf. Burns and Stalker 1961). RESPONSIVENESS EFFORTS The third main CPM element is responsiveness efforts, referring to the focal companys efforts to adjust its resource allocation according to the value of different customers in its current and future customer portfolio. Very little is accomplished in a thorough analysis of customers unless the firm is able to respond to the knowledge it gains through such activities. CPM is a futureoriented practice because it basically helps the company understand its current portfolio so that it is equipped to produce better future resource allocation among customers of different value. The resource-allocation strategies of customer portfolio models fall into two theoretically meaningful classes: matching and development (see Figure 2; Appendix 1). Matching relates to the cost-efficient treatment of customers of differing value in the current customer relationship portfolio. It involves issues such as tailored offerings, different operational models (e.g., service, channels), and the allocation of sales resources to customers of differing value. On the other hand, the development of a relationship-portfolio structure focuses on the future-oriented question of which relationships to develop and in which direction. Zolkiewski and Turnbull (2002, 578) separated the possible relationship-development implications in the form of four questions: Do new relationships need to be created? Which relationships should be developed? Which relationships should be maintained? Are there any relationships that should be broken or discarded? This division is not exactly clear-cut because both of these aspects of resource allocation overlap: customertreatment decisions always include a relationship-development aspect, and vice versa. RESPONSIVENESS DESIGN Another side to responsiveness concerns its design. The responsiveness design refers to the focal companys continuous efforts to plan and adapt its responsiveness activities to company needs with a view to implementing them in practice. Responsiveness design is a continuous process, and
A E D C 1. Strategies for adjusting resource allocation to match the value of different customers: How to manage efficiently customer groups A, B, C, D, and E? 2. Strategies for developing customer portfolio structure: How to develop customer groups A, B, C, D, and E?
FIGURE 2 Two Main Aspects of Resource Allocation for Hypothetical Customer Portfolio (A, B, C, D, E).
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includes the evaluation of current practices and their adaptation based on feedback. Unlike analysis design, responsiveness design directly incorporates implementation issues. Implementation is not self-evident: many of the interviewees in the pilot study indicated that they had difficulties putting the differentiated resource allocation into practice. This was the result, in many cases, of a sales-volume-oriented culture in the sales department, for example, emphasizing volume rather than profitability. To be able to successfully implement differentiated resource allocation a firm must be able to realize its strategies in the actions of its personnel at the customer interface in various functions (cf. Campbell 2003, 380381). For example, instructions about customer-management principles may be crucial. In sum, responsiveness design concerns the careful planning of resource allocation and the adaptation of current practices. High levels of design in responsiveness indicate more formal, mechanistic customer management.
MEASURES OF CPM Formative Measurement

Ever since Churchill (1979) presented his article about measure development, researchers in marketing have devoted considerable attention to the development of multiple-item measures with sound psychometric properties. Measurement in marketing has been largely based on the ideas behind classical test theory and its assumptions about the relationship between a construct and its indicators. The basic assumption here is that the latent variable results in the indicators (Bollen and Lennox 1991). Because the direction of the causality is from the construct to the indicators, and change in the construct causes changes in the indicators, the classical measures are referred to as reflective. In more formal terms, it is assumed in classical test theory that the variation in the scores on measures of a construct is a function of the true score, plus the error (Jarvis, Mackezie, and Podsakoff 2003, 199). The reflective indicators should, therefore, be internally consistent, as they all reflect the same underlying construct. For the same reason, the indicators in reflective measurement should be interchangeable and the construct validity should be unchanged when a single indicator is removed (Bollen and Lennox 1991). However, the suggested CPM conceptualization does not fit easily into the dominant reflective-measurement perspective (cf. Jarvis, Mackezie, and Podsakoff 2003). First, all four CPM dimensions are internally very broad, and each of them includes a wide variety of indicators that are not necessarily intercorrelated. For example, a company may analyze its current customer value but it does not have to analyze the future value potential. Similarly, it may manage customers of different value very efficiently but it does not have to try to develop its customer structure by driving customer
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relationships in a certain direction. Second, the same applies to the four CPM dimensions, which are not necessarily intercorrelated. This is obvious, because the existence of analysis activities does not mean that the company will respond to this knowledge. Neither do the analysis nor responsiveness efforts need to be carefully designed. CPM is better operationalized through the use of formative (cause) indicators (see Figure 1). Formative measurement is based on the idea that the indicators cause the concept measured. This has several effects on the properties of such measures. First, the internal-consistency criterion is not valid for the cause indicators (Bollen 1984, 381). On the contrary, a census of indicators, not a sample, is required for indicator specification in formative measures (cf. Bollen and Lennox 1991, 308). Second, as the formative constructs are caused by their indicators, dropping an indicator may alter the meaning of the construct. Third, for the same reason, the measurement error cannot be measured on the item level but must rather be estimated on the construct level (Bollen and Lenox 1991). A natural consequence of these characteristics is that the formation and validation of formative measures differ from traditional reflective measurement. Diamantopoulos and Winklhofer (2001) have developed guidelines for developing and validating formative measures. They separate four critical issues for successful index construction: content specification, indicator specification, indicator collinearity, and external validity. Next, the CPM measure is developed in accordance with these guidelines. The content specification and the indicator specification are discussed in the context of developing the survey instrument, while the indicator collinearity and external validity are based on the empirical survey data.
Survey Instrument
The above presentation of the CPM construct was based on theory and a field study. The first step in the construction of formative measures, content specification, is firmly rooted in the extensive definitions of CPM and its dimensions. The careful literature review and the empirical field study support the content validity of the construct. The second step, indicator specification, is based on definitions of the CPM dimensions. In order to ensure that the indicators will cover the entire scope of the construct, conceptual matrices based on these definitions are used as a guide. They provide a structured means of ensuring that the questions evenly cover all the main aspects. The list of items was tested in interviews with experts. The aim of this qualitative process is to ensure that the questions are understandable, relevant, and do not overlap too much. It consisted of an additional seven personal interviews with the senior managers responsible for customer management (with an emphasis on the clarity and scope of the questions), 10 personal interviews with academic experts
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(with an emphasis on the theoretical rigidity and scope of the questions), and a critical review with nine academics examining how the indicators fit the definitions. This process resulted in modifications to several questions until the indicators were found suitable. The result was a list of 10+6+9+6 indicators covering all the main aspects of CPM without excessive overlap, presented in the questionnaire in Appendix 2. The theory-based matrices used in the formation of the indicators are presented below. The numbers in the matrices refer to the indicators in the questionnaire. The original questions were in Finnish. Analysis efforts refer to the focal companys efforts to analyze its whole portfolio of customers pertaining to their different roles in providing it with current and future value. According to the definition, the two main aspects of analysis efforts comprise the temporal aspect of customer value analysis (current vs. future) and the degree to which individual customers and the whole portfolio are analyzed. The codes in the matrix correspond to the questions in the questionnaire (see Figure 3; Appendix 2). Analysis design refers to the focal companys continuous efforts to plan and to adapt its CPM activities to company needs. According to the definition, two main aspects are distinguished: time (what has been done/futureoriented development orientation) and the type of design (planning/adaptation of practices). The codes in the matrix correspond to the questions in the questionnaire (see Figure 4; Appendix 2). Responsiveness efforts refer to the focal companys efforts to adjust its resource allocation according to the value of different customers in its current and future customer portfolio. The main aspects are, once again, the temporal aspect (current/future moment) and the focus of the resource allocation (matching/development). The codes in the matrix correspond to the questions in the questionnaire (see Figure 5; Appendix 2). Responsiveness design refers to the focal companys continuous efforts to plan and to adapt its responsiveness activities to company needs with a
Relationship level Current (backwardlooking) value Future value AE1-AE2 AE3-AE4 Portfolio level AE5-AE7 AE8-AE10
FIGURE 3 A conceptual matrix for forming items for analysis effort.

Planning of practices Current focus Future focus AD1-AD2 AD3 Adaptation of practices AD4-AD5 AD6
FIGURE 4 A conceptual matrix for forming items for analysis design.

Matching focus Current focus Future focus RE1-RE3 RE4 Development focus RE5-RE7 RE8-RE9
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FIGURE 5 A conceptual matrix for forming items for responsiveness efforts.
view to implementing them in practice. Again, two central aspects can be drawn from the definition: time (what has been done/future-oriented development) and the type of design (planning/adaptation of practices). The codes in the matrix correspond to the questions in the questionnaire (see Figure 6; Appendix 2) The next stage was to test the suggested CPM measure empirically. The data collection is discussed first. The focus then shifts to multicollinearity and the testing of external validity based on partial least squares (PLS) modeling.
Data Collection
Large companies are more likely to systematically apply portfolio management given their more extensive resources. Therefore, a purposive sample was drawn from the Finnish Fonecta ProFinder B2B database for the largest B2B companies acting in all industries in Finland. There were no statistical considerations in the company selection. In practice, selecting all firms with a turnover of more than 55 million gave a list of 630 companies. Those acting mainly in business-to-consumer businesses, nonprofit companies, and those mainly supplying to their owners were dropped from the survey. CPM is frequently practiced in independent business areas in large companies, rather than as a centralized process. The researcher, therefore, contacted the senior management in every company in the sample in order to (1) identify whether there were one or more independent organizational units responsible for CPM, (2) find the key persons responsible for CPM activities, and (3) motivate the respondents to participate in the study (cf. Huber and Power 1985, 174175). The final sample consisted of 493 independent units responsible for customer-base management. Given the difficult respondent group of senior marketing managers, a single-respondent approach was adopted to get a better response rate. Of the personally contacted independent unit managers, 446 promised to participate. They were all sent an electronic
Planning of practices Current focus Future focus RD1-RD2 RD3 Adaptation of practices RD4-RD5 RD6
FIGURE 6 A conceptual matrix for forming items for responsiveness design.
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questionnaire and two reminders in order to obtain as good a response rate as possible. After three months of data collection a total of 225 questionnaires had been returned. In 18 cases two or more responses were received from a single company. Removing responses with low respondent competency, measured by means of a separate question, and those with a substantial quantity of missing values led to a total of 212 usable responses, which represented a high response rate of 43 percent. Even though the single-respondent strategy is a limitation, it helped in increasing the response rate, which in turn may improve the overall validity of this study. Armstrong and Overtons (1977, 396) guidelines for estimating nonresponse bias were used. First, the personnel class, turnover, and industry of the respondent companies were compared to all B2B companies in the focus area of the study for possible bias. There were no statistically significant differences in turnover or industry, although the personnel size of the respondent companies was slightly larger than that of the nonrespondent companies. Second, the early and late respondents were compared, and no systematic differences were found. In sum, the responses could be considered to represent large Finnish B2B companies well, and the results suggest that nonresponse-bias is not a problem in this study.
Estimation and Results

The third step in the CPM measure formation process is the examination of multicollinearity. Excessive collinearity is a problem in formative measurement because it affects the stability of the indicator coefficients. Moreover, multicollinear indicators would include redundant information, making the index problematic. In other words, index-construction procedures tend to eliminate highly intercorrelated items for minimizing multicolleniarity, whereas traditional scale-development procedures tend to retain highly intercorrelated items for maximizing internal consistency (Diamantopoulos and Siguaw 2006, 271). Diamantopoulos and Winklhofers (2001, 272) guidelines include the use of the variance inflation factor (VIF), for which they suggest a cut-off threshold value of 10. According to the VIF values, none of the indicators were problematic. Diamantopoulos and Siguaw (2006, 271) suggest studying multicollinearity in terms of a related tolerance value with a more conservative a cut-off value of .30, and, as a result of this procedure, two items were deleted (questions AD1 and AD6). Furthermore, multicollinearity was studied by examining pairwise correlations where correlations greater than .8 indicate multicollinearity (Gujarati 2003, 359). In this case, most of the correlations remained less than .6 and all of them were less than .7 (five variables greater than .6). Finally, Hair, Anderson, and Tathams (1995) two-part process for assessing multicolinearity did not reveal any such problems.
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The fourth and final phase in formative measurement development is ensuring the external validity of the construct. The formative indicators may have a positive, a negative, or no correlation between one another (Bollen and Lennox 1991, 307), which implies that the traditional assessment of individual item reliability and convergent validity is not meaningful for formative constructs (Hulland 1999). The error of an index may be approached on the construct level rather than on the item level. According to Diamantopoulos and Winklhofer (2001, 272), the external validity of an index should be examined by means of a multiple indicators and multiple causes (MIMIC) model in which the formative indicators act as direct causes of the latent variable, which, in turn, is indicated by one or more reflective indicators. If the overall model fit proves acceptable, it can be taken as supporting evidence for the set of indicators forming the index. The CPM construct consists of the four dimensions of analysis efforts, analysis design, responsiveness efforts, and responsiveness design, which together form the CPM measure. In the following, the MIMIC model is tested on the aggregate level, that is, all CPM dimensions are used as causes in an overall CPM measure using four reflective indicators. This is an established procedure for validating formative constructs with multiple dimensions (e.g., Reinartz, Krafft, and Hoyer 2004; Ulaga and Eggert 2006). The indicators of the reflective CPM measure can be found in the questionnaire in Appendix 2. Partial least squares, a component-based structural equation modeling technique, is used to test the MIMIC model. There are several reasons for choosing this approach over maximum-likelihood-based methods such as LISREL. First, PLS can model latent constructs under conditions of non-normality, which is the case in this research (e.g., Chin, Marcolin, and Newsted 2003, 197). Second, it avoids two serious problems associated with maximum-likelihood-based methods, namely, improper solutions and factor indeterminacy (Fornell and Bookstein 1982, 440). Attempts to explicitly model formative indicators in traditional structural equation modeling have been shown to lead to identification problems. One way of avoiding this problem is to apply components-based PLS, which can better model formative indicators (Chin 1998a, 910). Partial least squares estimates the latent variables as the exact linear combination of the observed measures, thereby avoiding the indeterminacy problem and providing an exact definition of the component scores. Finally, PLS is appropriate when the theory is untested in an application domain (Gopal, Bostrom, and Chin 1992, 57). The results of the MIMIC model are discussed. The measurement model results are discussed first, followed by the results of the structural model. The SmartPLS 2.0 program was used to carry out the analysis (cf. Ringle, Wende, and Will 2005). The four-item reflective CPM measure had a Cronbachs alpha of .66 (.65 acceptable), composite reliability of .80 (over .7), and an average variance extracted (AVE) of .50 (should be larger than .5), see Table 1. The item
392 TABLE 1 Summary Statistics for Measures Construct name Analysis efforts Analysis design Responsivness design Responsivness efforts Reflective CPM measure Number of items 6 4 5 7 4
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Mean 4.75 4.25 4.44 5.07 4.89
Std. Deviation 1.00 1.34 1.18 0.92 1.04
Range (17) 1.407.00 1.007.00 1.337.00 1.446.78 1.007.00
Reliability -/-/-/-/.66/.80
AVE .50
loadings were .67, .69, .72, and .73 (ideally over .7, but over .5 acceptable). Even though these figures are not ideal, they could be considered acceptable given the purpose of this research to develop measures, and the fact that the CPM measure is a very complex, widely varying multidimensional construct. Its broadness makes it difficult to capture in its entirety with a single reflective measure (cf. Churchill 1979, 68). Reliability and AVE are not applicable in formative measurement. Instead, item weights could be seen as validity coefficients. For this reason Diamantopoulos and Winklhofer (2001) recommend removing nonsignificant items in the MIMIC model. However, several authors stress that indicator elimination, by whatever means, should not be separated from conceptual considerations when a formative measurement model is involved (Bollen and Lennox 1991, 308; Diamantopoulos and Winklhofer 2001, 273). Furthermore, earlier studies have validated formative measures with several dimensions, based purely on structural relationships (e.g., Reinartz, Krafft, and Hoyer 2004). When the MIMIC model was tested several indicators turned out to have negative or near-zero indicator weights, suggesting the need to remove indicators. The decision was made to drop those with weights of under 0.100, with two exceptions (RE1, RE4). This was possible because the suggested list of indicators was very fine-grained, and there was slight overlap in the items. Therefore, removing the indicators did not alter the overall measure, as the final items still effectively covered the essential aspects of the CPM phenomenon. More specifically, items AE3 and AE4 could be considered to be covered by AE1 and AE2; AE6 by AE5 and AE7; AE8 by AE10; RE3 and RE7 by RE1, RE2, RE4; and RD4 by RD5 and RD6: AD1 and AD6 were removed earlier because of multicollinearity (see the questionnaire in Appendix 2) The measurement model results for the final purified CPM measure are shown in Table 2. Table 2 gives the item weights for the formative measures, the item loadings for the reflective measures, and the t values for all measures. Significantly, 19 of the 22 indicators were significant at least at the 10 percent level, and all of the indicators had positive indicator weights (retained nonsignificant indicators: AE2, RE1, RE4). Because PLS is based on standard ordinary least squares regression, misspecification due to the inclusion of irrelevant items will not bias the estimates of significant items
Customer Portfolio Management TABLE 2 Measurement Model Results for the MIMIC Model Formative Indicators AD2 -> Analysis_Design AD3 -> Analysis_Design AD4 -> Analysis_Design AD5 -> Analysis_Design AE1 -> Analysis_Effort AE2 -> Analysis_Effort AE5 -> Analysis_Effort AE7 -> Analysis_Effort AE9 -> Analysis_Effort AE10 -> Analysis_Effort RD1 -> Responsiveness_Design RD2 -> Responsiveness_Design RD3 -> Responsiveness_Design RD5 -> Responsiveness_Design RD6 -> Responsiveness_Design RE1 -> Responsiveness_Effort RE2 -> Responsiveness_Effort RE4 -> Responsiveness_Effort RE5 -> Responsiveness_Effort RE6 -> Responsiveness_Effort RE8 -> Responsiveness_Effort RE9 -> Responsiveness_Effort Reflective Indicators RF1 <- Reflective_CPM RF2 <- Reflective_CPM RF3 <- Reflective_CPM RF4 <- Reflective_CPM Indicator Weights .241 .274 .381 .317 .165 .117 .230 .413 .192 .301 .161 .318 .304 .187 .309 .087 .423 .033 .340 .168 .185 .227 Indicator Loadings .689 .674 .723 .733
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t statistics 2.473 3.485 4.116 3.644 1.718 1.248 2.496 4.152 1.817 3.122 1.814 3.214 3.088 1.964 3.820 0.831 4.620 0.367 3.491 1.677 2.745 3.011 t statistics 10.307 10.722 12.274 15.135
Note: t value 1.64 = 10%; 1.96 = 5%; 2.54 = 1% significance.
(Mathieson, Peacock, and Chin 2001, 107). The 10 percent significance level for the indicators was acceptable because of their strong conceptual support. The difficulty of forming a good reflective CPM measure also supports this choice because the nomological context is important in assessing the relative importance of formative measures (Mathieson, Peacock, and Chin 2001, 107). Furthermore, the structural model depicted in Figure 7 supports the construct validity of the CPM measure. The figure shows the path coefficients, with the t values in parenthesis, and the R2 value for the structural model. The interpretation of the R2 values is identical to that of traditional regression (Chin 1998b, 316). The corresponding path estimates could also be interpreted in the same manner. Following the bootstrap procedure included in the SmartPLS (500 resamples, as recommended by Chin 1998b, 323), all of the model path coefficients were found to be significant. The R2 of the CPM construct was substantial (.777), indicating that the reflective and formative measurement approaches shared 78 percent of their variance, supporting the construct validity of the formative CPM measure.
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.366** (4.931) .135* (2.403) .325** (5.916) Responsiveness efforts .226** (3.989) Responsiveness design R2 = .777 Reflective CPM Measure
Analysis design
Analysis efforts
FIGURE 7 Structural model results for the MIMIC model*t values 1.96 = 5% significance level. **t values 2.54 = 1% significance level.
TABLE 3 Latent Variable Correlations and Squared AVE for CPM Dimensions and Reflective CPM Measure Ana_Des Ana_Des Ana_Eff Resp_des Resp_Eff Refl_CPM (.823) .569 .669 .481 .769 Ana_Eff (.683) .564 .647 .673 Resp_des Resp_Eff Refl_CPM
(.775) .571 .775
(.656) .675
.705
Note: The bolded figures are squared AVE. AVE is not well suited for formative measurement and is therefore in sparenthesis for formative measures.
Interestingly, analysis and responsiveness efforts evinced weaker path coefficients than design in the structural model. This was clearly caused by the narrow scope of the reflective CPM measure, and can also be seen if the correlations and squared AVE figures for the CPM constructs are examined (see Table 3). The correlation table shows that all the CPM dimensions are highly correlated. However, design correlates more highly with the reflective CPM measure than with efforts. Furthermore, the correlations between the CPM dimensions are smaller than the squared AVE figures, the reflective CPM measure being an exception. This was expected, as the reflective CPM measure should overlap all formative measures. The GoF figure (geometric mean of the average communality and the average R2) can be used to estimate the overall goodness-of-fit of the PLS model. Even though the AVE figure is not well suited to formative measurement, the GoF figure was examined, indicating a good fit of .644 (cf. Tenenhaus et al. 2005, 173). Therefore, according to the path coefficients, the R2 value and the GoF value, the MIMIC model has a good fit with the empirical data. Finally, an alternative way of conceptualizing customer portfolio management is as a second-order construct. In the building of new measures,
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choosing between first-order and second-order conceptualizations should always be based on both theoretical and empirical reasoning. Hierarchical component analysis, as recommended by Wold (cf. Lohmller 1989, 130133), was used to test this alternative second-order conceptualization. In this case, it comprised the two second-order activities of analysis and responsiveness, both of which comprised CPM effort and design. Technically speaking, a second-order factor is directly measured by observed variables for all the first-order factors. While this approach repeats the number of manifest variables used, the standard PLS algorithm can be used to estimate the model (Chin, Marcolin, and Newsted 2003, 197). In other words, the second-order constructs repeat the indicators of the lower-order constructs (for analysis 4+10 indicators and for responsiveness 6+9 indicators). Significantly, the outer model results (indicator weights) are similar in this model to the previously tested first-order conceptualization of CPM. Therefore, both of these MIMIC models suggest keeping and dropping the same indicators, thereby providing further support for the validity of the construct. The R2 value of the tested second-order model was .775 and the GoF figure was .642, indicating that choosing a second-order conceptualization of CPM does not lead to a better model fit. Therefore, the simpler firstorder model is a reasonable choice.
LIMITATIONS AND IMPLICATIONS FOR FUTURE RESEARCH

This study developed a conceptualization of customer portfolio management based on theory and a qualitative field study. The suggested construct is formative and consists of four dimensions: analysis efforts, analysis design, responsiveness efforts, and responsiveness design. Hence, it takes into account both the strength and style of companies management practices. Together with the content validity established in the conceptual phase of this research, the empirical results based on survey data (N = 212) lend support to the construct validity of the suggested CPM measure. However, there are also limitations related to the novelty of the measure. The new measure should be cross-validated with a fresh set of data. Moreover, its nomological validity should be examined by linking it to other constructs (antecedents or consequences) to which it could feasibly be linked (cf. Diamantopoulos and Winklhofer 2001, 273). Avenues for future research are suggested based on both the theory and the field-study results. A crucial question for future research is whether companies CPM practices are related to company performance (cf. Turnbull and Zolkiewski 1997), or whether they could even be counterproductive (cf. Dubois and Pedersen 2002). CPM involves the processing of customer information and responding to the new knowledge and insights gained in this process. Therefore, it could be seen as organizational learning, which, at its most
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basic level, is the development of new knowledge or insights that have the potential to influence the behavior of the organization (cf. Huber 1991). Organizational learning is widely recognized as an important aspect of the strategic performance of companies (e.g., Fiol and Lyles 1985, 803; Slater and Narver 1995, 6667). Thus it could be hypothesized that CPM activities are linked to performance. Future research should consider three areas of performance. First, CPM activities may produce new and more precise knowledge about the portfolio of customers and their value to the focal firm. The learning that takes place in such activities enables firms to allocate their resources more efficiently among customers, thereby avoiding underspending or overspending. Therefore, it could be hypothesized that the activities of analysis and responsiveness are connected to financial customer performance, in other words to customer profitability. Second, CPM focuses on managing customers based on their value to the selling company. This strong supplier focus raises the interesting question of how its activities affect the customer perceived value in the exchange. Based on earlier studies, both negative and positive effects can be argued for (cf. Armstrong and Brodie 1994; Dubois and Pedersen 2002; Johnson and Selnes 2004, 15). Too strict a focus on customer profitability and customer costs in management could potentially decrease perceived value creation, customer satisfaction, and customer retention, all of which are reflected in overall customer performance. Then again, insight into the selling companys value creation could also result in openness and the understanding of customer value. Consequently, a positive relationship could be hypothesized. Third, the two areas of customer performance discussed are both key operational performance measures that form a meaningful link from CPM efforts to firm performance (cf. Venkatraman and Ramanujan 1986). If these links are strong enough the former may also have a direct relationship with the latter. Any testing of the link between companies CPM practices and performance should take into account the different roles of effort and design. First, behavior change is the necessary link between organizational learning and performance improvement (Slater and Narver 1995, 66). It is, therefore, rational to consider that only analysis and responsiveness efforts, that is, behavior, can provide a direct link to performance. Second, analysis and responsiveness design approximates CPM style and cannot therefore affect performance in isolation. Given that CPM efforts may but do not need to be highly designed, it would be very interesting to study whether the careful design of CPM practices would amplify the relationship between efforts and performance. In other words, does analysis and responsiveness design mediate the relationship between respective CPM efforts and performance? It would be rational to study mediation instead of moderation because the four CPM dimensions are all highly correlated (cf. Baron and Kenny 1986, 1176).
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Finally, future research should pay careful attention to the possible firm-external and firm-internal contingencies (moderators) in testing the relationship between CPM activities and performance with a view to creating more managerially and theoretically relevant knowledge. For example, a highly relevant proposition put forward by Mller and Halinen (1999, 2000) and Terho and Halinen (2007) is that the relational complexity and the context of exchange strongly affect what kind of customer management is reasonable in practice. On this basis, it could be hypothesized that market-like exchange contexts are likely to favor highly designed, more mechanistic CPM practices whereas network-like exchange contexts are likely to favor less designed, more organic CPM practices. Several company-internal variables could also be hypothesized to moderate the relationship between CPM activities and performance. The main issues identified concern the acquisition, quality, and adequacy of customer information; the use of information technology, organizational alignment, interdepartmental relationships; and the role of the accounting function.
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APPENDIX 1. CUSTOMER PORTFOLIO MODELS ANALYZED

Steps Sales volume, customers industry, sales trend Sales volume: history, current, targeted Compare sales volumes, product lines, and sales efforts Dimensions and operationalization Managerial implications
Author
Hartley (1976)
1) Sales analysis 2) Market penetration strategies
Smackey (1977)
1) Account analysis 2) Sales forecast and planning of sales resource allocation 3) Monitoring results Cunningham 1) Create a portfolio for and Homse (1982) analyzing customers
Strategies for market penetration: (present geographical, other SIC market) Allocate sales force resources to estimated customer potential
Help understanding different customers roles for developing customer structure
402
Canning (1982)
1) Creating a profit profile 2) Determining the source of profits 3) Assessing the value elements beyond profits: 4) Establish a value ranking 5) Set up a marketing program
Sales volume Technical interaction and assistance (Customers importance as a reference point) (Customers ability to provide important commercial information) Profit profile: Direct operating costs, sales order processing, field service costs Source of profits: Product mix, industry served, volume sold, order frequency/ size, share of customers business, length of time served, competitiveness of purchase Value elements beyond profits: Growth, technological issues, customer as a referential source, share of customer volume PCU (planning and control unit) opportunity: Size of account, sales growth rate of account, the intensity of competition/account Sales organization strength: Product distribution/the items stocked, shelf space and trade relations
Do dedicated sales programs for customers with similar value and requirements
LaForge and Cravens 1) Classify PCU for selling effort (1982) deployment
Adjust sales resources to customers with different potential
Fiocca (1982) Detailed implications for the key customers: Improve/ hold/ withdraw position with a customer
1) Analyze all customers in general level
General level: understand customer structure
2) Analyze the key accounts separately
403
Dickson (1983)
1) Distributor portfolio analysis
Trading tactics for different customers
2) Channel dependence matrix
The importance of the customer: Volume of purchases, potential sales, prestige of the account, market leadership, overall account desirability Difficulty of managing each account: Product characteristics (novelty and complexity), accounts characteristics, (customers needs, buying behavior, competencies, power, and competitiveness) competition for the account (number, strengths and weaknesses of competitors and competitors position vis--vis the customer) Customers business attractiveness: Competition, market, technological, financial and economic, socio-political factors The relative stage of the present buyer/ seller relationship: Length of the relationship, volume of purchases, importance of the customer, power, friendship, co-operation in development, managerial & geographical distance The monetary value of purchases for every product The accounts market share for selling firms each product The growth rate of the distributors sales the manufacturers share of distributors sales of the product or product group Manufacturers sales of the product per each distributor Gross profit and direct manufacturing costs Manufacturers market share Distributors market share
Explicit plans for developing long-term Channel distribution mix (offensive investment, defensive entrenchment, strategic retreat, abandonment) (Continued)
APPENDIX 1 (Continued) Steps Dimensions and operationalization Managerial implications Short term: general help for allocating resources among customers
Author
Campbell and Cunningham (1983)
1) Life cycle classification of customers A general analysis of customers
Long term: general help for understanding and Developing customer portfolio structure
404
Dubinsky and Ingram (1984)
Adjust sales resources to customer value and future potential Develop needed customer relationship categories
Dubinsky (1986)
Shapiro, Rangan, Moriarty and Ross (1987)
Sales volume Use of strategic resources Age of the relationship Share of customers purchases Profitability 2) Customer competitor analysis Customers share in his market by market segments Growth rate of customers demand for the Introduces competition product Volume of suppliers product purchased Competitors shares of the product 3a) Portfolio analysis of key Competitive position of the seller customers Growth rate of customers market Sales volume of each customer 3b) Portfolio analysis of a single Growth rate of customers purchases customer Life cycle classification of customers different businesses: Tomorrows, todays special, todays normal, yesterdays business Customers volume 1) Customer profitability The customers potential profit portfolio contribution: 2) Make a customer composition Net sales - (costs of goods sold + direct selling expences of salesperson) now The present profit contribution of a customer: Net sales - (costs of goods sold + direct selling expenses of salesperson) in future Cost to serve: 1) Customer profitability portfolio Presale costs, production costs, distribution costs, presale service costs 2) Management: five-step action Net price plan
Adjust marketing strategies for value of different customer groups General help for understanding and developing customer profitability structure
Krapfel, Salmond and Spekman (1991)
Rangan, Moriarty and Swartz (1992)
1a) Relationship type matrix (typing) 1b) Relationship management mode matrix (typing) 2) Combine the relationship type and the management mode (mapping) 3) Management mode matching across the dyad 4) Signaling about relationship 1) Segment industrial customers Help understanding and developing customer structure Price Cost to serve (Power)
Relationship value: Function of criticality, quantity, replaceability, slack (RV=f(C, Q, R, S)) Interest commonality: Actors economic goals and their perception of partners economic goals Perceived power position Interest commonality
Adjust, match, and signal interaction/ management style to different relationship type
Pels (1992)
1) Analyze customers to divide the main and key customers
Adjust pricing and level of service to customer value Help understanding and developing customer profitability structure Tailor marketing teams for key clients
405
Yorke and 1) Developing a customer Droussiotis (1994) portfolio
Adjust resource allocation to customer value Plans which relationships should be developed stronger for long-term portfolio balance
2a) Analyze important customers in depth - profitability
2b) Analyze important customers in depth - perceived relationship strength 3) Compare an important customers relationship strength and market share
The possibility of increasing sales volume The customers capacity to develop the sellers image The know-how which the client can transfer or help to create is the network effect The strategic importance of the account: Account potential, future capacity expansions, links to export markets, account prestige The difficulty in managing the customer: Competitor entrenchment, payment problems, claims put forward, buying behavior Customer profitability: Direct costs, pseudo-direct costs, indirect costs Perceived strength of relationship: Technical ability, experience, pricing, speed of response, frequency of contact, cooperation, trust + length of relationship, friendship, management distance Customers market share Strength of the relationship
(Continued)
APPENDIX 1 (Continued) Steps Dimensions and operationalization Managerial implications Adjust customer strategies to customer costs/profitability Help understanding and developing customer profitability structure Adjust customer strategies to customer costs (monitor migration patterns) Help understanding customer portfolio structure Prioritization in resource allocation; how to act toward customers Which relationships to develop, maintain, terminate
Author
Storbacka (1997)
1) Three views to create an understanding of customer base and its profitability
Turnbull and Zolkiewski (1997)
1) Analyze customers with a three dimensional portfolio
2) Monitor the migration of customer positions
Freytag and Mols (2001)
406
1) Ask five questions from main customers and divide customers to groups with regards of their importance now and in the future.
2) Combine questions with the Turnbull and Zolkiewskis (1997) model (note: relationship value understood differently)
Relationship revenue Relationship cost Volume Relationship volume Relationship profitability Net price Cost to serve: Presale costs, production costs, distribution costs, presale service costs (Shapiro) Relationship value: Function of criticality, quantity, replaceability, slack (RV=f(C, Q, R, S)) (Krapfel) Why the customer is important to the firm? Economy (turnover, earnings, costs, demand), know-how and learning (processes, technologies, employees know-how), competition (limits and advantages), other points (reputation, ethics) Major strengths and weaknesses of the customer? How does customer see selling firm and how it behaviors? In what direction are the customers developing? co-operation/competition? Is the direction in which the customer is heading compatible with seller? Net price Cost to serve Relationship value: e.g., earnings, access to knowledge, access to certain markets, high turnover
Zolkiewski and Turnbull (2002)
1) Identify the individual portfolio constituents
Customer profitability Relationship value Strategic importance of the account
2) Identify the interactions between portfolio constituents Customer, supplier and indirect portfolios Returns from customer portfolio: Sum of individual customer lifetime values (revenue-costs) Risk from customer portfolio. (How well managed, knowledge about customer, risk of being taken over, relationship strength)
Adjust relationship management strategies to customer value (such as KAM, attention, sales, contracts, time, etc.) Explicit plans for developing customer portfolio structure: which relationships to develop, maintain, broke, create new. Understand and develop customer portfolio profitability structure: try to reduce customer risk, acquire less risky customers
Ryals (2003)
3) Identify the interactions between different portfolios 1) Analysis for risk adjusted value of the firms customer portfolio
407
408
H. Terho
APPENDIX 2. QUESTIONNAIRE
The following statements deal with the strategic management of the customer base and customer relationships. Please indicate to what extent you agree or disagree with the statements in terms of the practices of your business unit (company): 1 = strongly disagree, 7 = strongly agree. (* = removed item)
Analysis Efforts (AE)

AE1 We analyze the value of all customer relationships in our customer base AE2 We analyze the costs of all customer relationships in our customer base AE3 We evaluate the expected value of our customer relationships* AE4 We look for customers in our customer base that have high future value potential* AE5 We look for diverse customer groups in our customer base that represent different sorts of value for our company AE6 We make comparisons of our customers based on their value* AE7 We segment our customers based on their value AE8 We analyze the roles various customers have for our company over the long term* AE9 We analyze the development of various customer groups in our customer base AE10 We analyze the health of our customer base over the long term
Analysis Design (AD)

AD1 We have carefully thought out the essential criteria for analyzing our customer relationships* AD2 We evaluate the quality of our customer-base analysis practices AD3 We tend to discuss how to develop our customer-base analysis practices AD4 We have tailored the criteria of our customer-base analysis to match the special characteristics of our business AD5 We have invested in developing our customer-base analysis methods AD6 We adapt our customer-base analysis practices according to the experiences gained from current practices*
Responsiveness Efforts (RE)

RE1 We tailor various product and service entities to customers based on their value RE2 We have created different operational models for treating customers with different kinds of value (e.g., service channels, level of service)
409
RE3 We allocate our sales resources to customers in relation to their value to our company* RE4 We systematically direct resources to customers that have high future value potential RE5 In our actions we aim at converting low-value relationships to more valuable ones RE6 We systematically develop our most valuable customer relationships RE7 We try to retain customer relationships that do not have development potential, but are careful about overly investing in them* RE8 We ignore or aim at terminating certain unprofitable customer relationships RE9 We put effort into finding new customers that have potential value to our company
Responsiveness Design (RD)

RD1 We have carefully considered the main aspects of our customer-base management practices RD2 We evaluate the quality of our customer-base management practices RD3 We try to find ways of improving our customer-base management practices RD4 We put a lot of effort into applying the principles of our customer-base management in our everyday business* RD5 We have created concrete instructions related to our customer-management principles for our personnel who work at the customer interface RD6 We adapt our customer-base management practices based on the experiences received from our practices
Reflective CPM Measure

RF1 We seek to develop our customer-base analysis practices RF2 We analyze the current and future value of our customer relationships extensively RF3 We seek to develop our customer-base management practices RF4 Customer value is an essential factor in our customer-base management practices
IMPLICATIONS FOR BUSINESS MARKETING PRACTICE

During the last two decades an increasing number of studies have underlined the need for companies to manage their customer base as founded on customer value. Customer portfolio management (CPM) focuses on the entire portfolio of customer relationships, from transactions to strategic partnerships,
410
H. Terho
and their management based on the value of the customers to the selling company. This article has conceptualized CPM and has created a measure for studying this pivotal area of customer-relationship management based on theoretical review, interviews, and survey data (N = 212). Several implications can be drawn from a theoretical review and the results of the empirical study for developing customer portfolio management practices. First, this article identifies key aspects of CPM activities, namely analysis and responsiveness. These two issues should be in focus when developing analysis activities. On the one hand, a company should understand the value of individual customer relationships and on the other hand the roles of different customers in the customer base in providing value for the focal company in the long term. In practice, the value of a customer to the selling company can be approached by analyzing the positive value and costs related to the customer relationship, the realized historical value and the future value potential, or the various functions the relationship serves. The state and characteristics of the relationship should also be taken into account in analysis because they may affect the future outcomes of customer relationships. It is important to note that the mere maximization of the lifetime value or revenues of single customers is a restricted view of CPM. Instead, the analysis activities should concentrate on the comparing, grouping, and prioritizing of customers in the entire customer base as based on their value. Further, the companies should respond to knowledge about different customers value in the customer base. Two general responsiveness strategies can be distinguished. First, a company should match its resource allocation according to the value of different customers. This implies the cost-efficient treatment of customers such as through tailored offerings, various operational models (e.g., level of service, service channels), and the allocation of sales resources to customers of different value. Second, companies should pay attention to developing their future customer-portfolio structure in the long term. Do new relationships need to be created? Which ones should be developed, which should be maintained, and are there any that should be broken or discarded? Both of these strategies greatly overlap because customer-treatment decisions always include a relationship-development aspect, and vice versa. Second, this study has identified several issues that are likely to foster or discourage the successful implementation of CPM. The results underline that customer portfolio management is a strategic multilevel and cross-functional practice, and the cooperation between various company levels and functions plays a critical role in its implementation. The support of top management is crucial in terms of securing the necessary organizational resources and changes. Further, the timeframe varies for the different aspects of its implementation, which should be taken into account. For example, analysis procedures can be developed and taken into use quite quickly. However, the main challenge in customer portfolio management
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lies in its proper implementation to everyday practices, which can be very time consuming. The personnel at the customer interface play a key role in putting the portfolio-management strategies into practice. Hence, the results highlight the need to pay special attention to motivating, giving instructions, and also listening to the staff. The results further indicate that CPM is highly interconnected to other management decisions and activities. Hence, CPM decisions should not be considered in isolation, in terms of the marketing department, but as interconnected to other functions such as supply, production, R&D, and accounting. Furthermore, attention should also be given to the connection with other marketing decisions. For example, managing customers based only on their value to the selling company would probably be very dangerous in the long term. CPM activities should, therefore, be well integrated into need-based segmentation. Similarly, the connections within customer relationships, between customer and supplier relationships, and among other network relationships should also be considered in CPM decisions. For example, managers should pay attention to the issue of how to treat customers who are buying several product categories from different business units in a consistent way. Overall, interdepartmental communication and cooperation should receive special attention. Third, the results of this study further highlight the need for companies to tailor CPM activities to their needs. For example, the appropriate analysis criteria for estimating customer value are likely to differ from company to company depending, for example, on the strategy, nature of the business, and characteristics of exchange with the customers. Hence, the companies should carefully consider the central criteria in their business for estimating customer value. A further pivotal question managers should ask themselves relates to the design of customer portfolio management. Do the companys customer relationships and customer-base characteristics imply the need for carefully designed, formal customer-base analysis practices, or do more informal, flexible customer-relationship-specific analysis procedures better suit its needs? Does it need carefully planned, top-down, formal procedures for responding to the value of customers, or would more flexible responsiveness procedures pursued in close interaction with customers be better?

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This article was downloaded by: [Romanian Ministry Consortium] On: 2 March 2010 Access details: Access Details:

Journal of Business To Business Marketing

A Measure for Companies' Customer Portfolio Management

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A Measure for Companies Customer Portfolio Management

Customer H. Terho Portfolio Management

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Customer Portfolio Management

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Customer Portfolio Management

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A Field Study of CPM Practices in Business

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A Field-Based View of Customer Portfolio Management

Customer Portfolio Management

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Customer Portfolio Management

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Synthesis: An Operational Definition of Customer Portfolio Management

Customer Portfolio Management

Customer portfolio management

FIGURE 1 Customer portfolio management construct.

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Customer Portfolio Management

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MEASURES OF CPM Formative Measurement

Customer Portfolio Management

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FIGURE 3 A conceptual matrix for forming items for analysis effort.

FIGURE 4 A conceptual matrix for forming items for analysis design.

Customer Portfolio Management

FIGURE 5 A conceptual matrix for forming items for responsiveness efforts.

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FIGURE 6 A conceptual matrix for forming items for responsiveness design.

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Estimation and Results

Customer Portfolio Management

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Mean 4.75 4.25 4.44 5.07 4.89

Std. Deviation 1.00 1.34 1.18 0.92 1.04

Range (17) 1.407.00 1.007.00 1.337.00 1.446.78 1.007.00

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Note: t value 1.64 = 10%; 1.96 = 5%; 2.54 = 1% significance.

(.775) .571 .775

Customer Portfolio Management

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LIMITATIONS AND IMPLICATIONS FOR FUTURE RESEARCH

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Customer Portfolio Management

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Customer Portfolio Management

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Customer Portfolio Management

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APPENDIX 1. CUSTOMER PORTFOLIO MODELS ANALYZED