Money for value: Pricing from a resource-advantage perspective

Tilburg University

Money for value

Ingenbleek, P.T.M.

Publication date:

2002

Document Version

Publisher's PDF, also known as Version of record

Link to publication in Tilburg University Research Portal

Citation for published version (APA):

Ingenbleek, P. T. M. (2002). Money for value: Pricing from a resource-advantage perspective. CentER, Center

for Economic Research.

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UNIVER,SITEJT *:: 0 VAN TILBURG ₀

BIBLIOTHEEK 1

-ALBURG ..

-MONEY FOR VALUE

Money

for

Value

Pricing from

a

_{Resource-Advantage}

_Perspective

Proefschrift

ter verkrijging vande graad van doctor aande Universiteit van Tilburg, op gezag van de rector magnificus Prof. Dr. F.A. van der DuynSchouten, in het openbaar te verdedigen

ten overstaan van een door _{het college voor promoties}

aangewezen commissie in de aula van de _{Universiteit op}

maandag16december 2002 om 14.15 uur door

PaulusTheodorusMaria _Ingenbleek

Promotores:

Preface

Atsomepoint in timethis thesis was intended tobeabout thetopic

of

market information acquisition. Afterreading a pile

of

books and articles, throwing away ideas and entire

papers, it was concluded that this topic was already sufficiently covered by Aguillar's

(1967) thesis. For this and many other reasons, the topic was changed to pricing. This

change in topic was a typical result ofthe collaboration with my thesis advisers Theo

Verhallen and Ruud Frambach. Our brainstorm sessions and _{discussions were always}

informal, surprising, down to earth, and inspiring, and _{never rushed,over-theorized, or}

limitedto professional matters.Althoughatfirstsight thetopic seemed illogical,ourfirst

discussion onpricingraisedmany interesting issues that werecloselyrelated toourfields of interest.Itbecameclear thatwewouldfocusour attention onthetopics thatgobeyond the mainstreampricing _{literature, and that}areclosely related tothe topics

of

strategy and marketorientation. In short, firms try to create value to customers in the form

of

better

productsand servicesthan theircompetitors offer, but how do theyget money in return

forthe_{value they}deliver?

The change

of

topic boosted the process in theright direction. The response

of

Marion

Debruyne to my request

of

getting a glimpse on her pricing data

of

_{industrial firms,}

resulted ina_{jointproject.}Aftera_relatively short_{period of time, I was ableto present the}

firstresults to _{my colleagues} at_{Tilburg University.} The_marketinggroup inTilburg has

established a stimulating research climate that strongly affected my development as a

researcher. The discussions I had with several of them on the statistical problems I

encountered, did not only raise solutions but also increased my insights. Although the projectwas presented in apreliminary stage, it rapidlyincreasedthequality ofourfirst paper. It was presented only two months later at the Fordham University pricing

conference. The paper gave riseto discussionswithShelby Hunt (who is akey proponent

in the theoretical perspective obtained in this thesis), and with business managers, like

Joost Krul whose stories connected the theory to practice in a lively way. Experiences

with thisfirst project were captured in a research proposal. The honorary mention that

this proposal received from Fordham's doctoral dissertation proposal competition on

pricing, motivatedto continue.

Afterthisperiod

of

rapid progress, the process reached a peak inamajordatacollection

that turned out to be

a

joint

project

of

Tilburg University, Vrije Universiteit in

Amsterdam, and research company Heliview. Related to this data collection, we

practical relevance of our study. I like to thank Heliview for theirsupport, in particular

Ton Ketelaars, Harrie van Elderen, and OlafCrutzen. 1 appreciate the support

of

Heidi

van denBorne in_organizingtheseminar.

The process hasnowreached itsfinalstage.The defense committeeconsists

of

professors Els _Gijsbrechts, Jean-Francois Hennart, Erik-Jan Hultink, Jaideep Prabhu, and Jan-BenedictSteenkamp. I appreciatetheir willingnesstoparticipate.Whiletryingtoanswer

their questions, I will feel supported by mytwo"paranimfs": my former office-mate and

new colleague, Erica van Herpen, and my brother Jan-Willem. I thank the CentER

researchschool for providing me with thenecessary conditions, includingthe education

program during the first two years (in particular Rik Pieters impressed me with his

marketingcourse) and Ilook forward to my jobs inThe Hague and Wageningen.

When Aguillar (1967) had finished_{his thesis,}he dedicated it tohis parents and allother

inspiring and inspired teachers in his life. Although it seems a bit silly to thank your

parents with something useless as a thesis, in stead of something nice like a bottle of

good wine and a bouquet

of

flowers, it does make sense to acknowledge the fact that

many people contributed indirectly to the fact that 1 was able to write this thesis, in

particularmy family, my friends, and Sander. In short, I wish to thank everybody who

helped,inspiredor contributedotherwise.

October 2002,

Contents

Chapter1 Introduction: Pricingand Resource-Advantage Theory 1

1.Problemstatement 1

2. Background 5

2.1 Pricingin perspectives oncreatingcustomervalue 5

2.2_{Pricing literature}in_{marketing 8}

2.3 Literatureonpricingpractices 9

2.4 Gaps in theliteratureonpricingpractices 10

3.Theoreticalapproach 13

3.1 Foundational

_{premises 13}

3.2 Background ofthe_{theory 15}

3.3 Overview ofR-ATheory 16

3.4Potentialcontributions of a R-A_{perspective on pricing 18}

4. Structure 20

Chapter2 _UnravelingthePricingCompetence 25

1. Introduction 25

2.Literaturereview 26

2.1 Pricing literaturebasedoncost-principlestheory 26

2.2_{Pricing literature} based on_{marketingstrategy 27}

2.3_{Pricing literature}basedonorganizational decision processes 34

3. Pricing intheprocess of R-Acompetition 34

3.1 Priceand_{performance 36}

3.2_{Market position}and_{price 36}

3.3 Resources andthe_{pricing competence 38}

3.4 Learning inthe_{process of R-A competition and} thepricingcompetence 38

4. The activities ofa_{pricingprocess 39}

4.1 Determining pricingobjectives 39

4.2 Analysis 40

4.3 Decision-making 42

4.4 Implementation 42

4.5 Evaluation 42

5.1 Pricing asa spanning-process 44

5.2 Relationwith_{value-contributingprocesses 46}

5.3Differentiating pricing processes 46

5.4 Determiningthefinal_pricediscretion 51

5.5 Determiningprices 52

5.6 Conceptualization

of

pricing asanorganizational competence 53

6. Conclusions 56

6.1 Implications for empirical studies 58

Chapter3 Successful _PricingPractices inaCustomerValueContext 61

1. Introduction 61

2. Concepts 62

3. Hypotheses 66

4. Method 69

4.1 Datacollectionand_{sample 69}

4.2 Measurement 70

4.3Theorytestingapproach 71

5. Results 72

6. Discussion 74

6.1 Limitations 76

Chapter4 Issues in New_{Product Pricing from}a _{Resource-Advantage} Perspective 79

1. Introduction 79

2. The effects

of

_{pricingpractices on new}productperformance 81

2.1 The effectsof_{pricingpractices}onrelative_profit

margins 82

2.2Theeffectsof_{pricingpractices on new}product market

performance 84

3. Otherissuesof_{pricing from a R-A perspective 87}

3.1 Marketposition andrelative pricelevel 87

3.2Marketposition andrelative importanceofpricing 88

4. Methods 89

4.1 Datacollectionprocedure andsample 89

4.2 Measurement 91

5.2_{Market position}and_{relative price level} 103

5.3 _{Market position}andimportanceofpricing 105

6. Discussion

6.1 The effects

of

_{pricingpractices on newproduct}

performance 107

6.2Otherissues_{ofpricing from a R-Aperspective} 112

6.3 Limitationsandfutureresearch 113

Chapter5 _LeveragingCustomerand_{Competitor Orientations for}Value

Creationand ValueExtraction 115

1. Introduction 115

2.Background 118

3.Conceptualframeworkand hypotheses 121

3.1 Valuecreation 122

3.2Valueextraction 125

3.3The businessenvironment 126

4.Methods 127

4.1 Modeland hypothesestestingapproach 127

5.Results 130

5.1 _{The hypothesized model} 130

5.2Interfunctional coordination 133

5.3 Businessenvironment 135

6.Discussion 137

6.1 Valuecreation 137

6.2Value extraction 139

6.3The businessenvironment 140

6.4Themarket_{orientation-performance}

relationship 144

6.5 Limitations andfutureresearch 145

Chapter6 _{Money forValue: Conclusions andImplications 147}

1. Introduction 147

2.Conclusions 148

2.1 Priceand _performance 149

2.2_{Market position}and_price 150

2.3thepricingcompetence 151

3.Contributions 152

3.1 Contributionsof_empiricalstudies 152

3.3 Contributions to R-A theoryandmarketingstrategy 154

4._Implications 156

4.1 Implicationsfortheory 156

4.2 Implicationsforbusiness practice 156

4.3 Implicationsforteaching 158

4.4 Implicationsforpublic policy 160

4.5 Implicationsforfuture research 161

Appendix 1 Scaleitems and resultsof factoranalysisChapter3 165

Appendix 2 Scaleitems, sources,reliabilities, andstanderdized path

coefficientsofmeasurementinstruments_{in chapters 4 and}5 167

Appendix 3 Test resultsdiscriminants validity ofconstructs used in

chapters 4 and5 173

Samenvatting(Summaryin Dutch) 175

List of

_{Figures and Tables}

Figure 1.1 Managers'assessments

of

pricing 3

Table 1.1 Taxonomyofpricing strategies 8

Table 1.2 Selection

of

reviews ofandcriticalcomments on_pricingliterature 11 Table 1.3 Foundational_premisesof_{perfect competition}and resource-Advantagetheory 14

Table1.4 Researchtraditionssharingafl'initieswithresource-advantage theory 14 Figure 1.2 Resource-advantagecompetition 17

Figure 1.3 _{Competitive position}matrix 17

Figure 1.4 Structure

of

thesis 21

Table2.1 Pricing literaturebasedoncost-principlestheory 28

Table2.2 _{Pricing literature}basedon_{marketingstrategy 30}

Table2.3 _{Pricing literature}basedonorganizationaldecision_{processes 32}

Figure2.1 Priceand_{pricing inthe processofR-A competition 36}

Figure2.2 Conceptualorientationin

pricing 37

Table2.4 Overviewofstudies_{comparingpricing}methods 43

Figure2.3 The position inthepricingprocess in theorganization 44

Table 2.5 Framework

of

_{different pricingprocesses}with_{examples 47}

Table 2.6 Relevance

of

decisionareas ofthe_pricingprocesses in relation tovalue-contributingprocesses 49

Table2.7 _{Topics,concepts, and strategiesfrom pricing literature}inrelation todecision

_{areas 50}

Figure2.4 Decisionareasofthe_{pricing competence 55}

Figure3.1 Conceptual

_{framework 65}

Table3.1 _{Hypotheses on the}Success_ofPricingPracticesinDifferent SituationsofValue Creationand_{Sustainability 66}

Table3.2 Correlationmatrix_ofpurifiedmeasures 71

Table3.3 Results

of

_{moderatingregression analyses (standardized} coefficients)Dependentvariable: Pricingsuccess 73

Figure4.1 _{Conceptualframework 83}

Figure4.2 Market positionandrelative

_{price 88}

Table4.2 Correlationmatrixofmeasures 96

Table4.3 _{Propertiesofpurified measures 97}

Table4.4 Results

of

_{moderatingregression analyses (standardized}

coefficients)Dependentvariable: Relativeprofit margin 99

Table4.5 Results

of

moderatingregression analyses (standardized

coefficients)Dependentvariable:New productmarket

performance 100

Table4.6 Results o

f

_{moderatingregression analyses (standardized} coefficients)Dependentvariable:New product financial

performance 102

Table4.7 Results

of

moderatingregression analyses (standardized

coefficients)Dependentvariable:Relativeprice 104

Figure4.3 _{Market positions}of_products 105

Figure4.4 Average relativeprices bymarket position(standerdized

deviation) 105

Table4.8 Results

of

regression analyses (standerdizedcoefficients)

Comparison

of

products withandwithout competitiveadvantage 106

Table4.9 _{Pricing "best" and}"bad"_practices 108

Figure4.5 Pricingbest practices toincrease newproductprofitmargins 109

Table4.10 Pricingbest practicesto achieve newproductmarket performance 111

Figure5.1 _Conceptualframework 122

Figure5.2 Hypothesizedmodel 129

Table5.1 Covariancematrix 129

Table5.2 Model estimates for the hypothesized model 130

Table5.3 Mediationtest results 132

Table5.4 Likelihood ratio differencetestresultson interfunctional

Coordination 134

Table5.5 LMtest resultson _{competitive intensity} 135

Table5.6 LMtestresults on demanduncertainty 136

Figure5.3 _Resultingmodel

of

valuecreationand valueextraction 138

Figure5.4 Resultingmodelmarkets with ahigh demanduncertainty 141

Figure5.5 _Resultingmodelmarkets with a lowdemanduncertainty 141

Chapter 1:

Introduction:

Pricing

and Resource-Advantage

Theory

'...the study of pricing strategy puts a researcher in a unique position, having the opportunity to study questions of immense practical importance while remaining on

the forefront between the economic and behavioral science. '

Timothy M.Devinney, 1988. 1.PROBLEM STATEMENT

Since the 198Os, structural changes take place in the business environment, like

increased competition, shortened _product lifecycles, better informed and more

demanding customers, globalization, discontinuous technological progress including

applications

of

information technology (Jones 1996). As a consequence, many

organizations attempt to set themselves apartfrom competition bycreating customer

value: _{offering unique} benefits to the customer in market _{offerings. Differentiation}

strategies as opposed to cost leadership strategies _{(Porter 1980)} have become

widespread in strategic marketing plans

of

firms (Ingenbleek, Frambach, and

Verhallen _{2000). Supported by} studies fromthe Profit Index

of

Marketing Strategies

(PIMS) database on a_{positive relationship between productquality} and _performance

(Buzzell and Gale 1987), total quality management became increasingly popular

throughout the 1980s (Day 1994; Griffin and _{Hauser 1993). In} this spirit, Hunt and

Duhan (2002, p. ₉₇₎argue that it hasbecome conventional wisdom forbusinesses to

strive for market offerings that offer more customer value than competitors do. "In this view "morecustomervalue"means"perceived bysomemarketsegment(s) to be

worthmore"." 1

However, creatinganddeliveringcustomer_{value is only half of thejob. Determining}

what to ask inreturn is the_{other half. As Day (2000, p. 24) notes:} "Central _{to every} market relationship isan_{exchange process where value}is_{given and}received. Even in

1

the most tenuous andshort-lived "relationship," eachsideofthedyadgives something

in return fora benefit or payoff

of

greatervalue." Strivingformarket offerings that

are perceived by customers to beworth moreimplies that what isasked in return also

should be worth more in order to be rewarded for all efforts in the creation of

customer value. In other words: a strategy in which the firm sets out to deliver

superiorcustomervalue isprofitable only if the firm is able to successfully determine

a price that customers are willing to pay in return. To this respect, Monroe (1990)

notes that pricing is

of

increasing importance inthe changing business environment.

The managerial relevance canbeoutlined by six additionalreasons.

First, managers find pricing important. Several studies have collected managers'

importance ratingson_pricingissues_comparedwithother marketingissues._Generally,

this evidence continuously shows high importance ratings for pricing _(Frambach,

Nijssen andVan Heddegem 1997; Hooley, West and Lynch 1984; Myers 1997; Pass

1971; Robicheaux 1975; Samiee 1987; Udell 1964; 1968). To illustrate, Figure 1.1

reports managers'assessmentsof_{pricing from}an onlinemanagement survey inwhich

95 managers

of

Dutch firms participated.' In line with the results

of

extant research,

managersgenerallyperceive pricingas _{important. However, thekeyquestion here is}

why theyfindpricing important? From aperspective

of

creating customervalue, the answerwould simplybe: because they have something at_stake, namely their efforts

increating customervalue. This would explain why manymanagers perceive pricing

asriskyaccordingto Figure 1.1.

Second, pricing may have severe consequences when mistakes are made. A lot of

anecdotal evidence points at consequences

of

pricing mistakes that often go beyond

theshort-term financial implications for firms, like long-run loss

of

market share, or a decrease ofan _{entire industry's profitability (Simon 1992). The} latter occurred for

instance when Japanese electronics firms introduced their first CD-players to the

market. _{Although superiorto alternatives, they charged}considerably lowerprices than the market leader thereby lowering the

profitability of

the entire industry. For this

reason price has been called a_{"dangerously explosive variable" (Oxenfeldt 1973, p.}

48). As found inTellis' (1988)meta-analysis: acertain percentage price change has a

ten to twentytimes strongereffecton sales than the same percentage in advertising

outlays.

Third, managers find pricing difficult. Dolan and Simon (1996) mention a recent

survey showing that marketing managers perceive pricing as the most difficult

marketing decision.The results presented in Figure 1.1 confirm this finding. Why do

'

This survey is carried out by Ondememerspeil.nl. 600firmswerecontacted ofwh ich108_responded

( 18 %). 13 respondentsdidn'tcomplete the questionnaire, leading to 95 usuablequestionnaires. 68% of

the respondents'firms has 1-10 employees, 22% has 10-50 employees, and 10% more than 50: 74% are servicefirms,7% manufacturers, 19%other,

FIGURE 1.1

Managers'Assessments_{of Pricing}

liow do youassessthe importance of

pricingascomparedtoother marketing decisions? (n = 95) 60 56.3 50 39.6 40 % 30 -20 10 , I ₀ 0 i-/

m 8 M mi

2. R

& &

g .g ./ i

2 5 3 5 Z Z

How do you assess the risk of pricing? (n = 95) 80 62.5 60 % 40 16.7 19.8 20

o

E---8 -K IR ITIA

& 2 & 29

Z Z >

How do_youassessthedifficulty of

pricingascomparedtoother marketing decisions? (n = 95) 80 _63.5 60 -%40 28.2 20 0.3 0 O r-= 25 2, 2.

a :8 8

%% 2

2 3

&

they findit difficult? Certainly, in decisions where so much isat stake and that may have so many unintended negative consequences, a thorough understanding of the

often complex situationsand_{continuous monitoring}

of

decision outcomes is_required.

For this reason, pricing is often organized as agroup process that involves multiple

business_{functions (Ingenbleek,}Frambach, and Verhallen 2001).

Fourth, managers find academic research on pricing

of

littlepractical help. The gap

between academic pricing research and the actual practices by which organizations

arrive at selling prices, is already pointed at for more than six decades _(Bonoma,

Crittenden and Dolan 1988; Cressman 1999; Diamantopoulos 1991; Fog 1960; Hall

and Hitch 1939; Monroe and Mazumdar _1988; Noble and Gruca 1999b; Oxenfeldt 1973). Asthe years

of

publicationinthese _{references indicate,}littleprogress has been madetobridge thisgapduring this period of time.

The argument that managers aresimply not interested in academic research however would not be fair. Related to the datacollectionon behalfof_{chapters 4 and 5 of this}

thesis,aseminar wasorganized in the fall of 2001 atwhich thepreliminary results of

these and other studies were presented to a business audience. The seminar was

visited_by nearly 100 _{senior managers from arich variety}

of

_{companies. The}practical

relevance of the research presented at the seminar was widely acknowledged by

national _newspapers and business _{press (Adformatie} 2001;Automatie 2001; Bosveld

2001; Brabants Dagblad 2001; Constructeur 2001; Liesker _{2001; Management}

Control & _Accounting 2001; Management Team 2001; Marketing Actueel 2001; Marketingonline200la;2001b;Tijdschrift Controlling 2001; VandeVelde 2001).

Fifth, and related to the previous point, marketing textbooks on pricing are hardly

underpinnedwithacademic researchon_{organizationalpractice (e.g.}DolanandSimon

1996; Fletcher and Russell-Jones 1997; Nagle and Holden 1995). Notwithstanding

that pricing textbooks might be helpful tools to improve price decisions, only few

ideasare_{theoretically}and_{empiricallygrounded}in_{organizational} researchon_pricing.

Sixth,

pricing is of

high importance to society and public policy (Grewal and

Compeau 1999). Of all marketing variables price is probably the most criticized by

forces in society and perhaps most restricted bylegislation. As indicated bya recent

example of a _{sharp increase in European} oil prices, wrong prices can not only

seriously harm a corporate image, but also lead to social unrest and immobilize economic life (NRCHandelsblad 2000).

Whereas much attention has focussed on how firms can create customer value in

products and services, little is known about how they can successfully determine a

price. As Cressman (1999, p.456) formulates it: "How is it possible thatwe advocate

with thedrivers

of

customer needs?

If

pricing practice is seen as the meansthrough whichmanagers"harvest"the "seeds" planted in amarket-oriented strategy process,

why arethere no pricing practices based on the value delivered to customers in the

marketing I iterature?

-This thesis deals withthe question how organizations successfullycan determine the

price that they ask in return forthecustomer value theyoffer? In thischapter,first the background ofthis question in academicliterature is_{discussed, includingstrategy and}

marketing literature on creating customer value, pricing literature in _{marketing, and}

literature on pricing practices. This section

will

conclude with a discussion of the remaining gaps in this literature. Second, the theoretical perspective ofthethesis is introduced. It is argued that a perspective derived from resource-advantage theory (HuntandMorgan ₁₉₉₅₎providestheopportunityto developaperspective onpricing

that can overcome the major gaps indicated in the literature review. Finally, the

structure of the rest ofthe thesis is _discussed, including the contributions of the

subsequentchapters.

2. BACKGROUND

This section first discusses the role

of

pricing inmarketingand strategyliterature on the creation

of

customer value. Next, a brief overview

of

pricing literature in

marketing is_{presented,followed by}adiscussion ofthe literatureon _{pricingpractices.}

This section concludes with a discussion ofthe major gaps in these literatures with

respect to the question how organizations successfully can determine the price that

they ask inreturn forthe customer value theyoffer.

2.1 Pricingin Perspectiveson _{Creating Customer Value}

The creation

of

customer value received increasingly attention in strategy and marketing literatures since the 1980s. This literature can be _{grouped in (1) strategy}

literaturebasedonindustrial _{economics,(2)}strategy literaturebased on the

resource-based view of the firm, and (3) marketingstrategy literature. These perspectives will

bebrieflydiscussed here and it will beoutlined how theypay respect topricing.

Strategy literature based on industrial economics essentially suggests that industry

structure determines conduct,which_{determines business performance.}Performance is

thus a consequence

of

industry choice and the firm's efforts to change industry

structure, like raisingentry barriers (e.g. Porter 1980; 1985). Withinan _{industry firms}

should chose oneof_{three generic strategies:differentiation (delivering industry-wide}

unique benefits), cost leadership (offering industry-wide lower prices) or focus

(delivering unique benefits tailored for a specific market segment). The chosen

strategy is given shape by coordinating the activities

of

business functions like

logistics, productionandmarketing inthevalue chain(Porter 1985).

Porter's (1980;1985) work stresses a_{relationship between value, benefits and price}

levels. If value is defined as "what buyers are willing to pay", then "superior value

stemsfromofferinglowerprices thancompetitors for equivalentbenefitsor providing unique benefits that more than offset a higherprice" _{(Porter 1985, 4). As such, this}

view actually explains relative price levels. Related to this, it formulates several

normative pricing strategies (Porter 1985). However, it offers no answer to the questionshowfirms canandshouldarriveat_pricedecisions.

In contrast tothe _{external emphasis} ofindustrial economics, the resource-based view

of the firm suggests that strategy and performance are consequences of a firm's

tangible and _{intangible resources (e.g.} Dierickx and Cool 1989; Penrose 1959; Wernerfelt 1984). Resources may include for instance machinery, distribution

channels, R&Dcapabilities,and _{specific skills.}The resource-based view_{suggests that}

resources are _{imperfectly mobile and heterogeneous, meaning that each firm has a}

unique assortment

of

resources that can't always be bought or sold in the market

(Hunt and _{Lambe 2000). A typical example of}an imperfectly mobile resource, is a

competence: "an abilityto sustain thecoordinateddeployment

of

assets in a way that

help thefirmachieve its_{goals"(Sanchez, Heene, and}Thomas 1996, p. 8). Day (1994,

p. 38) emphasizes thecomplex nature

of

competencies as"complexbundles

of

skills

and collective learning, exercised through organizational processes, that ensure

superior coordination of functional activities.- The competence-based view

emphasizes that firms have a core competence that is rooted in the culture of an

organization and that is therefore difficult to imitate by competitors. A core

competence enablesanorganization to createvalue in different market offerings and

product lines and thus provides access to a variety

of

markets (Hamel and Prahalad

1994).

Until recently the resource-based view

provided no link

with price or pricing. Recently, Dutta, Zbaracki, and Bergen (2001) study pricing as a _{competence in a}

single case study.' They stress that pricing requires a combination

of

knowledge,

skillsandroutines inorderto extract valuefromcustomers. Alonginvestments in the

resources that create value,firms shouldinvest in resources thatenable pricing. This observation however leaves many questions unanswered, like: How a _pricing

competence can be _{developed? Which pricingpractices} are _{important? How pricing}

competences relate tocompetences thatcoordinatethecreation ofvalue?, etc.

1

Specifically,Dutta,Zbaracki,and Bergen (2001) use the term"capability". Here, I adopt the

nomenclatureofSanchez, Heene, andThomas (1996) thatisdeveloped to overcome the inconsistent

terminologyin competence-based literature. From this perspectivepricing isa_competence(seechapter 2).

In marketing. there is considerable attention

of

academic research focussing on the

resources that enable a firm to create customer value. Grounded in the marketing

concept (Drucker 1954;Levitt 1960; MacKitterick 1957), this literatureis _according

to Slater (1997, p. 162)developing intoa"customervalue-basedtheory of the firm."

It includes literatureon market orientation _{(Deshpandd and Farley 1998; Frambach,}

Verhallen and _{Roest 1995; Gatignon and Xuereb 1997; Han, Kim, and Srivastava}

1998; Hurley and Hult 1998; Jaworski and _{Kohli 1993;} 1996; Kohli and Jaworski

1990; MatsunoandMentzer2000;NarverandSlater 1990; Pelham and_{Wilson 1995;}

Ruekert 1992; Shapiro 1988; Slater andNarver 1994; 1998; Voss and Giraud Voss

2000), organizational culture(Deshpandd and _{Webster 1989; Deshpandd, Farley, and}

Webster 1993; Homburg and Pilesser 2000), organizational learning from markets

(Adams, Day, and Dougherty 1998; Day 1991; Dickson 1992; McKee 1992;

O'Connor 1998; Sinkula 1994; Sinkula, Baker, and Noordewier 1997; Slater and

Narver 1995), organizational market information _{processes (Day and} Nedungadi

1994; Lynn,Simpson andSouder 1997; Lynn, Skov, and Abel 1999;MaltzandKohli

1996; Moorman 1995; Moorman and Miner 1998; Moorman and Slotegraaf 1999;

Ottum and Moore 1997; Slater and Narver_2000), market-related _{competences (Day}

1994; Ingenbleek, Frambach and Verhallen _{2000), knowledge (Menon and}

Varadarajan 1992;Moormanand_{Miner 1997), and relationships instrategic networks}

(Geyskens, Steenkamp, andKumar 1998;Morgan and Hunt1994; Webster 1992).

The ideas from thisstream

of

literatureareapplied toavariety

of

topicsinmarketing

literature _including the _{organization of}the _{marketing function (Homburg, Workman}

and Jensen 2000; Homburg, WorkmanandKrohmer 1999; Moorman and Rust 1999;

Webster 1992; Workman, Homburg and Gruner _{1998), sales (Siguaw, Brown and}

Widing 1994), new _{product development (Atuahene-Gima} 1995; Workman 1993),

entrybarriers (Han, Kim and Kim 2001), market segmentation (Verhallen,Frambach

and Prabhu 1998) and marketingchannels(Siguaw,Simpson andBaker 1998). So far,

pricingreceived scantattention in this literature. Some authorsbrieflytouchthetopic. Day (1994)suggeststhatpricing is anorganizationalprocess thatis influenced by the

firm'scompetencies. Day and_{Nedungadi (1994) find congruence between customer} and competitor orientations

of

firms, and the customer and competitor dimensions expressed in prices.

In summary, price received scant attention in literature on the creation

of

customer

value. Porter₍₁₉₈₅₎arguesthat creatinghigherbenefits to customers than competitors do, results inhigherprices than competitors ask. The resource-based view of the firm only recently acknowledges pricing asan_{organizationalcompetence(Dutta, Zbaracki,}

and Bergen 2001), which impliesthatorganizations mayhavecombinations

of

skills,

knowledge, androutines_{that makes them better, equal} orworse in pricingcompared

to competitors. In line with_{this observation,} marketing strategy literature has briefly

described _{pricing as} an _{organizational process that} is _{influenced by} a firm's

competencies (Day 1994) and_{strategicorientation (Day}and Nedungadi 1994).

2.2 Pricing Literature inMarketing

Pricing literature in marketing has focussed predominantly on normative pricing

models and _{consumers' perceptions}

of

_price and value. _{Normative pricing} models

solve_{problems of what price}decisions managers should take when facedwithcertain

situations. Since Monroe and Della Bitta's (1978) critical

review of this type of

studies, thisliterature hasmade considerable progress indeveloping decision models for a multitude

of

_{situations (see} for instance Gijsbrechts 1993; Monroe and

Mazumdar 1988). An important contribution to this literature is Tellis' (1986) unifying taxonomy

of

pricing strategies. Tellis organizes pricing strategies as they

emergefrom normative pricing models inanintegrative framework. Thetaxonomy of

pricing strategies is based on two dimensions: the objective of the firm and the

characteristics ofconsumers (see Table 1.1). Objectives refer to what the firm wants to achieve withitspricingstrategy, given theoverall objective

of

profitmaximization. Characteristicsoftheconsumersrefertodifferencesinsearch_{costs, reservation prices}

andtransaction costs.Depending on thefirm'sobjectiveandconsumer characteristics,

the firm may opt fora specific pricing strategy (for a more elaborated discussion of

these strategies, their relationships and the circumstances under which they are

optimal, see theoriginal article).

TABLE 1.1

Taxonomy ofPricingStrategies

Objective of Firm

Characteristicsof _VaryPricesAmong Exploit Competitive BalancePricing Over Consumers Consumer Segments Position Product Line

Some have_highsearch Random discounting Pricesignaling Imagepricing Costs

Some havelow Periodic discounting Penetrationpricing Price bundling reservation price Experience curve Premiumpricing

pricing

Allhavespecial Secondmarket Geographicpricing Complementarypricing

transaction costs discounting

Derivedfrom Tellis (1986).

Pricing literature from a _{consumer perspective examines consumers' perceptions of}

value and price_(seeGijsbrechts 1993 foran_{overview). An important contribution of} this literature is that is has extended the concept

of

price. Traditionally, pricing literature takes anarrow perspective on price, as in Simon's definition (1989, p. 1):

"The price ofa_{product or}service is the numberofmonetary units acustomer has to

pay to receive one unit ofthat product or service." Marketing literature however

increasingly advocates a broader definition

of

_{price (Gijsbrechts 1993). Zeithaml} (1988, p. ₁₀₎ arguesfor instance that: "From the consumer'spoint ofview, price is

what is given up or sacrificed to obtain a product." Simply stated, this literature

argues that purchaseintention is aconsequence

of

perceived value,which is a

trade-off

between perceivedquality ofamarket offeringand perceived sacrifices toobtain

this offering. Paying a monetary price is only one sacrifice, conditions

of

payment,

transportationcosts, andcostsofinformation_{seeking may}beothers.

Much less attentionhasfocussed on how firms arriveatprice settings and what they

should do in order to arrive at successful price settings. The advice

of

marketing literature is _{essentially to systematically analyze all relevant} factors before a _price

decision is made _{(Dolan 1995;} Monroe 1990; Nagle and Holden 1995; Oxenfeldt

1973). However, as willbe_{discussed in the next section,}relatively few theoretical or empirical contributionsfocus on thepricingpractices that lead topricedecisions.

2.3 Literatureon _PricingPractices

Main stream _{pricing literature builds strongly} on neo-classical economics and

suggests that firms arrive at selling prices by estimating customers' price elasticity

and competitors' prices and set prices to maximize profits (e.g. Pashigan 1998).

Although economic literature is often criticized for a lack

of

realism in _describing

how pricedecisions are made_{in business (e.g.Diamantopoulos 1991; Hall} and Hitch 1939; Monroe and DellaBitta 1978; Oxenfeldt 1973), accordingto Nagle (1984, p. S3) economicsdoesn'tclaimtoofferarealisticdescription of how pricedecisions are made infirms: "Yet, ifone approaches economicsexpecting too much, one may well come away withtoolittle. Economic models arenot designed to describerealistically

the way firms make pricing decisions..." Rather, economists "claimto explain why

certain decisions persist.„1

Dissatisfied withmain stream economics as a way to describehowprice decisions are madeinorganizations,variousdisciplines contributetodescriptions

of

organizational pricingpractices,including marketing, management, accounting,and economics (see Diamantopoulos 1991 fora_{review). This literature} originates with the work of Hall

and Hitch (1939), whoconcluded on thebasis of38interviews thatmanyfirms arrive

at _{price decisions by calculating a} cost _{price from which} is _{deviated by} either a

predetermined profit margin (as in cost-plus pricing), or -more frequently- a _profit

margin that is basedoninformationother than costs. Hall andHitch's (1939)finding impliesthatfirms arenoprofitmaximizers.This finding gave risetoempirical studies onpricing objectives, showingthatfirms mayhavemultiple pricing objectives at one

point in time (Diamantopoulos and Mathews 1994; Shipley 1981), that they may

change over time (Shipley 1981), and that they partlydepend on the stage

of

market evolution, firm size,and_{market turbulence (Jobber and} Hooley 1987).Another group

'

Others followastricterapproach to economics suggesting thatfirmsshould behave the way neoclassical economics describes. Urbany (2000)for_{example studies the barriers that prevent}firms from behaving the way itis_{described by economics.}

of studies has examined the importance

of

price compared to other elements of the marketing mix, price decision authority, and the practices used to arrive at price

decisions, such as _{cost-based, competition-based,} and value-based _{pricing (e.g. Coe}

1990; Udell 1964; 1968; 1972). These studies generally show thatprice is perceived by managers as one of the mostimportantelements after productquality and that the authority

of

pricing is in hands ofthe general manager or marketing manager (e.g.

Abratt and Pitt 1985; Piercy 1981; Samiee 1987). Findings on the frequency of

pricingpracticesare howevermixed (see also chapter 2). Finally,several researchers focus on_specificcase _descriptions in which pricing is described asan_{organizational}

decision _{processes consisting}

of

_{organizational routines (e.g. Farley,} Hulbert, and Weinstein_{1980; Hague 1971).}

2.4 Gaps in theLiteratureonPricingPractices

Pricingand marketing literature lackatheoretical perspective onpricing as itoccurs in business, that meets fourcriteria: (1) it pays respect to the complexity

of

pricing;

(2) it

is connected with other _{perspectives on pricing; (3) it} offers normative

statements about the success of _{pricing practices; and (4)} it relates _{pricing to the}

creationofcustomervalue.

First, the lack of

a theoretical perspective that pays respect to the complexity of

pricing in business, is _{regularly emphasized in pricing literature (see Table 1.2).}

Althoughthepublication of Hall and Hitch's article received a lot

of

attention, it had

little _{impact on main} stream _{pricing literature. This led Oxenfeldt (1973, p. 48) to}

speak of what he calls "The gap between pricing theory and _{application." In}

particular, Oxenfeldtasks _{attention for pricing as} anorganizational decision process.

He claims thatthepractice of suchanorganizationalprocess is far morecomplex than

the problems described in academic literature. In similar words also Rao (1984) and

Bonoma,CrittendenandDolan_{(1988) expressed this gap in} pricing literature. Monroe

and Della Bitta (1978) ascribe the gap between theory and practice amongothers to the lack

of

realism in economic theory. Monroe and Mazumdar (1988) call for this

reason for _{multidisciplinary} research on pricing. Qualitative case studies on _pricing

however lack a strong theoretical perspective _{(e.g Bonoma,} Crittenden, and Dolan

1988; Farley, Howard, and Hulbert 1971; Hague 1971; Wentz 1966). While

discussing Tellis' (1986) integrative framework of pricing strategies, Gijsbrechts

(1993) remarks that it offers no guidance on how to arrive at successful price

decisions in _{complex situations. The} same _critique is found in _{Cressman's (1999)}

commentary to Nobleand _{Gruca's (1999a) article,} inwhichthe authors applyTellis'

framework to an industrial context. Noble and Gruca (1999b) share Cressman's

critique to this respect and call for more research on the organizational practice of

pricing. Finally, Diamantopoulos (1991, p. 166) concludes from his literature review

"that pricing in the real world ismuchmore complex than any theoretical perspective

suggests."(ltalicsin_original).

TABLE 1.2

Selection

of

Reviews of and

Critical

Commentson PricingLiterature

HallandHitch "The purpose ofthis paper is to examine, in thelightofinterviews, the way in (1939, p. 12) which business men decidewhatprice to charge for their_{products and what}

output to produce.Itcastsdoubt on the generalapplicability oftheconventional analysisofprice and output policy in terms ofmarginal cost and marginal revenue, and suggests a mode of entrepreneurial behavior which current economicdoctrinetendstoignore."

Oxenfeldt (1973, p.48) "Researchcontinues onhow business shouldset _{prices. Most}ofthese studies attempt touncover thebest methodsrather than those incurrent practice. No

researcher hascompletely overcome the enormous difficultiesoflearning the

basis onwhichgroup decisions are made and the"sensitive"reasons_underlying manyprice decisions. Thecurrentpricing literature has produced few new

insights or exciting new approaches that would interest most businessmen enough to changetheirpresentmethods."

MonroeandDella Bitta "Two reasons for this lack ofcreative _{development of}new approaches to (1978, p.413) solving marketing problems are: (1) for some timetheeconomists' theory has

dominated despite the lackofrealism inthetheoretical structure and (2) until

recent environmental changes, the seller's problem was not price but rather demandstimulation."

Rao (1984, p. S40) "Eventhough theoretical research on price settingis sparse,there does not seem

to beadearthofadvise given to practitioners These ideas aretoo general, lack theoretical foundation, and are hard to implement."

Monroe and Mazumdar _{"Pricing necessarily must incorporate information, assumptions, and methods} (1988, p. 386) from the areas of economics, marketing, psychology, sociology, finance, accounting, and other disciplines as relevant to the issues underscrutiny. To

continue a _{single discipline orientation when the area} is _{multidisciplinary in}

natureisfollyanddoomed to fail "

Bonoma,Crittenden and "The gap between managers' concerns and academics' research is often Dolan(1988,p.337) recognized, bemoaned and blamed ononeparty bythe other.

Diamantopoulos "The diversity of theoretical approaches can partly be attributed to the

(1991, p. 121) shortcomings ofconventional price theory but also, more importantly, to the complexityoftheproblem underinvestigation,..."

Gijsbrechts On Tellis (1986): "Asa_{conceptual framework, it does}not provide managers

(1993, p 117) withpractical guidelines. In real life, a_{manager may} findhimselfindifferent "cells" at the same time, and facethe problemofcombiningvarious principles

into one setof_pricingrules."

Cressman (1999, "How is it_{possible that we advocate managers adopt}amarketorientation, but

p. 456) the literaturefails tolink pricingpractices with the driversofcustomerneeds? If pricing practice is seen as the means throughwhich managers "harvest" the

"seeds"_{planted in}a_{market-oriented strategy process, why} arethere no_pricing practices based on the value delivered to customers in themarketing literature?" NobleandGruca "Research on successful pricing process should bea major priority forfuture (1999b, p. 459) research. In such a research endeavor, the definitions ofcustomer value and

value-based_pricingshouldbe_{clear enough to avoid the potential}for confusion

between academic andpractitionerusersoftheresults."

Second, the body

of

knowledgeon pricing practices is fragmented to a large degree

and disintegrated with other fields of pricing literature. Contributions on pricing

practices weakly build on each _{other's insights (see also chapter 2). A great deal of}

qualitativeresearchhas focussed ondescribingcomplex butunique pricingsituations

(e.g. Bonoma,Crittenden,andDolan 1988;Farley,Howard, andHulbert 1971; Hague

1971; Wentz 1966). Monroe and _{Mazumdar (1988), as well} asBonoma, Crittenden, and Dolan (1988) call for evenmoresituation-specific descriptiveresearch. This type

of studies is however unlikely to produce insights that

will

contribute to a more

general theoretical perspective on pricing that explains and incorporates the

complexity ofthe issue underinvestigation. In addition, a_theoryon _pricingpractice

from a firm perspective would have to provide links with other streams

of

pricing

research, inparticularthosethatbuild on economicsor consumerbehaviorliterature.

In order to do so, it should may the decision areas that managers cope with and

establish links with the types

of

research that may be helpful to firms facing these

situations.

Third, possibly because of its strong rejection

of

economics as a way to describe

pricingin_{organizational practice (e.g. Hall} andHitch 1939; Udell 1964), literature on

pricingpracticesoffersnonormativestatements on thesuccessof_pricingpractices. In

the same line, Noble and Gruca (1999b) call for more research on the success of

pricing practices (see also Table 1.2). Also Diamantopoulos (1991) recognizes a

separation in perspectives on pricing from a firm's point ofview betweenthose that

include normative statements but lack realism, and those that overcome the lack of realism but lack normative statements. As a _{consequence, empirical research on}

pricing practices is generally descriptive, including quantitative studies that are generally limitedto descriptivestatistics (Diamantopoulos 1991).

Fourth, and related to a lack

of

normative theory on pricingpractices, literature on pricing practices provides no link with the creation

of

customer value even though

strategic marketing literature generally acknowledges the importance

of

creating

customer value for _{business performance (see} for instance Slater 1997). In this line

Cressman _{(1999) questioned why literature doesn't provide} research on _pricing

practices that enable firms to take "money for value": the financial rewards for creating _{customer value (see also} Table 1.2). A link that is also missing in the literatureoncreating customervalue.

In the next section, a theoretical perspective will be introduced that promises to provideabasistoovercomethesedeficiencies.

3.THEORETICAL APPROACH

Thisthesis approaches pricing fromthe perspective

of

resource-advantagetheory. In theirfirst publication on resource-advantage theory, Hunt and Morgan (1995, p. 1)

argue that: "Three recent streams

of

research portend major changes in marketing

theory and practice: works addressing strategic issues in marketing theory and

research _(Aaker 1988; Bharadwaj, Varadarajan, and Fahy 1993; Day and _Wensley

1988;McKee, Varadarajan and Pride 1989), thoseadvocatingamarketorientation for

superiorfirm performance (Day 1984; Dayand_Nedungadi 1994;KohliandJaworski 1990; Narverand Slater 1990; Shapiro 1988; Webster 1994), andthoseemphasizing the desirability

of

relationship marketinginstrategicnetwork competition (Berry and

Parasuraman 1991;Dwyer, Schurr, and Oh 1987; Morgan and Hunt 1994; Parvatiyar,

Sheth and _Whittington 1992; Thorelli 1986; Webster 1992)." Hunt and _Morgan's

"central thesis" isthat strategic marketing literature"isevolvingtowards anewtheory of competition."They labelthis theory"resource-advantagetheory

of

competition" or "The comparative advantage theory

of

competition" (hereafter abbreviated as R-A

theory).

R-A theoryshould be seen asatheoryindevelopment, withthefinal goalto develop

into ageneral theory

of

_{competition (Hunt}200Oa). The main ideas from R-A theory

were first published in an article in_{Journal ofMarketing (Hunt and Morgan 1995).} Based on the ideas in_{this article,}severalaspects ofthetheory areelaborated upon or

commented in subsequent articles (Hunt 1995; 1997a; 1997b; 1997c; 1998; 1999;

2000c; 2001; Hunt and_{Arnett 2001; Hunt}and _{Duhan 2002; Hunt}and_{Lambe 2000) a}

book _{(Hunt 200Oa),} commentaries on the theory (Delig6nul and Cavusgil 1997;

Dickson 1996; Foss 2000; Savitt 2000), and reactions to those commentaries (Hunt

200Ob; Hunt and Morgan 1996; 1997). In the following, first the foundational

premises of R-A theory are _{briefly presented, followed by} a

_{glimpse on its}

background andanoverview ofits_{major ideas. Next, it}is discussed how_{R-A theory}

promises to offer a perspective that will help to overcome the gaps in literature on

pricingpracticesas_{outlined previously.}

3.1 FoundationalPremises

R-A theory can be contrasted with perfect competition theory in the sense that its foundational premises are different (see Table 1.3). Although economists often

weaken the original assumptions

of

perfect competition theory in _{their work (Foss}

2000), the only alternative theory

of

competition that has explicated its foundational premises is R-A theory (Hunt 200Ob). However, R-A theory doesn't reject perfect competition theory,itincorporatesperfectcompetition asaspecific-though inreality

very rare - case (Huntand Morgan 1997). R-Atheory therefore can be seen as more realistic andexplains many phenomena better thanperfect competition theory (Hunt

200Oa).

TABEL 1.3

Foundational PremisesofPerfectCompetitionand Resource-AdvantageTheory Perfect Competition Theory Resource-AdvantageTheory P1. Demandis: Heterogeneousacrossindustries, Heterogeneous across industries,

homogeneouswithinindustries, and heterogeneouswithinindustries, and

static. dynamic.

P2. Consumer Perfectandcostless. Imperfectandcostly.

information is:

P3. Humanmotivation Self-interestmaximization. Constrainedself-interest seeking.

is:

P4. Thefirm's Profit maximization. Superiorfinancialperformance.

objective is:

P5. Thefirm's Perfect and costless imperfect and costly.

information is:

P6. Thefirm's Capital, labor and land. Financial,physical,legal, human,

resources are: organizational, informational and relational. P7. Resource Homogeneousand_perfectly Heterogeneousand_imperfectly mobile.

characteristicsare: mobile.

P8. The roleof Todetermine quantityand To_{recognize, understand,}create. select.

managementis: implementproductionfunction. implement, andmodifystrategies.

P 9. _{Competitive Equilibrium-seeking, with} Disequilibrium-provoking withinnovation dynamicsare: innovation exogenous. endogenous.

Derived from Huntand_{Morgan ( 1997).}

TABLE 1.4

Research_{Traditions Sharing Affinities with} Resource-AdvantageTheory

ResearchTradition Affinities withResource-AdvantageTheory

Evolutionar·y economics Competition isanevolutionary.disequilibratingprocess. Firms have heterogeneous competencies. Path dependencies can occur.

Austrianeconomics Competition isaknowledge-discoveryprocess. Markets are in

disequilibrium.Entrepreneurshipis_{important. Value}issubjective. Intangibles canberesources.

Heterogeneous demand Intra-industrydemandissubstantially heterogeneous. Heterogeneous supply

theory isnatural."Product"should be defined broadly.

Differentialadvantage Competition (a)is_{dynamic, (b) is}bothinitiatoryanddefensive, and (c)

theory involvesa struggle foradvantages, General equilibriumininappropriate

welfare ideal.

Historical tradition History"counts."Firmsareentities thatarehistoricallysituated inspace and

time.Institutions influenceeconomic performance.

Industrialorganization Firm's objectiveissuperiorfinancialperformance. Marketplace positions economics determine relative performance. Competitors. suppliersandcustoniers

influence performance.

Resource-basedtradition Resources maybetangibleorintangible. Firmsare_historicallysituated combinersof_{heterogeneous,imperfectly mobile}resources.

Competence-based Competitionis_{disequilibrating.Competencies}areresources. Renewal

tradition competenciespromptproactiveinnovation.Firmslearnfromcompeting.

Firmsareembedded.

Institutionaleconomics Competition isdisequilibrating. "Capital" is more than justphysical resources. Resources have"capabilities."

Transaction cost Opportunismoccurs.Manyresourcesarefirm-specific. Firm-specific

economics resourcesare_important.

Economicsociology Institutions canbeindependent variables. Social relations mayberesources. Economic systemsareembedded.

Derived from Hunt (2000a). For representativeworksinthesetraditions, seeHunt(2000a, p. 4-5).

3.2 Background oftheTheory

R-A theory shares affinities with a _varietyofresearch streams(see Table 1.4). It is

beyond the scope ofthis overview to discuss these in _{detail (see Hunt 200Oa for a}

review), However, five importantfeaturesofthetheoryshouldbeemphasized.

First, in R-A theory competition is defined as: "the disequilibrating process that

consistsofthe_{constant struggle among}firmsfor_{comparativeadvantages in resources}

that

will

_{yield marketplace positions}

of

_{competitive advantage for} some market

segment(s) and, thereby, superior financial performance." (Hunt

20004 p. 12).

Competition is seen as a _{dynamic process in which non-price competition is}

emphasized.By introducing innovations tothe market,firmscan _{improve their market}

positions and thustheir financialperformance.

Second, firms don't _{compete necessarily} within certain _{industries, but do compete}

necessarily on certain markets or market segments. Market segments "are

intra-industry groups

of

consumers whose tastes and preferences foran industry's output

are _{relatively homogeneous." (Hunt 2000a, p. 11).} The notion of _{competition on}

market_{segments is akey feature}

of

_marketing.

Third, the firm's resources are

of

various kinds: financial, physical, legal, human,

organizational, informational and relational. As such they may be the result of the

firm's past and they may

be imperfectly mobile: rooted in the

culture of an

organization. R-A theory defines resources as: "the tangible and intangible entities

available to the firm thatenable itto produce efficiently and/oreffectively a market

offering that has value to some market segment(s)." _(Hunt 200Oa, p. 11). To this

respect, R-A theory is linked to the resource-based view of the firm, as well as to

competence-based theories.

Fourth, firms strive for superior financial performance: "a level of financial

performance that exceeds that ofits referents, often its closest competitors." (Hunt

and Morgan 1995, p. _{6). Organizations do not maximize} profits because they

generally lack the information to do so and because morality considerations may

prevent them.

Fifth, value "refers to the sumtotal ofallbenefits that customers perceive they will

receive if_{they accept}a_particularfirm's market_{offering."(Hunt2000a, p. 32). Since} value isan_{ambiguous concept (Zeithaml 1988)}

of

which _manydefinitions are in use

(Woodruff 1997), it is _{important to note} that value _{doesn't include price or price}

perceptions in this _{definition. Zeithaml (1988)} sees customervalue forexample as a customer's trade-offbetween perceived quality and perceived sacrifices. Perceived

sacrifices include _{both monetary and nonmonetary} sacrifices. The _{perspective from}

the firm ishoweverdifferent. A firm'smarketoffering is acombination ofa certain

degree o

f

value(total sum o

f

benefits) anda_{price (Anderson}andNarus 1998). Firms set out to create value in _{products, services,} or bundles and firms determine an objective price level stating the amount

of

money that is asked in return from

customers for delivering value, as well as conditions

of

payment stating how and

when this monetary amount will be paid by the customer. -Relative superior value therefore, equates with perceived to be worthmore." (Hunt 200Oa, p. 32, italics in original), and_price equates with monetary ejIort (Gijsbrechts 1993),or monetary

amount pitts conditions of payment.

3.3 Overview of R-A Theory

R-A theory can beexplained on the basis

of

Figures 1.2 and 1.3. According to R-A

theory, firms strivetoachieve superior financial performance,which can beachieved

through a market position

of

competitive advantage. A position

of

competitive advantage is a consequence of a firm's advantage in resources compared to competitors(Figure 1.2). Marketpositions depend on the value thefirm creates on the

basis ofits resources toacertainmarketor marketsegment compared tocompetitors,

as well as on resource costs compared tocompetitors(Figure 1.3).

Firms achieve a position

of

competitive advantage ifthey create superior value at

costslower than orequal to competitors (respectively cell 3 and 6in Figure 1.3), or if

they create value equal to competitors at lower costs (cell 2). In other words: to

capturea_position

of

_{competitive advantage, a}firmneeds a_{comparativeadvantage in}

its resources that enables it to produce more effective and/or efficient than its competitors. A firm obtains a _position of _{competitive disadvantage if it} creates

relatively lowervalue at costs equal toor higherthancompetitors (cells 4 and 7), or if itcreatesvalue_{equal tocompetitors}at_{higher costs (cell 8).}

Cell 5 _represents a _{parity position. In this situation} all firms competing on a certain

market or market _{segment have} relatively equal resource-produced value and

relativelyequal resource costs. A firmthat occupiesa marketposition represented by

cell 1,in whichitcreateslower value at lower costs, will have to set lowerprices than

competitors inorder to haveachanceatachieving competitiveadvantage. Also if the

firm creates relatively higher value at relatively higher costs, its position is

indeterminate (cell 9). Its _{competitive advantage depends here on the} willingness of

customers to paypremium prices in returnformarket offeringsofsuperior value.

The process of R-A competition is dynamic. In order to achieve a position of

competitive advantage, firms seek continuously for a _{comparative advantage in}

resources. Achieving superior financial performance enables the firm to invest in

resources. Firmscan improve theirmarketpositionsby introducing innovations to the

market. _{According to} R-A theory, proactive innovations can be _{distinguished from}

reactiveinnovations. Proactive innovationsoffer_superiorcustomer value thus

FIGURE 1.2

Resource-AdvantageCompetition

SocietalResources SocietalInstitutions

1 Raources

1 .1 Mar'k Posit1.

1-1

Financial Performance

-4.Com„ra,«.Advantage •Competitive Advantage_•Parity •Superior

•Parity

1 •Parity

•Competitive Disobantage

•ComparativeDisadvantage .inferior

Competitors-Suppliers Consumers Public Policy

Derived from Huntand_{Morgan (1997)}

FIGURE 1.3

Competitive PositionMatrix '

Relative Resource-Produced Value

Lower Paritv Superior

1 2 3 Lower

Indeterminate Competitive Competitive

Position _{Advantage Advantage}

Relative 4 5 6 Resource

Parity

Costs _{Competitive Parity Competitive}

Disadvantai Position Advantage

7 8 9

Higher

Competitive Competitive Indeterminate

Disadvantage Disadvantage Position

Read: The marketplacepositionofcompditiveadvantaiidentified as Cell 3 results

from the firm, relative toits competitors, havingaresource assortment that enables it

to produceanoffering forsomemarket segment(s) that (a)isperceived to be of

superior value and (b)is_producedatlower costs

Derived from HuntandMorgin (1997)

repositioning the firm in cell 3,6 or

9 depending on its resource costs. Reactive

innovations offer customer value equal to competitors,thus repositioning the firm in cell 2,5 or 8 (Huntand Morgan 1997). As such, competitive positions arenot stable. Positions

of

competitive advantage can be sustained if they are based on resources

thataredifficulttoimitateor obtainbycompetitors.

Organizational learning is endogenous to the process

of

competition. If the firm

achievesacertain degree

of

performance, itmay learn about thecompetitive position

and the specific resources on which this position is based. By learning from the

processofcompetition, organizationsmay learn inwhichresources itshouldinvest in

orderto improve its position. Considering that a firm may learn the wrong things, a position canbeharmed if thefirminvests in theresources that don't lead toaposition

of

_{competitiveadvantage.}

The process of R-A competition is influenced by customers, competitors, suppliers,

societal institutions, public policyandsocietal resources._{Customers' preferences may}

change, competitorsmay imitatecertain types

of

resources, suppliers may raise their

prices,etc.Thesestakeholders mayimpact onthecomparativeadvantage

of

resources

as well as onthe explicit and implicit "rules of thegame." Societal resources impact on the firm's resources, like the availability ofnatural _{resources such as oil, or the}

level

of

education in asociety. Resources ofa legal nature,like patents, mayprotect

innovations,whileenvironmental orsafety laws may forcefirmstomodify production plantsandprocesses.

3.4PotentialContributions of aR-A Perspectiveon Pricing

Having outlinedthemajorideas, the background, andthefoundational premises of R-A theory, two questions remain. _{First, is R-A theory}aperspective that could help to

overcome the gaps in literature on pricingpracticesas indicated in section3?Second, does the development of a R-A perspective on pricing also contribute to R-A theory

itself?

First, in section 3 itisconcluded thatpricing literature lacks atheoretical perspective on pricing practice, that ( 1) pays respect to thecomplexity

of

pricing as it occurs in organizational practice; (2) provides links with other streams

of

pricing research in

stead

of

_{excluding them; (3) offers a way}to developnormative statements about the

successof_{pricingpractices; and}(4)relates _{pricing to} thecreationofcustomer value. Thesefourissues areaddressedbelow.

1Vould a R-A perspective to pricing pay respect to the complexity as it occurs in

organizational practice?R-Atheory is based on more realistic foundational premises

than conventional price theory (Hunt and Morgan 1995). This is perhaps the most

distinctive feature _{of applying a} R-A _{perspective to pricing,} since reliance on