Flexibility versus efficiency:
Balancing the tradeoff in
supplier-customer relationships
Implications for sales organizations
Master thesis
to obtain the degree of MSc at the
University of Groningen,
Faculty of Economics and Business
by
Maximilian Gatza
S3051366
Supervisor Dr. M. M. Wilhelm1
Co-supervisor Dr. Olof Lindahl
Abstract: The tradeoff between flexibility and efficiency is long discussed in management theory. At the same time, business-to-business literature identifies an increasing market orientation of firms, stressing the need for suppliers to balance flexibility and efficiency in their customer relationships. Supplier firms that emphasize intensive customer support (efficiency) might struggle to quickly react to changes in customer relationships (flexibility). This paper connects both strands of literature and explores the flexibility-efficiency tradeoff in the context of suppliers` sales structures. Using a case study design at a multinational supplier firm, it is argued that the tradeoff management depends on different market characteristics. Furthermore, this paper provides organizational and managerial responses that may help firms to manage flexibility and efficiency in their customer relationships.
1. INTRODUCTION ...1
2. THEORY ...3
2.1 FLEXIBILITY VERSUS EFFICIENCY ...3
2.2 ORGANIZATIONAL RESPONSES ...6 2.3 MANAGERIAL RESPONSES ...9 3. METHODOLOGY ... 12 3.1. RESEARCH SETTING ... 12 3.2. DATA COLLECTION ... 12 3.3. DATA ANALYSIS ... 14 4. RESULTS ... 15
4.1 MAGNOLIA: COMPANY BACKGROUND ... 15
4.2 MAGNOLIA´S MARKETS: WITHIN CASE ANALYSIS ... 16
4.2.1 Dispersed markets ... 16
4.2.2 Concentrated markets ... 19
4.3 MAGNOLIA´S TRADEOFF RESPONSES ... 21
4.3.1 Organizational responses to dispersed markets ... 21
4.3.2 Managerial responses to dispersed markets ... 24
4.3.3 Organizational responses to concentrated markets ... 26
4.3.4 Managerial responses to concentrated markets ... 27
6. DISCUSSION ... 29
6.1. INTERPRETATION OF THE FINDINGS AND WORKING PROPOSITIONS ... 29
6.2 MANAGERIAL IMPLICATIONS ... 37
6.3 LIMITATIONS AND FUTURE RESEARCH... 38
APPENDIX A. INTERVIEW GUIDELINE FOR MAGNOLIA ... 39
1. Introduction
Power imbalances, stiff competition, rapidly changing conditions - suppliers face many challenges in their customer relationships. To address these challenges, suppliers must balance various elements. Some of these elements, however, might be paradoxical. This creates tradeoff situations for supplier firms in which contradictory yet interrelated elements must be balanced over time to remain capable of acting and to be successful in their relationships to customers (Smith, Lewis, & Tushman, 2012). One of these tradeoff situations is created when suppliers want to balance between flexibility and efficiency in their customer relationships.
Literature defines the terms flexibility and efficiency in various ways (Carlsson, 1989; Evans, 1991; Ghemawat & Costa, 1993; Tan & Wang, 2010; Yeung, 2008). For example, Yeung (2008) defines cost based-efficiency as related to “costs of quality, costs of engineering changes, and manufacturing costs” while Ghemawat and Costa (1993) talk about static efficiency which concerns the improvement of existing capabilities, products or processes. Likewise, flexibility is expressed in different ways. Carlsson (1989) divides the term into operational, tactical and strategic flexibility. While operational and tactical flexibility relate to short-term, strategic flexibility is associated with the adaptive use of resources and re-arrangement of processes to quickly respond to changes in dynamic environments (Schreyogg & Sydow, 2010; Zhou & Wu, 2010).
The tradeoff between flexibility and efficiency is long discussed in management theory (Adler, Goldoftas, & Levine, 1999). Kortmann, Gelhard, Zimmermann, and Piller (2014) argue that if firms overemphasize strategic flexibility, they may miss opportunities, such as advantages deriving from economies of scale or operational excellence (Grewal & Tansuhaj, 2001). The risk of overemphasizing counts equally for operational efficiency. Often pushed by stakeholder pressure or specific measurement structures, managers may favor short-term profitability over long-term adaptability (R. S. Kaplan & Norton, 2001). Furthermore, Adler et al. (1999) point out that efficiency requires bureaucracy, which in turn impedes flexibility, and thus firms confront a tradeoff between efficiency and flexibility.
in customer relationships (flexibility).
First, firms that overemphasize flexibility might miss opportunities deriving from efficiency, such as economies of scale or operational excellence (Grewal & Tansuhaj, 2001). Moreover, staying flexible often contradicts with specific investments demanded particularly from larger customers. Second, the risk of overemphasizing counts equally for efficiency. Often pushed by stakeholder pressure or specific measurement structures, managers may favor short-term efficiency over long-term flexibility (R. S. Kaplan & Norton, 2001). In doing so, firms can adapt structures that impede flexibility, thus making it harder to regain efficiency after experiencing dynamics in customer relationships.
To explore how supplier firms balance flexibility and efficiency in customer relationships, this study focusses on suppliers` sales structures. In doing so, it addresses both organizational and managerial responses to tradeoff situations. A case study involving experts of a multinational supplier firm is performed to explore these effects in a natural setting. Using a case study allows for a more in-depth examination that considers contexts and also enables the emergence of meaningful theory (Meredith, 1998).
The purpose of this study is to clarify how suppliers manage flexibility and efficiency in their customer relationships to reduce the risks deriving from relationship terminations. To answer this question, the paper observes this phenomenon at Magnolia (a pseudonym used to protect the anonymity of the company). Magnolia is a multinational supplier firm that delivers its products in various markets. The characteristics of these markets considerably differ which requires unique approaches to balance flexibility and efficiency, thus making the company a fruitful example to study the management of the tradeoff. Over the course of this study, Magnolia´s business units will be divided in dispersed markets (many small customers) and concentrated markets (few big customers) to acknowledge distinct market characteristics that influence the tradeoff. According to these market characteristics, tradeoff responses on an organizational and managerial level will be identified.
The remainder of this paper is organized as follows. First, it provides theoretical background knowledge about the flexibly-efficiency tradeoff which is further underpinned by practical examples from business-to-business literature to establish the link to suppliers` sales structures. After distinguishing between organizational and managerial responses, a case study accumulates first-hand knowledge from a multinational supplier firm that is active in various markets. These markets are classified into dispersed markets and concentrated markets, which provides a foundation for the subsequent examination of organizational and managerial response strategies. Finally, the main findings are summarized and discussed to guide practitioners and further empirical research.
2. Theory
2.1 Flexibility versus efficiency
The paradox or tradeoff between flexibility and efficiency is one of the most abiding ideas in management theory (Adler et al., 1999). Due to the enduring discussion, a good deal has been written about the efficiency-flexibility paradox. Smith, Lewis, and Tushman (2012) define a paradox as “contradictory yet interrelated elements that exist simultaneously and persist over time”. In their research paper, Schad, Lewis, Raisch, and Smith (2016) introduce a typology of paradoxes. Using the term alignment vs. flexibility, the authors classify the efficiency versus flexibility tradeoff under the category of organizing. Organizing paradoxes analyze how corporations develop “competing designs and processes to achieve a desired outcome” (Schad et al., 2016).
the definition of Tan and Wang (2010), suppliers reach high efficiency when they commit resources to customers to guarantee extensive customer support.
Similar to the efficiency term, flexibility is defined in various ways. Carlsson (1989) argues that the definition of flexibility should involve not only capacity utilization issues but also strategic management aspects. He differentiates between three different aspects of flexibility: operational, tactical and strategic flexibility. Operational and tactical flexibility relate to short and medium term, whereas strategic flexibility relates to long-term and indicates how the organization positions itself taking into account a set of choices for the future (Carlsson, 1989). Again, this study uses the definition of Tan and Wang (2010) who treat flexibility as the degree of uncommitted resources that can be used to respond to environmental changes.
Literature addresses the flexibility-efficiency tradeoff in slightly different ways, however, the underlying idea remains the same. Kortmann, Gelhard, Zimmermann, and Piller (2014) use the terms operational efficiency and strategic flexibility to introduce ambidextrous operational capabilities. Operational efficiency relates to cost and time saving that generate short-term benefits (R. S. Kaplan & Norton, 2001). Strategic flexibility is associated with the adaptive use of resources and re-arrangement of processes to quickly respond to changes in dynamic environments (Schreyogg & Sydow, 2010; Zhou & Wu, 2010). Yet, strategic flexibility is also linked to high investment and opportunity costs (Bowman & Hurry, 1993). Firms that overemphasize strategic flexibility may miss opportunities, such as advantages deriving from economies of scale or operational excellence (Grewal & Tansuhaj, 2001). The risk of overemphasizing counts equally for operational efficiency. Often pushed by stakeholder pressure or specific measurement structures, managers may favor short-term profitability over long-term adaptability (R. S. Kaplan & Norton, 2001). Furthermore, efficiency requires bureaucracy, which in turn impedes flexibility, and thus firms confront a tradeoff between efficiency and flexibility (Adler et al., 1999).
puts the focus on buyer-supplier relationships and suppliers` sales structures.
Balancing the tradeoff between flexibility and efficiency is influenced by many factors, such as the level of collaboration between supplier and their customers. If the firms engage in arm´s-length market relationships, they usually show less mutual commitment (e.g., nonspecific asset investments, minimal information exchange, separable technological and functional systems, low transaction cost and minimal investment in governance mechanisms) (Dyer & Singh, 1998). Supplier firms may, therefore ,achieve efficiency without much commitment to the other party which makes it easy to change partners and thus also induces flexibility (Dyer & Singh, 1998). This shifts the focus to close buyer-customer relationships where firms have to deal with large and significant customers. In these buyer-supplier relationships, it is common that the parties make unilateral relationship-specific investments.
Specific investments between buyer and supplier refer to the allocation of investments into specific assets between both parties (Ebers & Semrau, 2015). They are specific as they allow neither for alternative uses nor alternative users without losing productive value (Williamson, 1991). Still, such investments can be beneficial beyond the sole satisfaction of the transaction partner. Due to specialization and relational rents, specific investments can lower production costs and increase revenue (Dyer, 1996; Ghosh & John, 1999; Madhok & Tallman, 1998). In practice, these investments are often spread asymmetrically between suppliers and buyers with the supplier assuming the bulk of investments (Ebers & Semrau, 2015). This imbalance leads to greater vulnerability for investing suppliers. The supplier firms are exposed to the opportunistic behavior of buyers that have not made such commitments and who therefore are in superior bargaining positions (Klein, Crawford, & Alchian, 1978; Williamson, 1985).
Suppliers often invest both tangible and intangible assets in their buyer-relationships (Kang, Mahoney, & Tan, 2009). One of the intangible assets a supplier might invest is human capital. Human capital involves knowledge, skills, and abilities within a company (Frank & Obloj, 2014). It is part of a firm´s intellectual capital and has high importance for its productivity, performance, and competitive advantage (Barney, 1991; Becker, 1962; Penrose, 1995). The allocation of human capital (e.g., key account managers) towards specific customers, however, affects the supplier´s internal structure.
challenge for supplier firms, which have to set up an internal structure that on the one hand
serves customers efficiently but on the other hand stays flexible when transactional relationships are terminated. Davis, Eisenhardt, and Bingham (2009) found that more dynamic environments require greater flexibility. Therefore, the challenge for managers and scholars in addressing the tradeoff between efficiency and flexibility derives from the characteristics of flexibility (e.g., low bureaucracy, flat hierarchies, or reduced standardization) that often impede efficiency goals (Adler et al., 1999; Kortmann et al., 2014).
This paper argues that managing such trade-off situation takes place on two levels. On the first level, firms must align their organizational structures to provide well-functioning systems that support managers to better address the flexibility-efficiency tradeoff. Thus, firms must find organizational elements that help to balance flexibility and efficient in customer relationships (Adler et al., 1999). However, structures alone do not solve the flexibility-efficiency tradeoff but shift responsibilities more towards an individual level. On this individual level, managers, especially those in customer contact, have to manage the tradeoff in their daily routine by using managerial capabilities. Therefore, this paper divides supplier responses to balance the flexibility-efficiency tradeoff in two levels, namely organizational and managerial responses.
2.2 Organizational Responses
Organizational responses can be described as decisions regarding the organizational structure that are usually made on a strategic firm-level. Responses on an organizational level play a key role in addressing the flexibility-efficiency tradeoff. Recently, firms shift their organizational structures from a products and functions orientation and restructure around customer and market demands (Galbraith, 2002). This shift leads many suppliers to realign their sales and account management resources (N.F. Piercy, 2006), expecting greater value from a structure alignment with markets (Day, 2006). A survey involving 347 companies found that customer-oriented structures improves accountability for customer relationships, enhance information sharing about customers, and allows for better dealing with customer problems and queries (Day, 2006).
While increasingly seeking efficiency in sales and service, companies have to deal with “unprecedented escalation in the demands of customers, particularly major customers, for higher quality relationships and higher levels of service and added-value.” (N.F. Piercy, 2006).
and may have considerable influence on how suppliers structure their “front-ends” (N.F. Piercy, 2006).
Payne (1988) pointed out that an important factor in increasing market orientation is to understand the mix of potentially conflicting orientations in the organization, such as flexibility and efficiency. The challenge is to arrange the organizational structure in a way that it balances specialization (efficiency), and can adapt to changes in the firm´s overall activity (flexibility) (Teece, 1996).
The internal structure, “a firm´s allocation of decision rights to subunits completing distinct jobs and the coordination among those subunits” (Weigelt & Miller, 2013), influences its capability to efficiently access and utilize knowledge of employees, incentivize knowledge sharing, and allocate resources productively (Bower, 1986; Grant, 1996; Milgrom & Roberts, 1990). It can be seen as an instrument for the integration or creation of knowledge within a company. Therefore, internal structure indicates how companies allocate certain jobs and manage coordination among them (Weigelt & Miller, 2013).
The literature on organizational design distinguishes two major aspects of structure that might be used to balance flexibility and efficiency: differentiation and coordination (Lawrence & Lorsch, 1967). Differentiation belongs to the “segmentation of the organizational system into subsystems” while coordination concerns “achieving unity of effort among the various subsystems in the accomplishments of the organization´s task” (Lawrence & Lorsch, 1967). It can be assumed that suppliers must consider both aspects when managing with the flexibility-efficiency tradeoff. For example, differentiation might be used to partition sales structures into distinct subunits that are better able to address the varying needs of different clients or markets (i.e., efficiency). Coordination might be used to ensure that these subunits are not acting completely independent with the risk of placing the interests of some customers above those of the company (i.e., flexibility).
means, firms should choose a mechanistic form if they have a simple and stable task and their goal is efficiency, but they should choose an organic form if they have a complex and changing task and their goal is flexibility (Burns & Stalker, 1961).
Furthermore, partitioning organizational structures can help firms to manage the flexibility-efficiency paradox. Firms can allow for subunits to concentrate on routine tasks while other subunits concentrate on non-routine tasks (Adler et al., 1999). To increase flexibility without losing efficiency, both types of subunits must coordinate and integrate (Adler et al., 1999). If one or both tasks of the subunits are non-routine, coordination and integration can be accomplished by mutual adjustment in lateral relations between the subunits (Mintzberg, 1979; Thompson, 1967).
Moreover, research suggests that firms can use spatial (Eisenhardt and Sull, 2001; Gilbert, 2005) or temporal (Nickerson and Zenger, 2002) differentiation to deal with conflicting efficiency and flexibility demands. Spatial differentiation separates organizations in small decentralized units that focus on flexible exploration and large centralized units that focus on efficient exploitation (Gilbert, 2006). The small units work isolated but can be reintegrated when high flexibility is no longer needed. On the other hand, temporal differentiation separates units that change between efficient and flexible structures (Nickerson & Zenger, 2002). Kortmann, Gelhard, Zimmermann, and Piller (2014) further introduce the term of ambidextrous operational capability as a firm´s ability to balance value-creating activities in tradeoff situations.
Managing the tradeoff between flexibility and efficiency seems to a high degree influenced by a firm´s environment. For example, Eisenhardt, Furr, and Bingham (2010) argue that firms should balance efficiency and flexibility to perform well in dynamic environments but favor flexibility at the expense of structure when dynamic increases. Hannan and Freeman (1977) talk about generalists using r-strategies that focus on excess capacity and flourish in open environments contrary to specialists using k-strategies that reduce flexibility for higher efficiency and help to survive in competitive markets.
suppliers may categorize them as major or key accounts (see: Nigel F. Piercy, 2010). Contrarily to smaller customers that can be served through direct channels, major or key accounts need great management attention since they are accounting for a large part of a supplier´s sales (N.F. Piercy, 2006).
A supplier firm´s strategic issues in relationships with these large customers mainly concern the stability and dependence issues (N.F. Piercy, 2006). The resources devoted to an efficient service of such customers involve high risks when customers terminate their relationships or cut back on orders. These risks may become particularly considerable in relationships with large customers. Relationships with these customers often bind many resources since they demand intensive support and have superior bargaining positions due to their significant sales (Klein et al., 1978; Williamson, 1985).
Suppliers organize their “front-end” managers by setting up sales structures that address the risks deriving from dynamics in customer relationships. For example, Brady (2004) examined the implementation of a new key account management strategy in a large UK distribution service supplier. The firm developed a designated KAM unit that was targeted at its top 50 UK clients (Brady, 2004). Developing appropriate organizational structures is important for suppliers to support their managers in better balancing flexibility and efficiency in customer relationships. However, the influence of organizational structures on balancing the tradeoff is limited since structures can only provide operational frameworks.
Within these frameworks, managers must evaluate tradeoff situations and make decisions how to balance them. Michael (1973) points out that organizational activities cannot reduce situations of uncertainty, but managers may change their perceptions of these situations to make them more certain. The perception and behavior of managers can be seen as highly individual and influenced by many factors (Hahn, Preuss, Pinkse, & Figge, 2014). It is, therefore, possible that managers within the same department may deal with paradoxical situations in different ways. The literature has identified common elements of individual cognition and behavior in conflicting situations. These managerial responses will now be presented before this paper investigates the individual dynamics of the flexibility-efficiency tradeoff through a case study.
2.3 Managerial Responses
should devote significant attention to manage the cognitive spheres in the conflict between flexibility and efficiency (Eisenhardt et al., 2010).
For example, a problem of balancing flexibility and efficiency in sales may arise from relying on specific customers. When serving big customers that generate high sales, managers may focus on these customers and neglect the acquisition of other sales sources. Kahneman and Tversky (1979) found that in situations of gains, managers tend to reinvest in existing products at the expense of innovation. Further, Levinthal and March (1993) argue that managers tend to favor short term over long term and certainty of success over the risk of failure.
When dealing with complex problems, managers usually start with little comprehension of the situation and improve their understanding through working on the problem (Mintzberg, Raisinghani, & Theoret, 1976). In paradoxical situations, managers face high levels of uncertainty. The uncertainty inherent in strategic decisions about conflicting forces drives managers to act on a simplified model of reality (Michael, 1973). These models are based on managers` cognition and help to simplify their decision situation (Schwenk, 1984). To make sense of complex situations, managers` cognition becomes schema-driven and “assigns their direct perceptions to types, categories, stereotypes, and schemas” (Weick, 2010: 541). The literature distinguishes between cognitive frames and cognitive processes (Smith & Tushman, 2005; Walsh, 1995).
Cognitive frames provide a basis for cognitive processes that can handle inconsistencies (Smith & Tushman, 2005). A cognitive frame can be defined as “a mental template that individuals impose on an environment to give it form” (Walsh, 1995: 281). Managers use these mental templates to filter knowledge and direct actions (Smith & Tushman, 2005). Moreover, managerial cognitive frames direct attention and action to organizational issues (Dutton & Jackson, 1987; S. Kaplan, 2008), define the manager´s understanding of particular issues (Dutton & Ashford, 1993), and assign socioemotional information to these issues (Pinkley, 1990).
More specifically, cognitive frames might help managers to balance tradeoffs in the following ways. First, cognitive frames are associated with reduced fear and threat and thus encourage managers to use the conflict (Smith & Tushman, 2005). This may help managers to positively embrace the tradeoff by shifting their view of competition between flexibility and efficiency to how they could benefit one another or the whole company. Second, cognitive frames set up a context that requires managers to define goals for both flexibility and efficiency (Smith & Tushman, 2005). Latham and Locke (1979) found that a clear articulation of goals motivates their achievement. The achievement of flexibility, as well as efficiency goals, may increase success in both spheres and thus help suppliers in balancing the tradeoff.
The literature on managing paradoxes suggests that managers use cognitive processes of differentiation and integration when dealing with tradeoff situations (Andriopoulos & Lewis, 2009; Bartunek, Gordon, & Weathersby, 1983; Smith & Tushman, 2005). Cognitive processes are used to handle the inconsistencies in cognitive frames.
Differentiation emphasizes efforts on either exploitative or exploratory qualities of the paradox (Andriopoulos & Lewis, 2009), and thus involves recognizing and articulating distinctions (Smith & Tushman, 2005). Flexibility and efficiency are associated with specific organizational logics (Adler et al., 1999; Kortmann et al., 2014). Differentiating means that managers recognize and reinforce the differences in these logics (Smith & Tushman, 2005). Differentiation may help a supplier´s manager to reduce risk by supporting the needs of customers and being careful that flexibility is not crowded out by strong commitments and focus towards certain customers.
In contrast, integration focuses on potential linkages between seeming opposites and facilitate coordination (Andriopoulos & Lewis, 2009). While differentiation is based on conflict, integrating means that managers look for synergies between contradicting forces (Smith & Tushman, 2005). This may help to find synergetic solutions and implement strategies that can help each other. To find synergetic solutions, managers must link conflicting forces at a superordinate level (Smith & Tushman, 2005). The shift to a superordinate level creates an overview of the overarching frame and leads managers to better address tradeoffs (Langer, 1989; Sherif, 1958). Smith and Tushman (2005) state that it is the interplay of both differentiating and integrating cognitive processes that drives managers to a balanced decision making.
can help in supporting the management of these tradeoffs. Tradeoff management on a managerial level requires that managers take a right situational decisions determined by their cognitive frames and processes.
However, reviewing the literature showed that, to date, studies about the tradeoff between flexibility and efficiency provide a less detailed view of how managers can use managerial capabilities to address this paradox. At the same time, studies that focus on the managerial capabilities to handle tradeoff situations are not sufficiently analyzing the flexibility-efficiency tradeoff. Thus, specific options for action to manage flexibility and efficiency on a managerial level are sparse. Furthermore, literature predominantly examines organizational and managerial tradeoff responses as isolated factors, yet, the role of these factors might be more collaborative in nature. The role of managing flexibility and efficiency within the sales structures of suppliers also remains unclear.
This paper complements existing research by examining both organizational and managerial responses to address the tradeoff between flexibility and efficiency, thereby acknowledging correlations between both spheres. Combining the literature strands of classic management theory and business-to-business literature, the paper concentrates on the sales structures of suppliers. Examining sales structures in this context allows firms and managers to derive concrete options for action.
3. Methodology
3.1. Research setting
This study uses a single-case design with the intent of theory building. Yin (2013) emphasizes that single-case studies can be a valuable contribution to knowledge and theory building by “confirming, challenging, or extending the theory” (Yin, 2013: 51). A case study method was chosen because it creates knowledge that cannot be gathered from a solely statistical analysis (Meredith, 1998). This method allows for research in complex contexts and thus is seen as most appropriate to study the flexibility-efficiency tradeoff in the supplier-buyer relationship context.
3.2. Data collection
tension between flexibility and efficiency. First, the company delivers its products in many different industries that require distinct structures and support. In these industries, Magnolia has developed relationships with many customers that significantly differ regarding size, sales, and demands. Because of the firm´s inhomogeneous customer base, there is a high need for flexibility. This need for flexibility, in turn ,creates challenges for efficiency. Second, Magnolia recently carried out a reorganization of its organizational structures which might deliver valuable insights for tradeoff responses on an organizational level.
Given the sensitivity of company and customer data, the company´s name and the name of specific products or customers is not mentioned in this study. Thus, Magnolia serves as a pseudonym that is used to protect the anonymity of the company.
Data consisted of semi-structured interviews that were conducted via telephone. The conversations were held in English and German. They were recorded and subsequently transcribed for a more in-depth analysis. Unclear answers were clarified via email. All interviews were carried out in December 2017. Interviews are chosen as the source of evidence since they can be targeted directly at the case study´s topic and offer explanations as well as personal views (e.g., a manager´s perceptions or attitudes) (Yin, 2013). Furthermore, literature suggests that cognitive frames of managers can be identified through their words and actions (Huff, 1990; S. Kaplan, 2008; Murnighan & Conlon, 1991; Smith & Tushman, 2005).
Position Business unit Hierarchical level Length (min)
Marketing director Dispersed market Middle management 57:30 Sales director Dispersed market Middle management 53:23 International key account manager Concentrated market Lower management 71:24 International key account manager Concentrated market Lower management 56:06
The interviewees were selected by specific criteria to serve the purpose of this study. First, they must hold a position within Magnolia´s sales structure. Second, they must have proven knowledge and experience in customer relations. Both criteria were defined to provide best insights into the dynamics and processes of supplier-buyer relationships. These insights constitute a credible source of information since they consist of first-hand knowledge and practical expertise of managers that are frequently dealing with dynamic buyer-supplier relations. The selection process took place through personal contacts within Magnolia. In awareness of the research topic, these contacts selected the interviewees according to the given criteria.
The interview guideline was structured to address both the organizational and managerial level of the flexibility-efficiency tradeoff. In the first section, managers were asked introducing questions (e.g., “What are the main tasks in your current position?”). Questions in the second section sought to further analyze the organizational tradeoff-level (e.g., “How many customers are served by a key account manager?”) In the third section, questions addressed the tradeoff at the managerial level (e.g., “What was your reaction when a big customer terminated the business relationships?”). Finally, managers were asked about their general opinions regarding the tradeoff (e.g., “Do you think the tradeoff is solved at the organizational or managerial level?”). The interview guideline was slightly adopted after each interview to best use each interviewees knowledge base or to clarify obscurities that arose from previous interviews.2
3.3. Data analysis
A qualitative content analysis was used to systematically categorize the collected data and draw conclusions of it (Miles, Huberman, & Saldaña, 2013). Structure and concepts that were developed to guide the interviews were also used as a foundation for analyzing the data.
2 Appendix A provides the initial interview guideline Table 1
However, this foundation was not strict but open to adjustments whenever it was necessary to appropriately capture the data or to improve the data analysis.
First, the transcribed interviews were studied in-depth and compared to discover similarities and differences. Subsequently, similar data was categorized, and redundant data was eliminated to create a first overview. Finally, the data was structured into overarching patterns regarding the management of the flexibility-efficiency tradeoff.
The categorized answers served as raw data (Saldana, 2013). Out of this data, preliminary codes derived in the form of market characteristics (dynamics, efficiency, flexibility, risks,
orientation). The preliminary codes led to the final codes in the form of tradeoff responses on
an organizational level (organizational structure, KAM job characteristics, KPIs) and on a managerial level (prioritization of customers, development of close ties, internal
cross-functional and cross-border communication). Because the small-scale of this case study, coding
was executed manually and did not involve computer software (Bazeley, 2007).
4. Results
4.1 Magnolia: company background
Magnolia is a large German supplier and one of the globally leading companies in its field. The firm operates globally with more than 50 subsidiaries in over 100 countries employing a workforce of more than 4,100 people. The B2B-business accounts for almost 76% of Magnolia´s revenue with the rest coming from B2C-sales. This paper only considers Magnolia´s B2B-business. The firm delivers its products in various industries, such as electronics or automotive. It distinguishes between four business units, namely: specific industrial markets (SIM: includes, e.g. building supply), general industrial markets (GIM: includes, e.g. traders and distributors), automotive, and electronics.
Magnolia communicates with its customers through several positions within its sales structure. Usually, sales functions form the company´s front-end and are in close customer contact. Within sales functions, Magnolia uses key account managers (KAMs) to serve customers. So-called international key account managers (IKAMs) are responsible for large customers that require communication and coordination on a global scale. A customer service assists Magnolia´s salesforce and can take over certain sales responsibilities in dealing with customers.
developers build up knowledge for future markets which sometimes requires visiting new customers. Global value chain managers (GVCMs) are responsible for overlooking the complex global value chains of large customers.
4.2 Magnolia´s markets: within case analysis
The empirical research revealed that Magnolia´s sales structure considerably differs between its business units to address different market demands. In search for patterns in managing the flexibility-efficiency tradeoff, this paper looks at the issues arising from these differences between Magnolia´s markets. Because the firm´s business units electronics and automotive as well as the business units SIM and GIM each share similar market characteristics, they can be divided into two sub-units. These two subunits will be treated as embedded cases within the Magnolia case (Yin, 2013).
Markets served by Magnolia´s business units SIM and GIM usually have a great number of customers that are, however, small regarding size and sales and thus will be summarized as dispersed markets. Contrarily, the business units electronics and automotive serve markets that have fewer customers but these customers are often large in size and sales and hence will be summarized as concentrated markets.
This study expects that the differentiation between concentrated and dispersed markets reveals different responses to the flexibility-efficiency tradeoff due to distinct market and customer characteristics in these markets. The original intention was to separate the business units in terms of their degree of relation-specific investments. During the empirical research, however, the separation criteria shifted to distinct market and customer characteristics, such as the customer structures of each business unit.
The insights gained through first-hand knowledge and experience of the interview partners help to disclose and examine the differences between concentrated and dispersed markets about the tradeoff situation. This allows for the identification of patterns on the organizational and managerial level and will contribute to building theory in the area of the flexibility-efficiency paradox.
4.2.1 Dispersed markets
First, dispersed markets show high dynamics. This means that these markets exhibit frequent changes in customer relationships. Due to the great number of customers, a certain number of business relationships will be terminated regularly. Magnolia´s sales director with long experience in sales in dispersed market environments illustrates the dynamics in dispersed markets as follows:
“I would say that we lose customers almost on a daily basis. Every year some customer relationships end due to an omission of the application, competition, or insolvencies. In my case, you can say that 10 to 15 percent of current business will be lost every year. You can be as good as you want - you simply cannot change this fact.”
The challenge in balancing the tradeoff in dispersed markets is to guarantee an efficient customer service since these markets allow for relatively low efficiency. The high number of customers makes it hard for suppliers to address each customer´s individual needs. Suppliers find themselves in situations in which they must decide about supporting some customers at the expense of others. In these situations, suppliers might neglect customers with high sales potential. Furthermore, serving numerous customers aggravates an intensive collaboration between supplier and some customers. This, in turn, might open the door for competition when customers feel not adequately supported. Magnolia´s sales director exemplifies the challenge of having many customers that are often small in size:
“Of course, our bigger customers require a closer contact. When we get application specific requests for bigger projects, our KAMs might take application engineers to the customers. However, this is a costly process. We will not take application engineers to small customers to discuss minor projects. We have to set the focus on the more important customers here.” Thus, due to the high dynamism and low efficiency, balancing flexibility and efficiency might play a focal role in dispersed markets. Firms must develop organizational and managerial responses to efficiently serve a great number of customers but stay flexible because the possibility of changes in customer relationships in these markets is high. However, although managing the tradeoff in dispersed markets might be challenging for suppliers, some characteristics of these markets might support them in balancing between flexibility and efficiency.
losing customers always involves certain risks, these risks are relatively low in dispersed markets compared to concentrated markets. When customer relationships end, dispersed markets offer many alternative customers that are relatively similar and can fill the resultant gaps. Hence, the supplier´s risk of having unexploited resources over a longer period is relatively low. The high flexibility can help to balance flexibility and efficiency in environments that show great dynamics (Davis et al., 2009; Eisenhardt et al., 2010).
There are additional reasons why there might be lower risks for supplier firms in dispersed markets. These reasons derive from the customers` size and sales share. Customers in dispersed markets each account for a relatively small share of a supplier´s sales. Therefore, losing a customer in these markets does not result in large declines in a supplier firm´s revenue. Thus, even if suppliers favor efficiency at the expense of flexibility, the financial risk may be manageable. Moreover, customers in dispersed markets are often small and thus less demanding. Less demanding customers might not require supplier firms to make large specific investments. This similarly results in a manageable financial risk for suppliers when customer relationships are terminated. Furthermore, less and smaller specific investments prevent lock-in situations and make it possible to switch to other customers with relatively less effort.
Moreover, switching customers in dispersed markets might be easier because customers are relatively similar and these markets have a more local orientation. Although business becomes increasingly global, smaller customers from dispersed markets usually have strong roots in their local environments (Freel, 2003). This local orientation might reduce the complexity of business relationships for supplier firms since they face smaller and less complex customer operations. Therefore, supplier firms might be better able to quickly adapt to new customers and might also better cope with terminated business relationships without wasting too many resources. Thus, switching customers in dispersed markets may be easier compared to concentrated markets where firms engage in complex multinational business operations. This enables higher flexibility for supplier firms in dispersed markets while reducing the risk of dynamics in customer relationships.
4.2.2 Concentrated markets
Concentrated markets do not have many customers but the customers are often large in size and sale. The relatively small number of customers lets suppliers experience lower dynamics in concentrated markets. Suppliers might have a better overview over their customers and can quickly intervene when they recognize signals of dissatisfaction on the customer side. This, in turn, might prevent that customers feel neglected and make it harder for competition to step in. Moreover, the simple fact that there are fewer customers in concentrated markets lets suppliers experience fewer dynamics in these markets compared to dispersed markets. Hence, suppliers experience fewer situations in which customer relationships are terminated in concentrated markets. Contrarily to the sales director´s statement, who “loses customers almost on a daily basis,” an IKAM serving concentrated markets appears to not have experienced many dynamics in his markets:
“I heard of some dynamics in our markets, and of course everyone knows about the business we recently lost at one of our largest customers, but fortunately I did not experience losing any customer since my time as an IKAM at Magnolia.”
Furthermore, the relatively small number of customers in concentrated markets allows for
high efficiency. Fewer customers enable supplier firms to support each customer more
individually. This situation allows supplier firms to deeply engage in customer relationships and to give each customer close attention. In this way, they can develop strong ties to customers and benefit from increased trust and positive spillover effects (Levin & Cross, 2004). Strong ties and close attention might also prevent situations of customer dissatisfaction that competition could use to lure customers away.
However, managing the tradeoff in concentrated markets is especially important since these markets allow for low flexibility. Although customer relationships in concentrated markets show lower dynamics, this does not mean that all customer relationships will last forever. If customer relationships end, suppliers might struggle to find alternatives to quickly redeploy their freed-up resources. Thus, suppliers acting in concentrated markets need to ensure flexibility to manage situations of dynamism.
financial loss ran into millions of euros. This not only led to major declines in Magnolia´s revenue but the company also had to lay-off parts of their workforce since it could no longer cover the fixed costs.
Furthermore, since customers in concentrated markets are large in size and sales, they might be more demanding. Supplier firms often need to make specific investments when engaging in relationships with these customers and thus are more vulnerable when such relationships are terminated. For example, the size and financial importance of Magnolia´s large customer required the firm to commit specialized staff that was no longer needed after Magnolia lost the project. These specific investments and financial dependency create lock-in situations, making it difficult for the supplier to switch to other customers.
Although large customers from concentrated markets tend to be more demanding, there can be differences depending on individual customer characteristics as one of Magnolia´s IKAMs further describes:
“You can say the bigger (the customer), the more demanding. However, the kind and level of demands also depend on other factors. For example, an Italian firm might have other demands as a German company. It is also about how customers are positioning themselves on the market. If your customer is an innovation-leader, it has less pressure on its product offerings since it does not sell products but values. These customers usually have higher margins and therefore do not put high pressure on suppliers to lower costs. Also, it depends on the markets your customers are engaging in. If they are, for example, active in competitive markets, their prices have to be on a certain level. Thus, they put more pressure on their suppliers.”
Finally, concentrated markets have a more global orientation. In such markets, global coordination plays a focal role when dealing with customers since large customers often have value chains that span around many countries. Besides proximity, the business operations of such multinational companies are often complex regarding processes and decision-making which makes it hard for supplier firms to quickly adapt to new customers when losing others. Unlike in dispersed markets, where companies are relatively similar, the more globally orientated and demanding customers in concentrated markets need individual solutions and support. This implies that supplier firms might need more time to adapt to alternative customers which further limits flexibility when customer relationships are terminated.
following, organizational and managerial response strategies for each market are examined.
Market characteristics Dispersed markets Concentrated markets
Dynamics high low
Efficiency low high
Flexibility high low
Risks low high
Orientation local global
4.3 Magnolia´s tradeoff responses
4.3.1 Organizational responses to dispersed markets
Magnolia developed a unique sales structure tailored to meet the demands of dispersed markets. To achieve a structural fit for balancing flexibility and efficiency in these markets, Magnolia responds with changes in organizational structure, customized job characteristics for KAMs, and specific KPIs.
Magnolia changed the structure of its business in dispersed markets into two business units. Both business units have the characteristics of dispersed markets with many different customers that are often small but relatively similar.
The separation of the firm´s business unit GIM was carried out just recently. Some time ago Magnolia recognized a stagnation of sales to traders and distributors while the global trade and distribution market was growing. To resolve the problem, Magnolia created the new business unit GIM that involves only business with traders or distributors. The new business unit should enable efficiency through an improved focus on these markets. Before structurally separated into an independent business unit, however, the business with traders and distributors competed with concentrated market business units for internal resources.
“Our business units electronics and automotive have grown very strongly in recent years. The trade and distribution markets, however, have stagnated. Therefore, Magnolia changed the structure and created the new business unit GIM, including only trade and distribution business, so that the firm was able to target measures to develop these businesses and increase their growth. The fact that the trade and distribution markets were growing over the last years implies that our stagnation in these markets is not stagnation but a decline. The
Table 2
underlying idea for this separation was that the new business unit GIM could improve the relevance of the trade and distribution markets and were able to make their own decisions and that they do not have to compete with firm resources that also have to be used for the business units electronics and automotive.”
Before the separation, Magnolia could serve traders and distributors without committing too many resources, thus having a certain degree of flexibility. However, efficiency in could not be guaranteed without focusing and deploying some resources to these markets. The structural separation helped the company to regain efficiency in these markets. When the business with traders and distributors was not structurally separated, it was difficult to serve these markets since customers could not be supported efficiently.
In addition to the structural changes regarding its business units, Magnolia had to align the
job characteristics of its KAMs to meet the demands of dispersed markets. To serve the high
number of customers markets, Magnolia´s KAMs in dispersed markets are responsible for up to 80 customers at a time. Also, IKAMs usually serve more than a single customer in these markets. In having more customers per KAM, the company ensures efficient customer support since having less KAMs would result in many customers being neglected.
To address the local orientation of dispersed markets, KAMs are also less structured to serve specific customers but more responsible for certain regional areas. This, in turn, improves flexibility. In case of losing a customer in a certain area, the responsible KAM usually has many alternative customers in geographical proximity to compensate the loss and reduce risks. Additionally, the geographical proximity allows KAMs to visit customers that have terminated the business relationship without losing much flexibility. KAMs might thus exploit opportunities to re-activate terminated customer relationships when visiting current customers in the area.
Magnolia further uses KPIs such as measurements and indicators to manage flexibility and efficiency in dispersed markets. For example, the firm defines specific KPIs for these markets. Using these KPIs, the firm can exert control over its sales structures to balance between flexibility and efficiency.
it leads KAMs to look for new business. Further, the company will not be surprised by a certain number of terminated business relationships.
Other measurements and indicators help the KAMs to prioritize customers. Magnolia categorizes customers in customers portfolios or select key accounts with the help of specific key account selection criteria. Providing such KPIs to classify customers might help KAMs to better allocate their resources to act both efficient but also flexible.
Although most of the decisions about the tradeoff are made situational, and on a managerial level, these structural measurements and indicators are needed to set the foundation for success in balancing flexibility and efficiency. One of Magnolia´s marketing directors describes the use of indicators to balance the tradeoff as follows:
“To manage tradeoff situations, some things need to be institutionalized to be successful. It is necessary to actively talk about these things because solutions will not emerge out of nothing.”
However, the challenge in defining certain measurements and indicators is keeping them realistic and meaningful. Otherwise, such elements would bring little to no benefits or even hamper the management of flexibility and efficiency. When Magnolia launched a new product in 2015, the firm required each of its KAMs in dispersed markets to realize three projects involving the new product. Magnolia´s sales director illustrates the problem with this KPI:
“It is understandable that the company wants to boost sales of new products. However, such a KPI is problematic because it can result in neglecting more important projects. Thus, the attempt to be efficient with the new product hampers flexibility and might not even guarantee a higher efficiency if KAMs implement the product at customers just because of this KPI and not because of the individual needs. Hence, it is also a question of quantity and quality.” This quote indicates a problem of over-structuring. In fact, structures sometimes might have negative consequences on the managerial level. Magnolia´s sales director further describes the problem of rapidly changing structures:
4.3.2 Managerial responses to dispersed markets
Besides structural foundations, the case study also revealed managerial approaches to balance flexibility and efficiency in dispersed markets. Insights from Magnolia managers show important managerial capabilities that are key to deal with the tradeoff situation in dispersed markets. Managers must develop close ties with their customers and have to prioritize between tasks.
To balance flexibility and efficiency, managers must not only have some knowledge about their customers but develop close ties and a deeper understanding of how the customer thinks and works. This involves understanding where critical decisions are made or how specific processes are handled by a certain customer. First, KAMs ensure efficiency when developing
close ties. This is because they know which person they have to talk to and what solutions fit
the customer best. Moreover, understanding customers reduces the risks of terminated relationships since customers feel well taken care of. A Magnolia sales director exemplifies this situation:
“With one of our customers, we developed a high customer intimacy throughout the years. Our salespeople visited the customer on a regular basis and knew the processes and important contact persons at this customer.”
In case of dynamics in customer relationships, close ties can also have positive effects on flexibility. The sales director further explains:
“One day, the competition offered very low prices to this customer. The prices were so low that we could not compete and the customer had no chance but to switch business to competition. However, because of the high intimacy, the customer relationship did not end when competition took over the business. Although we lost this certain business at the customer, we are now in talks about other possible projects. This is only possible because the close relationship motivates the customer to make business with us.”
Furthermore, prioritizing plays a significant role when balancing the tradeoff in dispersed markets. In daily business, managers must prioritize between tasks and actions to balance flexibility and efficiency. This is particularly important in dispersed markets since the variety of customers offers KAMs many different ways to prioritize their tasks and actions. Thus, KAMs must find a perfect fit of priorities that balance flexibility and efficiency. Problems occur if a KAM´s attention is unevenly divided between both factors. Magnolia´s marketing director uses the terms “farmer” and “hunter” to describe this issue:
“KAMs that serve many customers at the same time can often be divided into hunter and farmer types concerning their personality. Hunters are hungry for new businesses and are constantly developing new ideas. These people facilitate flexibility since they are always searching for new opportunities and quickly react to changes. Contrarily, a farmer often visits the same customers, drinks a coffee and asks if someone wants to buy something. While this might increase the efficiency due to reliability and building of networks, these people are certainly less flexible because they have a schedule that is constantly full. Moreover, farmers are less likely to have a filled project pipeline that could compensate dynamics in customer relationships.”
Likewise, the right prioritization is key when KAMs collaborate with internal departments. The marketing director further explains:
“First, it is important for KAMs to evaluate if customers have enough potential that could justify intensive support. They have to plan their schedules regarding this potential. While doing so, managers must decide what projects they forward to the internal customer service to create time to focus on more important projects. This often happens in practice because things, such as the analysis of orders or regular telephone calls, consume much time. However, the delegation process highly depends on the KAM´s personality. Some KAMs can delegate tasks easily and do it a lot, but others think that it is best if they handle everything on their own.”
setting company interests before personal interests in business decisions.
4.3.3 Organizational responses to concentrated markets
Similar to Magnolia´s organizational responses to dispersed markets, the firm´s organizational responses in concentrated markets can be categorized in organizational structure, KAM job
characteristics, and KPIs. However, due to the difference in market characteristics, these
tradeoff responses are adjusted to the demands of concentrated markets.
First, Magnolia adjusts its organizational structure to balance flexibility and efficiency. The reasons for the firm´s structural changes in concentrated markets and dispersed markets are relatively similar. The firms separated its automotive and electronic markets into distinct business units to enable an improved focus and development. This was a unique approach since Magnolia´s other business units generally include multiple different markets. Yet, the separation of the automotive and the electronics market was necessary to efficiently serve the high demands of the few large customers in these markets.
Second, the job characteristics of its KAMs in concentrated markets are distinct from the demands of dispersed markets. In concentrated markets, Magnolia deals with less but larger customers as in dispersed markets. Therefore, KAMs serve fewer customers in these markets to be able to generate efficiency. Dependent on size and demand of the customer, KAMs in concentrated markets can be responsible for a small range of customers, single customers, or even for specific departments of large clients.
Furthermore, since concentrated markets are more globally oriented, there is a higher need for international coordination. Therefore, Magnolia deploys more IKAMs in these markets. These IKAMs are important to facilitate communication between regional KAMs and function as a contact person for big customers. By seeing a bigger picture of the customer relationship, IKAMs can help to balance flexibility and efficiency. Since they can evaluate critical situations on a global scale, they are especially important to serve the multinational firms in concentrated markets.
Finally, the KPIs Magnolia uses in concentrated markets differ from the ones used in dispersed markets. KPIs used for dispersed markets seem to be defined to increase efficiency since the greater challenge in these markets is to ensure efficiency rather than flexibility. Thus, KPIs in dispersed markets tend to control for KPIs that emphasize efficiency, such as the number of customer visits. However, the challenge in concentrated markets is to stay flexible rather than to further increase efficiency. Thus, KPIs used in concentrated markets are more concerned with analyzing the external customer than controlling the internal sales end. Analyzing or categorizing customers with the support of such KPIs, for example, might help KAMs in concentrated markets to prevents the risk of losing customers. An IKAM illustrates the benefits:
“For our major customers, we just developed some key account selection criteria. The importance of customers is ranked based on classic criteria such as turnover. Yet, we also select regarding strategic fit, which can be customers that value the high service level of Magnolia, or regarding a customer´s willingness to cooperate. Also, we are currently analyzing the power balance in customer relationships. Here, we are looking at the risks of losing a customer but also if it is easy for the customer to switch to competition. For example, we have a customer that is supplied with around 130 Magnolia items with a total turnover of more than 2 million euros. This makes it somewhat difficult for the customer to switch to competition.”
4.3.4 Managerial responses to concentrated markets
The important managerial capabilities for concentrated markets that emerged from this case study are developing close ties to customers as well as increased internal cross-functional and
cross-border communication. Similar to dispersed markets, managers must develop close ties
to customers in order to balance flexibility and efficiency in concentrated markets. Firstly, building close ties is required reach efficiency in these markets. A marketing director explains why this is particular important in concentrated markets:
Apart from larger dimensions, the way how close ties help to balance flexibility and efficiency in concentrated markets does not significantly differ from their functioning in dispersed markets, except they might be harder to establish due to the higher complexity of customers. The development of close ties increases efficiency in customer support while simultaneously sustains flexibility since established networks can be used to find alternative business project in case of losing the original project. When Magnolia lost a project worth 25 million euros at one of its biggest customers, the short-term consequences were immense. However, although Magnolia had to lay-off workers, the firm reduced but did not stop allocating sales people to this customer. Keeping the network active led to a reacquisition of the project. Of course, the firm discussed how they could lose the business in the first place. A marketing manager describes the situation after losing the project:
“In this particular case, the discussions went up to the board level. The questions asked were: “have we been close enough to the customer?” or “why did we not recognize the competitor?”. As a result, we talked about how to develop a closer network at this customer and how to identify the people we have to talk to. Subsequently, we also increased internal key account trainings that should facilitate knowledge in analyzing how customers work.” This statement shows the importance of close ties in customer relationships, particularly when these relationships experience dynamism.
Besides close ties to customers, the internal communication and coordination becomes increasingly important to balance flexibility and efficiency in concentrated markets. Global orientation and complexity in concentrated markets demand growing levels of communication and coordination from managers. The size of customers in concentrated markets often requires whole teams that serve a specific customer. Due to the multinational nature of these customers, the team members are usually geographically separated. Thus, to efficiently serve customer communication becomes key. The right communication might also enhance flexibility. For example, local team members might forward information that is useful to analyze potential risks or dynamics in customer relationships early enough to respond accordingly. One of Magnolia´s IKAMs underlines the communicational part in concentrated markets:
or the customers department. The preparation of a global contract always involves lots of different people. This communicational effort is neither visible nor measurable which means no one thanked me that I took care of this but in the end the outcome was that we became a preferred supplier for this important customer.”
6. Discussion
6.1. Interpretation of the findings and working propositions
Table 3 summarizes the main findings of this paper. The case study identified six key elements that help suppliers to manage tradeoff situations between flexibility and efficiency. Firms can address the tradeoff on an organizational level through changes in organizational structure, customized KAM job characteristics and the help of KPIs. At the same time, managers within these firms must develop capabilities in networking, prioritizing, and communication to balance flexibility and efficiency. The case further revealed that different markets require different approaches on how to leverage these elements.
Dispersed markets Concentrated markets
Organizational responses Organizational
structure
Creation of business units focusing on multiple markets to better respond to market demands and prevent internal competition over resources
Creation of business units focusing on single markets to better respond to market demands
KAM job characteristics
More customers per KAM and less specialized positions
KAMs serve less customers and creation of specialized positions to meet market demands
KPIs Internal focus:
controlling the firm’s salesforce
External focus: analysis of the firm´s customers
Table 3
Managerial responses Prioritization of customers
High importance due to great number of customers. Often single KAMs are responsible for a customer base
Less important since number of customers is smaller and more people are involved in the customer support
Cross-functional / cross-border communication
Less relevant since KAMs are often solely responsible for a customer base and customers have a more local focus
High relevance since customer support involves teams that are often globally dispersed due to a more global orientation of customers
Developing close ties with customers
Important to strengthen both flexibility and efficiency but efficiency is generally more difficult due to high number of customers
Important to strengthen both flexibility and efficiency but flexibility is generally easier since less customers allow for a more intensive and individual support
On an organizational level, Magnolia adjusted its organizational structure to create business units that are better able to deal with specific market characteristics. While Magnolia´s business units SIM and GIM (dispersed markets) include various markets, the firm separated its markets automotive and electronics (concentrated markets) in two independent business units. Through this separation, the firm was able to reach high levels of efficiency, which are required by the large and demanding customers in these markets.
resources were now bound to these markets and could no longer been used to respond to dynamics in concentrated markets. Yet, it helped to regain efficiency in the distribution and trading markets.
This indicates that firms balance the tradeoff not only externally between customers but first internally between business units. More specifically, firms must structure their business units to allocate their resources in a flexible and efficient way. Then, these resources can be used by each business unit to address the tradeoff in its customer relationships. This becomes particularly important when markets from certain business units tend to dominate markets from other business units in terms of sales and might, therefore, be provided with greater resources by the firm.
For example, spatial differentiation, which separates organizations in small decentralized units that focus on flexible exploration and large centralized units that focus on efficient exploitation (Gilbert, 2006), does not hold for the Magnolia case. Although Magnolias business units from concentrated markets exhibit a higher efficiency whereas the dispersed market business units show greater flexibility, the risks of low efficiency in concentrated markets outgrow the flexibility advantages from dispersed markets. This is because the aggregated volume of sales generated from concentrated markets dominate those stemming from dispersed markets. For example, one large customer in dispersed generated a sales volume of roughly 200 thousand euros whereas turnover generated at a large customer from concentrated markets exceeded 25 million euros. Thus, losing large customers in concentrated markets cannot be compensated by any efforts in dispersed markets. This indicates both flexibility and efficiency should be balanced by each business unit independently when the sales volume of customers in certain business units dominates those in other business units.
Proposition 1: Firms that address different markets characteristics with the same business unit are likely to neglect markets with lower sales volumes.
