Understanding the non-economic value of business relationships

This article contains a review of relationship value literature which is structured by episode, relationship, and network level. We propose characteristic value dimensions in each level. The article concludes by a three levels and two dimensions framework of focal relationship value in business network. This value combines economic and non economic aspects and episode, relationship and network levels. "All relationships are valuable...,but some are more valuable than others." (Ford and McDowell 1999 pp.430) The value should be measured at the activity level (Porter 1985), also at the product level (Reddy 1991). But it is not certainly enough to measure its complexity in the business markets. That is why it is important to understand this complexity through the value of the business relationships. Business relationship value is also a problematic concept. "The value concept and value adding seem to be one of the most recent and popular trends today. However, the concept of value is multifaceted and complicated...." (Ravald and Grönroos 1996 pp.19). And Wilson said "value is a problematic concept which cannot be ignored" (Wilson and Jantrania 1996). So value creation is now a central purpose of marketing (Jantrania and Wilson 1999) and particularly to understand the dynamics of the business relationships (Anderson and Narus 1991). It is because delivering superior value to customer enhanced his satisfaction, his competitive position and his loyalty for sustaining long-term business relationships. To understand business market the basic and now days familiar concept is the business relationship. Our starting point about business relationships is the well known IMP interaction model (Hakansson 1982). We emphasise that the business relationship is a process of bounded interactive exchange episodes (products/services, information, finance, and social exchanges) between the groups of actors involved in it. Business relationships are realised between the buyer and seller and demand different level of efforts in investments (money, time, skill...), organisational learning, adaptation, co-ordination, commitment and trust building from both parties. The main goal and incentive to do it are to create a superior value for each and to share it. There are differences in the frequency, the structure and the perception of the exchange episodes and relationships. These are the main, but not the only, causes of the heterogeneity and dynamics of business relationships. Business relationships have different, non-sequential development stages (pre-relationship, exploratory, developing and stable) (Ford 1980, Ford at al.1998). For each stage there is a decision situation to continue or not if so how (Valla 1986, Anderson 1995, Wilson 1995). The focal relationship is embedded in its atmosphere (Hakansson 1982), and its network (Ford at al.1998). This complexity leads to see the business relationship management as an integrated element of the strategy redefinition in business markets (Hakansson and Snehota 1989, Ford at al.1998). It seems that the value of the relationship participates to this management. Relationship management has three levels: episodes, relationships and networks. We notice the importance of the management of the portfolio the relationships (e.g. Turnbull and Zolkiewski 1995, Turnbull and Topcu 1996) even to understand the value of business relationships (Krapfel at al. 1991, Ford at al 1998, Ford and McDowell 1999). In our purpose we are interesting about the value of a focal business relationship at episode, relationship and network level. Episode value Anderson and Narus (1999) consider the value as a cornerstone of business marketing. They define value in business markets "is the worth in monetary terms of the economic, technical, service and social benefits a customer firm receives in exchange for the price it pays for a market offering" (Anderson and Narus 1999 pp.5) Even they use monetary terms to express value because of managerial practice of utility understanding, they have a broaden approach of value which is rooted from the social exchange theory. Their value concept is based on benefits and calculates the difference or trade off between perceived worth and price paid (Anderson et al 1993). Anderson and Narus emphasise the "value is what a customer firm gets in exchange for the price it pays. Therefore, we conceptually view a market offering as having two elemental characteristics: value and price." (Anderson and Narus 1999 pp.6). Value is a net benefit (total benefit minus costs) perceived by the customer, and the fundamental value equation makes possible the comparison of an offering and its the nextbest alternative (Anderson and Narus 1999). This value concept is clearly concerning the offering, ("offering is a set of economic, technical, service and social benefits a customer firm receives" Anderson and Narus 1999 pp. 5) or more exactly the exchange of it. This type of exchange is realised as an exchange episode of an interactive relationship between the supplier and customer (e.g. Hakansson 1982, Turnbull and Valla 1986 or Ford 1990). Normann and Ramirez (1993) say "in fact what we usually think of as product or services are really frozen activities, concrete manifestations of the relationships among actors in value creating system. To emphasis the way all products and services are grounded in activity, we prefer to call them offerings." (Normann and Ramirez 1993 pp.68). So the offerings are results of activities of exchanging partners realised in previous relationships. Ravald and Grönroos argue that a relation consists of episodes. "An episode can be defined as an event of interaction which has a clear starting point and ending point and represents a complete exchange. In an episode there can exist several interactions..." (Ravalad and Grönroos 1996 pp.29). They are referring to Monroe's definition of customer perceived value as the quotient between perceived benefits and perceived sacrifice. The perceived benefits are some combination of attributes (physical, technical, service) in relation to the particular use, the purchase price and other indicators of perceived quality. The perceived sacrifice contains all the costs the buyer faces when making a purchase (e.g. purchase price, acquisition costs, transportation, installation, order handling, repairs and maintenance, risk of failure or poor performance) (Ravalad and Grönroos 1996). In other words it could be considered as a trade off between the perceived benefice and the perceived sacrifice They emphasise that the customer-perceived value of an offering is highly situation specific. as "the utility or the outcome of buying a good or a service [an offering]...per se raises buyer performance" (Ravalad and Grönroos 1996 pp.22). The offering as a "value carrier" contributes to the buyer performance and must be perceived buy the customer as a greater net-value then the competitors' offering. Reddy (1991) does not speak about offering but he defines the product value in industrial markets as a two dimensions construct. The product value is an ensemble of economic and non-economic elements (one dimension) and intrinsic and extrinsic elements (second dimension). Intrinsic elements come from the product itself (they are the economic and non economic attributes of the product). Extrinsic elements are mainly the activities (services) of the vendor. The intrinsic part of economic elements is the product performance, reliability, technology and price. Operator training, maintenance training, warranty, spare parts and identifiable post-purchase costs consist of the extrinsic economic elements. Non-economic intrinsic elements are the brand name, styling, packaging and appearance. Extrinsic noneconomic features are the vendor's reputation, reliability, responsiveness, dyad relations and service. (Reddy 1991, Wilson and Jantrania 1996) But "the value of having a relationship, e.g. the value of commitment for both parties,...also needs to be taken into account when analysing the offering provided and the manner in which it influences the customer's perception of the value." (Ravalad and Grönroos 1996 pp.23). To identify it the authors introduce the term of "total episode value", which could be describes "as a function of both episode value and relationship value" (Ravalad and Grönroos 1996 pp.23). This total episode value is always a ratio of perceived benefits and perceived sacrifice: ( ) ( ) sacrifices ip relationsh sacrifices episode benefits ip relationsh benefits episode value episode Total _ _ _ _ _ _ + + = One can ask what does it mean the relationship benefits or sacrifices. With this question we can discuss the problem of relationship value. Offerings (products at Reddy) are the object of exchange episode between buyer and seller. Offerings mean a perceived customer value for the buyer. It determines the episode value. But this value contains some element beyond the exchange episode which came from the relationship. Different kinds of episode value are summarised in the table 1. Table 1. Episode value Episode value Offering as sum of benefices received by customer in monetary terms Offering as result of previous relationships Offering as a value carrier Offering as a set of economic and non economic elements Offering as relationship benefices or sacrifices Relationship value Most of the theoretical frameworks describing buyer-seller relationship emphasise its interactive (e.g. Hakansson 1982, Turnbull and Valla 1986, Ford at al. 1986), dynamic (Ford 1980, Ford at al. 1986, Wilson and Möller 1995), ongoing (Dwyer et al. 1987) complex (Anderson and Narus 1990) and embedded (Anderson et al. 1994) characters. Theoretical bases of these models are different (Dwyer at al. 1995), some of them focus on the interactive exchange process (e.g. Hakansson 1982) others the consequences of the exchange (Anderson and Narus 1990) or the development phases of the buyer