Wang 2003

Journal of Management Development
Customer-focused performance and the dynamic model for competence building and
leveraging: A resource-based view
Yonggui Wang Hing-Po Lo
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Customer-
Customer-focused focused
performance and the dynamic performance
model for competence building 483

and leveraging Received September
A resource-based view 2001
Revised May 2002

Accepted October 2002
Yonggui Wang
Nankai University and City University of Hong Kong, Kowloon, China
Hing-Po Lo
City University of Hong Kong, Kowloon, China
Keywords Customer orientation, Organizational learning, Strategic planning,

Core competences, Customer satisfaction, Service quality
Abstract In today’s turbulent environment, customers are playing a more important role in
competition, which can be reflected by customers as co-producer, value co-producer, or co-developer
of knowledge and competencies, etc. Accordingly, business priority should be given to what
customers really value. Unlike previous studies, which emphasize market performance mainly from
the internal or firm’s perspective, this paper proposes that firms should prioritize customer-focused
performance, defined totally from an external perspective of targeted customers. The paper
examines the important role of customer-focused performance and its interactive relationships
with other dimensions of the overall performance system, and goes further to analyze the
components and dynamics of customer-focused performance. Finally, attention is given to the
dynamic competence building and leveraging process and its key elements, which determines the
customer-focused performance in perspective of resource-based views. Important propositions are
presented and future implications discussed.
1. Introduction
The increasingly dynamic nature of competition has made the improvement of
organizational learning and the development of more effective methods for
managing knowledge and other intangible resources, a central concern of
contemporary strategic management. Consequently, an approach based on
resources and dynamic capabilities, which emphasizes the critical importance
to sustainable competitive advantage and performance of invaluable resources
and competences such as customer relationship, learning culture, and employee
The authors thank the financial support of CCUIPP-NSFC (China-Canada University Industry
Journal of Management Development
Partnership and National Natural Science Foundation of China (70142023), National Natural Vol. 22 No. 6, 2003
Science Foundation of China (70202002), National Social Science Foundation of China 02CJL004, pp. 483-526
q MCB UP Limited
and The Sumitomo Foundation of Japan (018006). We also thank Prof. Andrew Kakabadse and 0262-1711
Dr. Nada Korac-Kakabadse and the reviewer for their valuable advice. DOI 10.1108/02621710310478486
JMD skills and knowledge (Barney, 1991; Teece et al., 1997), has won increasing
22,6 attention both from academic and practical circles.
In environments characterized by high velocity change, accelerating product
life cycles, narrowing customer niches, mass customization and technological
discontinuities, today’s product markets can appear and disappear quickly
(D’Aveni, 1994), with traditional product-centered strategies providing little
484 long-term advantage (Christensen, 1998). This has led to renewed efforts to
understand how firms can develop dynamic capabilities which enable them to
adapt, integrate, and reconfigure their skills and knowledge in order to adapt to
a changing business environment. The dynamic process of developing
resources and competences has also turned the attention of firms to collective
learning (Prahalad and Hamel, 1990), a process through which organizations
apply existing knowledge and develop new knowledge that shapes the
development of new competences that are necessary in the changing
environment (Kogut and Zander, 1992; Henderson and Cockburn, 1994).
Furthermore, this work has highlighted the need for a deeper understanding of
how trajectories of knowledge and capabilities develop and how factors such as
absorptive capability (Cohen and Levinthal, 1990) and “lock in” (Dosi, 1988)
influence the process of knowledge and capability development. However, up to
now, there have been few systematic studies done in this field. Furthermore,
there has been a strong trend for researchers and managers to try to explain the
influential factors of competitive advantage and performance from their own
perspective and ignore the rationality of views from other streams. Thus, little
effort has been made to integrate knowledge management, organizational
learning and competence-based competition with empirical investigations and,
as a result, little research has been done to explore and examine the interactive
relationship between knowledge acquisition, accumulation and sharing,
organizational learning, and competence building and leveraging, and their
impact on customer satisfaction, service quality and other dimensions of
business performance.
Furthermore, even though almost all researchers agree that firms competing
in present and future situations will encounter a dynamic environment in
which strategic flexibility and responsiveness will be paramount, few take
strategic flexibility into account when they explore or test the causal links
between different factors and firm performance. In addition, in today’s
turbulent environment, customers are playing an ever more important role in
business competition, and many means have been advocated of understanding
customer demands from the viewpoint of customers themselves, so that these
demands can be translated into business language and actions. However, little
progress has been achieved concerning customer-focused performance.
Although many studies have been made of business performance, most of
which take overall performance, market performance or new product
performance, as the focus. Therefore, drawing on a growing body of
literature that distinguishes between a firm’s products and its resources and Customer-
capabilities (Snow and Hrebiniak, 1980; Hitt and Ireland, 1985; Barney, 1991; focused
Henderson and Cockburn, 1994; Markides and Williamson, 1996), emphasizes performance
organizational learning (Argyris and Schon, 1978, 1990; Senge, 1990), and pays
more attention to customer satisfaction and service quality (Gronroos, 1988;
Parasuraman et al., 1991; Zeithaml et al., 1990; Anderson et al., 1994), this paper
will try to bridge gaps that currently exist in our understanding of business 485
dynamics in turbulent environments and link what strategic management field
argues and what service management emphasizes.
In this paper we aim at defining customer-focused performance in
perspective of customers totally externally and identifying its key

determinants on the basis of a resource-based view. Section two, which
follows the introduction, gives a simple definition of customer-focused
performance and its key role in the whole business performance system, and
discusses the interactive relationship among different dimensions of
performance. The components and dynamics of customer-focused
performance are analyzed in section three. Section four provides a dynamic
model for excellence in customer-focused performance in perspective of a
resource-based view, while trying to combine external perspective from
customers and internal perspectives within firms of business together, in order
to help managers bring together these seemingly disparate elements of a
company’s competitive agenda. These elements are described as customer
oriented, marketing driven, learning oriented, competence-based and so on.
What’s more, the moderating effects of environment turbulence and strategic
orientations are also identified. It is further hoped that this research will
provide valuable insights and lay a foundation for further empirical research in
the future. Finally, implications and conclusions are provided and future
research directions suggested.
2. Customer-focused performance and its significant role in success

Concepts such as customer orientation, staying “close to the customer”,
customer segmentation and niche marketing, customer as co-producer
(Wikstrom, 1996), value co-production, critical co-developer of knowledge
and competence (Sivula et al., 1997) and co-opting customer knowledge
(Gibbert et al., 2001), all point to the much more significant role of customers in
business success than ever, which necessitates the focus of customer-focused
performance.
2.1 Customer-focused performance

Accordingly, customer-focused performance, which is perceived and evaluated
directly by customers themselves based on what a company provides them,
represents the key dimension in, and the decisive source of, company
competitive advantage. Only by addressing this can companies go beyond the
JMD traditional financial performance, understand the real requirements of their
22,6 targeted customers, act on the actual information flowing from customer
demand, and deliver superior customer value and higher satisfaction than their
key competitors. This paper strongly recommends that, in pursuing this goal,
firms should define some of their performance measures based on customer
assessment and view their performance through their customers’ eyes. In
486 addition, this would be consistent with most companies’ mission or vision
statements, which pointedly refer to the special significance of customers
(Kaplan and Norton, 1992).
Therefore, how a company is performing from its customers’ perspective is
inevitably a priority for top management, which reinforces the significance of

customer-focused performance, as defined here. In practice, it seems that some
firms have begun to act unconsciously based on this idea. For example, the J.D.
Powers Quality Survey has become the standard ofperformance ofthe automobile
industry (Kaplan and Norton, 1992). Firms, therefore, need to maneuver all their
resources, competences and operational activities around achieving superior
customer-focused performance, because this can provide a practical standard to
see whether they are valued by their targeted customers, or not.
2.2 The embarrassed context of financial measures

Traditionally, firms are believed to exist for shareholders, and their
performance is measured financially. They focus primarily on the character
and rate of financial return, operating income and return on investment
(Paple-Shields and Malhotra, 2001), taking sales and earnings growth, market
share change and cash flow, into account. However, with the increasingly
stronger bargaining power of other stakeholders, the situation has changed
significantly. With the current stronger trends such as the contraction of
communication cycles, the blurring of industry boundaries, the deconstruction
of traditional value chains and the fact that industries are being “blown to bits”,
customers are playing an increasingly important role in business success. They
have already moved out of the audience and onto the stage, and are
fundamentally changing the dynamics of the marketplace and the market, as a
result, has become a forum in which customers are playing an active role in
creating and competing for value (Prahalad and Ramaswamy, 2000). On the
contrary, financial measures have been criticized for their well-documented
inadequacies, their backward-looking focus and their inability to reflect
contemporary value-creating actions. Furthermore, these financial measures
are only the result of operational actions and contribute almost nothing to the
improvement of customer satisfaction and value, or service quality, cycle time
and employee motivation.
2.3 The whole company performance system based on different perspectives

Accordingly, different perspectives have been introduced to help firms compete
successfully and survive in the long-term, for example, the special interests of
other stakeholders such as customers (suppliers, dealer and ultimate clients), Customer-
employees, managers, government and communities. Figure 1 shows the focused
interactive relationship of customer-focused performance, shareholder-based performance
performance and employee-based perception. As a well-known and useful
measurement of performance, the balanced scorecard is one of the typical
examples of the interactive relationship (Kaplan and Norton, 1992). It consists
of customer perspective, internal business perspective, innovation and learning 487
perspective, and financial perspective. However, there are still some differences
between what we call customer-focused performance here and what Kaplan
defines as from the customer’s perspective. The former stresses what
customers can see, feel, obtain and value, that is, what they can see and
perceive for themselves, while some elements of the latter are not actually from
the customers’ perspective by virtue. For example, customers show less
concern for internal processes or information to produce or deliver a product or
service, such as when a new product is launched, how innovative it is, the
minutiae of its production, or the percentage of its sales, which are often
considered performance measures of customer perspective by Kaplan and
Norton (1992). In comparison, customers show more interest in how much value
they receive from a product or service, how good the product is, and the degree
of satisfaction they gain, all of which are external measures assessed by
customers and constitute customer-focused performance, which we defined
above, as important measures. In fact, Kaplan’s performance measures reflect,
in a sense, a firm’s internal view of customer perceptions.
2.4 The interactions of different dimensions of company performance

As a whole system, all of these four perspectives (shareholder, customer,
internal process and learning and growth) have their own benefits and
Figure 1.
Relationship among
dimensions of
performance: example
from customers,
employees and
shareholders
JMD emphases and also interact with one another continuously. Creating value for
22,6 shareholders has been said to be the purpose of business, shareholder value,
however, is really the outcome of business success, not its intrinsic reason for
being. Only if the real purpose, creating and providing valuable products and
services for customers, is first met, can a firm provide shareholder value.
Therefore, as Drucker (1973) notes, business success is determined, not by the
488 producer, but by the customer, and the customer-focused dimension should be
the priority of managerial attention. This dimension not only acts as the key
driver of the financial dimension, but also determines the character of the other
two dimensions. In other words, the internal process and learning and growth
dimensions act as the basis of the customer-focused dimension, enabling the

latter to drive financial performance as a result. This can also be seen in the
service profit chain model of Heskett et al. (1997), which stipulates that there
are direct and strong relationships between customer loyalty, customer
satisfaction, value of goods and services delivered to customers, service quality
and productivity, employee capability, satisfaction and loyalty, financial profit
and growth. Similarly, the employee-customer profit chain model developed by
Rucci et al. (1998) describes further the interactive relationship among different
dimensions of business performance, and stresses that an attractive place to
work provides solid support for an attractive place to shop and, finally, drives
an attractive place to invest. Figure 1 shows the relationships among
dimensions of performance from different perspectives. On the one hand, the
greater the customer value, the more attractive and competitive the product,
resulting in higher employee satisfaction and superior profitability. On the
other hand, the greater the shareholder value, the more money there is for
investment in R&D, training and customer service systems, and the more
competitive again the product, resulting in superior customer-focused
performance, which shows dynamically the cycles of interactive improvement.
In fact, customer-focused performance represents not only short-term
competitiveness, but also long-term or potential competitiveness. As a key
indicator of customer-focused performance, customer satisfaction has often
been considered one of the important dimensions of business performance, no
matter when competitiveness or performance is studied, strategically or
operationally. Enhanced customer satisfaction, greater customer loyalty,
increased sales and productivity, high new product success, effectiveness of
internal processes, innovation and improvement activities and higher employee
satisfaction and empowerment are all inter-linked and will always lead to more
sustainable competitive advantage (Meyers et al.,1999; Lipovatz et al., 2000). As
for other aspects of customer-focused performance, Zeithaml (1996) report a
study of the links between service quality and customer behavior, in which the
overall findings offer strong support for the intuitive notion that improving
service quality can increase favorable behavioral intentions and decrease
unfavorable intentions, implying great potential for higher profit. Rust et al.
(1995) examine the links between service quality, customer satisfaction, loyalty Customer-
and profitability, and provide strong support for the profit impact of focused
improvements in service quality. Similarly, Kordupleski (1995) provides performance
empirical evidence that successful customer value based strategy increases
shareholder value. For example, AT&T research shows how improvement in
revenue share growth is driven by improvement in customer value.
Parasuraman (1997) gives further empirical evidence of a systematic, 489
positive association between customer value and organizational value
(stockholder), which provides an impetus for implementing value-based
strategies in companies that might otherwise be reluctant to do so.
P1. Firms with superior customer-focused performance usually have

superior financial performance and higher employee satisfaction.
Therefore, the activities best suited to today’s competitive environment may be
those that help to achieve superior customer-focused performance, through
which the interests of other stakeholders, such as shareholders and employees,
can also be met, resulting in higher profitability. All other dimensions would
serve as the basis of, and provide support for, customer-focused performance
throughout the process, including investment in employee training,
advertising, and strong career paths. In fact, as discussed above, a number
of profit impact of market strategies-related studies (PIMS) have provided
valuable empirical support for positive quality-profitability relationships
(Buzzell and Gale, 1987; Phillips et al., 1983; Zeithaml, 1996; Rust et al., 1995;
Chang and Cheng, 1998).
3. Dynamics and key components of customer-focused performance

Customer satisfaction is driven by price and quality attributes which
businesses need to define, refine and redefine, if they are to secure competitive
advantage. Customer-focused performance is driven by the need for businesses
to redeploy and link their processes and build strong capabilities based on
value innovation, in order for the performance to deliver superior customer
value and higher customer satisfaction. Customer-focused performance is
characterized by a number of components.
3.1 Key components of customer-focused performance

Many factors may influence customer-focused performance in practice, and all
have a significant impact on business performance, especially on profitability.
However, all these factors tend to fall into four categories: time, quality,
performance and service, and cost (including price, effort, energy and other
related cost such as ordering, scheduling and delivering). In this paper, we
suggest that service quality, customer value and customer satisfaction are the
most effective and important dimensions of customer-focused performance,
because they are related directly to customer perceptions and, hence, their
JMD purchasing decisions. For example, on the one hand, time, quality and cost can
22,6 all be reflected in terms of customer perceived quality. On the other hand, the
same attributes can be understood even better in terms of customer value if
they are combined, and the combination of performance and service can then
measure how the company’s product and service quality contributes to creating
value for its customers.
490 Furthermore, the three dimensions, i.e. service quality, customer value and
customer satisfaction, also interact dynamically with one another (Wang and Lo,
2002b). For example, Oliver (1993) first suggests that service quality should be
antecedent to customer satisfaction, regardless of whether these dimensions are
measured for a given experience, or over time. McDougall and Levesque (2000)
identify two key drivers of customer satisfaction: service quality and customer
value. Similarly, Patterson et al. (1997) identify the dynamic interactive
relationship among service quality, customer value and satisfaction, and its
impact on purchase behaviors. Up to now, other researchers have found
empirical support for the point of view mentioned above (Anderson and Mary,
1993; Spreng and Mackoy, 1996), wherein customer satisfaction is a consequence
of service quality and customer value (see Figure 2). Whats more, customer value
may be the most important factor in determining the superiority of
customer-focused performance, because customer satisfaction can generally
be considered the consequence of customer value, and service quality is only one
of its antecedents. That is to say, only customers who obtain superior customer
value in the form of higher quality, lower sacrifice, or a combination thereof, may
be satisfied, but only by first providing quality products, can firms deliver
superior customer value. Customers who buy products of quality lower than
threshold level, will not feel value for money at all[1]. In addition, these three
dimensions are themselves dynamic, and their nature and determinants may
change over various stages of a customer’s association with a company.
However, it should be noted here that researchers sometimes obscure the
distinction between customer satisfaction and value. For example, when
measuring value to customers, five measurement items are used by Tu et al.
(2001), at least two of them are directly related to customer satisfaction.
Figure 2.
Customer-focused
performance:
components and
dynamics
P2a. Both customer value and customer service quality contributes Customer-
positively to higher customer satisfaction. focused
P2b. Both customer perceived sacrifice and customer service quality have performance
an important influence on customer value.
491
3.2 Customer perceived service quality
It has been widely accepted that quality products can result, not only in lower
cost by reducing waste and deficiencies, but also in higher competitiveness, by
establishing reputation, delivering superior customer value and realizing other

positive attraction and retention effects. As a result, with the changing role of
customers (Prahalad and Ramaswamy, 2000), customer perceived service
quality has been given more attention for its specific contribution to business
competitiveness (Wang et al., 2003).
Over recent years, there have been a variety of studies on different aspects of
service quality measurement. Traditionally, service quality has been defined as
the difference between customer expectations and perceptions of service
(Gronroos, 1984; Parasuraman et al., 1985, 1990). These researchers believe that
measuring service quality as disconfirmation (the difference between
perceptions and expectations) is valid, and allows service providers to
identify gaps in the service provided. However, most of these studies have
found a poor fit with the disconfirmation model. As a result, their SERVQUAL
scale has been frequently criticized by researchers for its use of gap scores, for
its measurement of expectations, for positively and negatively worded items,
for the generalizability of its dimensions, and for its defining of a baseline
standard for good quality (Cronin and Taylor, 1992; Brown et al., 1993; Oliver,
1993; Teas, 1993; Spreng and Olshavsky, 1992). Further, problems of reliability,
discriminant validity and variance restriction exist because of the computed
difference scores. As a result, researchers have tried to combine expectations
and perceptions into a single measure to alleviate these problems, and have
found that this technique outperforms the SERVQUAL scale in terms of both
reliability and validity (Babakus and Boller, 1992; Brown et al., 1993; Andaleeb
and Amiya, 1994; Mittal and Lassar, 1996; Dabholkar, 2000).
Although an increasing number of research findings have appeared
concerning quality in the past two decades, it is still worth noting that there are
several distinct conceptualizations of quality. In marketing and economics,
quality often has been viewed as dependent on the level of product attributes.
In operations management, quality is described as having two primary
dimensions (Garvin, 1988):
(1) Fitness of use: Does the product or service do what it is supposed to?
Does it possess features that meet the needs of customers?
(2) Reliability: To what extent is the product free from deficiencies?
JMD In the service literature, quality is viewed as an overall assessment
22,6 (Parasuraman et al., 1985). As for the overall measure of quality,
Parasuraman et al. (1985) write that it can be obtained in the form of an
average score of the five related dimensions.
On the other hand, some have advocated measuring overall service quality
directly. Among them, only a few have used multi-item measures (Dabholkar,
492 2000; Dabholkar et al., 1996; Spreng and Mackoy, 1996; Taylor and Baker,
1994), while most (Babakus and Boller, 1992; Bolton and Drew, 1991; Boulding
et al., 1993) have used a single-item measure, which makes it impossible to
ascertain the reliability of the construct.
3.3 Customer satisfaction

By nature, the study of customer satisfaction typically falls within the domain
of marketing (Rust and Zahorik, 1993; Anderson et al., 1994; Dean and Bowen,
1994). It is perceived to be a key indicator of a firm’s market share and
profitability, and portrayed as an important indicator of a firm’s overall
financial health. Simply stated, a satisfied customer will repeat the purchase of
the goods or services, increasing a firm’s market share and profits, which
signifies its significance to successful competition in customer-centered era.
Originally, satisfaction is defined as disconfirmation (Miller, 1976; Oliver,
1981) and later is equated with emotion (Westbrook, 1980; Westbrook, 1991).
Generally speaking, there are at least two different conceptualizations of
customer satisfaction: one is transaction-specific, the other is cumulative
(Boulding et al., 1993).
On the one hand, from a transaction-specific perspective, customer
satisfaction is viewed as a post-choice evaluative judgment of a specific
purchase occasion (Hunt, 1977; Oliver, 1977, 1981, 1993). Up to now, behavioral
researchers have developed a rich body of literature focusing on the
antecedents and consequences of this type of customer satisfaction at the
individual level (Zeithaml, 1988). On the other hand, cumulative customer
satisfaction is an overall evaluation based on the total purchase and
consumption experiences with a product or service over time (Fornell, 1992;
Johnson and Fornell, 1991), which is a more fundamental indicator of the firm’s
past, present and future performance. It is the cumulative customer satisfaction
that motivates a firm’s investment in customer satisfaction. So here our
theoretical framework treats customer satisfaction as cumulative.
Fornell (1992) enumerates several key benefits of high customer satisfaction
for a firm. In general, high customer satisfaction should indicate increased
loyalty of current customers, reduced price elasticity (Garvin, 1988), insulation
of current customers from competitive pressure, lower costs of future
transactions, reduced failure costs, low cost of attracting new customers, and
enhanced reputation for the firm. For example, increased current loyalty means
more customers will repurchase (be retained) in future, and ensures a steady
stream of future cash flow (Reichheld and Sasser, 1990). An increase in Customer-
customer satisfaction should enhance the overall reputation of the firm, which focused
can aid in introducing new products by providing instant awareness and performance
lowering the buyers’ risk of trial (Robertson and Gatignon, 1986). What is more,
reputation also can be beneficial in establishing and maintaining relationships
with key suppliers, distributors, and potential allies. At some point, however,
there must be diminishing returns to increasing customer satisfaction
493
(Anderson et al., 1994), which means there is a trade-off during the process of
improving customer satisfaction. However, empirical studies have, for most
part, not addressed the differential effects of service quality and customer
satisfaction. Even for those by Taylor and Baker (1994), Gotlieb et al. (1994),
Dabholkar (1995), Dabholkar (2000), no effort has been paid to disclose the
conditional benefits of customer satisfaction. What’s more, few studies have
recognized the multi-level nature of customer satisfaction, i.e. attributed-based
satisfaction, consequence-based satisfaction and goal-based satisfaction,
although all of them should be emphasized in business improvement at the
same time. In addition, findings have been somewhat different across these
studies and the relationships between customer satisfaction and other
constructs mentioned in the paper have, up to now, been less discussed, which
implicates the necessity of more related research.
3.4 Customer value

Driven by demanding customers, keen competition and rapid technological
change, more and more firms are searching for new ways to achieve, retain,
upgrade and leverage competitive advantages. As a result, many firms are
transforming their focus from looking internally for improvement by way of
quality management, downsizing, business process reengineering or lean
production and agile manufacturing, to pursuing superior customer value
delivery (Band, 1991; Day, 1990; Gale, 1994; Naumann, 1995; Butz and
Goodstein, 1996; Woodruff, 1997). Furthermore, as some researchers have
concluded (Narver and Slater, 1990), creating superior customer value is a major
goal for market-driven firms, and delivering superior customer value is
becoming one of the most important success factors. Therefore, knowledge
about customer value and learning how to respond to it, is playing a more
important role in a firm’s competitiveness. There is much evidence to support
the key position of customer value for success of firms, for example, the
experience of many companies such as AT&T, Federal Express and Xerox, and
the findings of the positive relationship between market orientation and
organizational performance (Slater and Narver, 1992; Jaworski and Kohli, 1993).
Accordingly, in today’s hypercompetitive environment, any firm which aims
at achieving competitiveness and superior performance must have ample
knowledge about customer value and its definitions, processes, key drivers and
effective management practices. Learning about the process of customer
JMD perception of value and value delivery has become the focus, along with the
22,6 sources and driver, of customer value in increasingly competitive environments.
It is clear that any factors influencing the benefits customers receive, or the
sacrifices customers have to make, will cause different assessments of customer
value, which may also change over time. For example, product-related factors
such as product quality, and product customization, service-related factors such
494 as responsiveness, flexibility, reliability and technical competence, and
relationship-related factors such as image, time/effort/energy and solidarity,
are all customer value drivers or sources (Lapierre, 2000; Ravald and Gronroos,
1996; Bolton and Drew, 1991; Zeithaml, 1988).
Although the significance of customer value is widely recognized, the

growing body of research about customer value is quite fragmented, and the
definitions of customer value diverge. Zeithaml (1988) considers value as the
customer’s overall assessment of the utility of a product, based on the
perception of what is received and what is given. It has been argued that
buyers’ perceptions of value represent a trade-off between the quality or
benefits they received in the product, relative to the sacrifice they perceive in
paying the price. Gale (1994) considers it as market perceived quality adjusted
for the relative price of the product. Butz and Goodstein (1996) define it as the
emotional bond established between a customer and a producer after the
customer has used a salient product or service produced by that supplier.
Woodruff (1997) defines value as customer perceived preference for, or
evaluation of, those product attributes, attribute performances and
consequences arising from use that facilitate achieving the customer’s goals
and purposes. Woodruff’s definition is based on empirical research into how
customers think about value. However, it is obvious that there are some areas
of consensus among the different concepts mentioned above. For example,
customer value is inherent in some products or services, or is linked through
their use. Customer value is something perceived by customers rather than
objectively determined by sellers or other stakeholders and those perception
processes typically involve a trade-off between what customers receive, such as
quality, benefits and utilities, and what they sacrifice, such as price, and
opportunity, maintenance and learning costs. The present study concurs with
the majority of researchers who define customer value in terms of “get”
(benefit) and “give” (sacrifice) components (Woodruff, 1997; Slater, 1997; Berry
and Yadav, 1996; Ravald and Gronroos, 1996; Slater, 1997; Hass, 1995;
Mazumdar, 1993; Slater and Narver, 1992; Narver and Slater, 1990; Day, 1990;
Zeithaml, 1988), although some researchers argue that perceived value consists
only of benefits (Hunt and Morgon, 1995; Hamel and Prahalad, 1994).
As far as the significance of customer perceived value is concerned,
researchers are now paying more attention to the operationalization of this
concept. Among them, Barney (1991) develop a broad theoretical framework.
They suggest five dimensions of value, i.e. social, emotional, functional,
epistemic and conditional value, which provide the best foundation for Customer-
extending the existing value construct. However, it is worth noting that not all focused
the dimensions have equal significance at any time, although they are related in performance
some sense. In fact, different value dimensions may have different importance
in different situations or industries, over time.
495
3.5 Customer perceived sacrifice
As is discussed above, customer value has a relation to not only what
customers can get, but also what they have to give up; that is, customer
perceived sacrifice. Sacrifice refers to what is given up or sacrificed to acquire a

product or service (Heskett et al., 1997; Zeithaml, 1988). For example, Lapierre
(2000) identifies the key drivers of customer perceived value and clarifies
sacrifice as one of the two key factors (the other is benefits). However, not only
is price considered an element of sacrifice, but also other non-monetary factors
are believed to be closely related to sacrifice. Many customers count time rather
than dollar cost as their most precious asset. Therefore, generally speaking,
there are two broad kinds of sacrifice: monetary costs and non-monetary costs.
The former can be assessed by a direct measure of the dollar price of the service
or product, and the latter can be defined as the time, effort, energy, distance and
conflict invested by customers to obtain products or services, or to establish a
relationship with a supplier.
4. The dynamic model for excellence in turbulent environments

Although customer-focused measures are important, they must be translated
into measures of what a company must do internally to meet its targeted
customers’ expectations. Many studies, especially resource-based ones, witness
that competitive advantage does not rest in industry structure or the firm’s
membership in a collective, but rather in its strategic resources and core
competences, which are a complex combination of processes, routines,
technologies and individual skills. This means that superior performance is
always derived from the possession of unique difficult-to-imitate skills,
knowledge, resources, or competences and assets. For example, large scale
statistical studies of the industry effect, while they produce different
quantitative estimates, generally agree that only between 16-19 percent of
the total variations in profit between business units can be directly explained
by industry variables (Rumelt, 1991). Thus, superior customer-focused
performance is achieved through a set of interlinked business processes and
coordination of strategic resources, whose goal is to satisfy customer needs.
Such key determinants of performance as customer care, structure change,
marketing effort, reputation, organizational redesign, distribution strength and
staff skills (Petroni, 2000) can all be reflected by the strategic resources and
core competence of the firm.
JMD 4.1 A conceptual model
22,6 Those factors that interact with one another and are combined to lay a solid
foundation for the distinctive competences of a firm, are difficult to copy or
imitate, and finally determine its the firm’s customer-focused performance. The
resource-based view allows each action to be referenced to the satisfaction of
customer needs; in other words, to the delivery of value (Hamel and Prahalad,
496 1989; Chiesa and Barbeschi, 1994) and believes that superior performance is
based on the dynamic competence building and leveraging process, as shown
in Figure 3. Turbulent environments characterized by dynamics, complexity
and unpredictability, determine the sustainability of existing core competences
or competitive advantages and require organizations to make continual

improvements to their existing products and processes, and foster the ability to
introduce entirely new products with expanded capabilities. This involves
competence building and leveraging at the same time. Organizations, as a
result, must decide on and measure the processes and competences they must
excel at, and the critical technologies needed to ensure continued market
leadership based on the type of special strategic orientation, such as
operational excellence, customer intimacy or product leadership[2]. In addition,
they must build and upgrade their own competences through organizational
learning, innovative ability and strategic flexibility, which help to identify
trends in business, track performance of customer value delivery, deal with
ambiguity and support quick response. Generally speaking, core competences,
organizational learning, strategic flexibility and turbulent environments must
maintain a healthy internal fit around strategic positioning, while firms need
also to decide on proper strategic positioning, based on environment scanning
and sensing capabilities and their existing core competences. The new
competence building and leveraging process can then begin and any changes in
environment will be perceived by organizational learning activities coupled
Figure 3.
The conceptually
dynamic model for
excellence in
customer-focused
performance in turbulent
environments
with an advanced real-time environment information system. With the existing Customer-
core competences as catalysts, organizational learning in the resource market focused
(from component suppliers, talented labor forces, shareholders, debtors, etc.) performance
and in the product market (from dealers, customers, competitors and
cooperators) will help firms find profitable opportunities to build new
competences, leverage existing ones, reorient strategic positioning, create new
market space, and adapt effectively. This will enhance the strategic flexibility
497
necessitated by the environmental turbulence, while improved strategic
flexibility will propel the process of competence building and leveraging, in line
with changes in environment.
It should be noted that this conceptual model is applicable not only to

manufacturing companies but also to service companies, given that both kinds
of firms need to build and leverage their unique competences to achieve
superior customer-focused performance. For example, Federal Express has
achieved sustainable competitive advantages in the service market by building
and leveraging competences in package transport and delivery such as
bar-coding technologies and linear programming skills, which provide superior
customer value and rapid responses. Wal-Mart has realized rapid and
sustainable growth based on its unique competences, such as its cross-dock
transportation system, its inventory management skills, and its accumulated
knowledge about delivering large amounts of goods, globally and rapidly.
Wal-Mart has also developed meta-competences that enable it to transfer from
the original location-based advantages, to the more dynamic knowledge-based
advantages. Similarly, the continuous building and leveraging processes of the
competences in brand management of Coca Cola, the innovative capabilities of
3M, the particular imaging technologies of Canon, the lean production system
of Toyota, the agile manufacturing techniques of Mazda, the mail-order sales
management of Dell Computers, and the fast-flexible response of Boeing based
on its multitask production equipment, enable all of these businesses to deliver
high quality products/services and superior customer value and thus achieve
higher customer satisfaction (Hamel and Heene, 1994)
4.2 Core competences

Bogner and Thomas (1994) define core competences as firm-specific skills and
cognitive traits directed towards the attainment of the highest possible levels of
customer satisfaction, vis-à-vis competitors. These can be leveraged directly to
satisfy existing customer needs, or indirectly to develop a range of core
products or core services, based on which a stream of final products or services
of higher quality is delivered. Therefore, core competences are skills that enable
a firm to deliver fundamental customer benefits (Hamel and Heene, 1994) by
enabling the firm to establish, enhance, upgrade and utilize proprietary access
to those resources that lead to a stream of sustainable competitive advantages.
JMD However, core competences are the least definable kinds of productive
22,6 resources, and consist of complex bundles of constituent skills and
technologies, collective learning, and both tacit and explicit knowledge,
contributing to competitiveness through organizational processes that ensure
superior coordination of functional activities (Prahalad and Hamel, 1990).
These have often been referred to in the contexts of functional areas (Snow and
498 Hrebiniak, 1980), abilities, technologies (Prahalad and Hamel, 1990) or simply
skills and resources (Reed and DeFillippi, 1990). They provide the conceptual
glue that gives shared meaning to all the separate functional activities and
programs, and serve to coordinate the competitive actions driven by the unique
strategic positioning of a firm. Even though these competences are in large

measure, a by-product of past activities, what matters at any point is the range
of future activities that they make possible and the fact that they constitute the
fundamental sources of sustainable competitive advantages (Prahalad and
Hamel, 1990; Leonard-Barton, 1992). At the same time, core competences
represent both the underlying knowledge base and the set of skills required to
compete successfully. What is more, a firm’s current core competences serve as
platforms for ongoing development and application of those new competences
needed to sustain competitive advantages in the future, which evolve through
an iteration of repeated doing and learning, with each sequence expanding
knowledge and enriching the core competences. This may explain why firms
are being increasingly seen as portfolios of core competences, which admits a
proactive construction of competence, sees competence as spanning multiple
businesses, and sees competition as being over the acquisition and
development of competences.
Recent theoretical developments and empirical evidence have shown that
firms with superior competences are better generators of information about
customer wants and needs and are also better at developing and marketing
goods or services to meet these wants and needs by well coordinated activities.
Furthermore, superior competences also give firms the capability to generate
and act on knowledge about competitor actions and reactions, which help them
to develop the basis for competitive advantages (Naver and Slater, 1990;
Tuominen et al., 1997; Woodruff, 1997). However, to sustain those advantages,
core competences must add value, be difficult to replace by substitute
processes, be difficult for competitors to imitate, and be immobile across firm
boundaries (Barney, 1991; Grant, 1991, 1996). Furthermore, at least four
mechanisms related to core competences, such as time-compression
diseconomies, asset mass efficiencies, asset interconnectedness and causal
ambiguity (Dierickx and Cool, 1989) may help to prevent both cheap and rapid
asset accumulation and the sustaining of competitive advantage resulting from
core competences[3]. In addition, to qualify as a core competence, a capability
must meet the following requirements. It must be a close integration of skills or
technologies, be competitively unique, and must contribute to customer
perceived value and provide an entry into new markets (Prahalad and Hamel, Customer-
1990; Hamel and Heene, 1994). focused
P3. Core competences contribute positively to superior customer-focused performance
performance.
Today, there are many different ways to view core competences, with different 499
emphasis trends. For example, Meyer and Utterback (1993) emphasize the
special role of technology and single out R&D competence, production and
manufacturing competence, and marketing competence. Dosi and Teece (1993)
define core competences as allocative competence, transactional competence,
administrative competence and technical competence. Leonard-Barton (1992)

emphasizes the importance of knowledge, and considers core competence as a
complex knowledge system that includes employee skills and learning, and the
technological, managerial and value systems of the firm. Oliver (1997) pays
more attention to strategic resources and argues that the resources constituting
core competence should be scarce, unique, specific, intangible, immobile and
difficult to substitute and imitate. Hamel and Heene (1994) distinguishes
market-access competences, integrity-related competences and
functionality-related competences. Bogner and Thomas (1994) argue that core
competence is comprised of three fundamental components: shared value
systems, recipes and routines, and tacit understanding of interaction. Richard
Hall (1994) believes those functional, cultural, positional and regulatory
capabilities as a whole constitute and determine the competitiveness of the firm.
As mentioned above, although most writers tend to focus on technological
competences as the basis for core competences, other knowledge-based or
experiential assets may underlie core competences (Wang and Lo, 2002a). For
example, organizational culture could also be a fundamental source of core
competences and sustained competitive advantages (Barney, 1986). Furthermore,
since core competences often go beyond the traditional boundary of functions,
result from capabilities integrated across functional lines, and are deployed
across multiple product-markets to leverage firm-specific value-added activities
and processes, we can classify all these competences into three broad types:
technological competences, marketing competences and integrative competences.
Each of these makes a different contribution to the core competences of a firm.
Generally speaking, technological competences determine which products or
services can be provided technically at one time; marketing competences
determine which products are demanded by targeted customers; and integrative
competences reflect the degree of fitness between the above first two
competences and the effectiveness and efficiency of delivering offerings with
superior customer value. It is with the last kind of competences, for example
human capital and knowledge learning culture, that a firm can encompass its
unique human, physical, organizational and coordinating resources, respond to a
JMD variety of changing environmental conditions, and deploy its resources in ways
22,6 that can lead to competitive advantages.
P4. The three kinds of competences do not contribute equally to the core
competences of a firm.
500 Technological competences. Technological competences refer to the ability to

develop and design new products and processes and combine knowledge about
the physical world in unique ways, transforming this knowledge into designs
and instructions for the creation of desired outcomes. So they are more than the
mastery of technological capabilities; they are the capability to deploy and

expand the range of core competences, integrate various streams of
technologies, and effectively mobilize resources across firms (Miyazaki,
1994). More concretely, technological competences are a set of pieces of
knowledge consisting of both practical and theoretical know-how, methods,
procedures, experience and physical devices and equipment (Dosi, 1984). They
also refer to superior and heterogeneous technical assets of a firm, which are
closely related with product, design, process and information technologies.
Technological competences require a deep understanding of scientific
principles, as well as the ability to generate new knowledge, although they
are different from science in that they are usually implicit in experience and
skills (Wheelwright and Clark, 1992; Dosi, 1988). In particular, technological
competences represent an important potential source of competitive advantage
in technologically competitive markets (Tyler, 2001). Only if aligned with
customer demand can this potential source become a powerful tool for success.
P4a. Technological competences contribute the lowest to core competences
in customer-oriented environments, compared with the other two
competences.
Market competences. As one more important element of core competences,
market competences are defined as the processes designed to apply the
collective knowledge, skills and resources of the firm to the market related
needs of the business, which add value to its goods and services so as to meet
the competitive demands of customers. Therefore, they are based on a profound
understanding of customers’ current and future needs, preferences, factors
affecting them and knowledge of competitors’ possible action (Kohli and
Jaworski, 1990). So there are two important elements of market competences in
nature: competitor knowledge and customer knowledge and access, which are
usually supported mainly by input assets, channel assets, customer assets and
market knowledge assets identified by Paul and Peter (1994).
P4b. Marketing competences contribute more than technological
competences to core competences in customer-oriented environments.
Superior market competence is characterized by a set of cultural values and Customer-
beliefs that put customer interests and current and potential customer demands focused
first; that is, it is market-oriented. With such competences in action, the firm performance
can have strong capacity to sense events and trends in its rapidly changing
markets ahead of its major competitors, and focus its most intensive efforts on
understanding the market and on developing strategies in response to market
opportunities or threats. It can anticipate more accurately the response to
501
actions designed to retain or attract customers, improve channel relations or
thwart competitors, and act on market information in a timely, coherent
manner, which has significant implications for attainment and sustainability of
competitive advantage. To help organizations deal with market events and

trends, specific internal supporting processes can be developed to harness
valuable data from customer surveys and other market research, to learn what
buyers want, and to deliver the value they desire (Moller and Anttila, 1987;
Slater and Narver, 1994). This may include formal and informal approaches for
gathering, processing, communicating and interpreting marketing information,
such as data on customer visits, customer complaints, customer-targeting,
customer value determination, and competitor offerings. Of these, marketing
strategy planning processes and the related value generating processes, such
as customer value delivery processes, mass customization processes and
integrated marketing processes, used to analyze and leverage market
knowledge, are cited as being among the most important (Moller and
Anttila, 1987) and as being the most adaptable as market conditions change
(Tuominen et al., 1997). Recently, six dimensions of marketing competences
were identified: marketing research capabilities, pricing capabilities, product
development capabilities, channels/distribution capabilities, promotion
capabilities and marketing management/planning capabilities. For each
dimension, several items are used to measure effectively.
Integrative competence. Even though unique marketing competences for
understanding customers and markets, and technological competences for
making innovative use of technological developments are strategically
important, not all firms in possession of them achieve above industry
average performance (Teece, 1986; Teece et al., 1997). In practice, to compete
successfully firms need one more important competence: integrative
competence. In fact, it is this competence that helps to achieve the positive
interaction among elements of the dynamic competence building and
leveraging process, that enhances the strategic alignments and fitness
among elements such as different competences, organizational learning,
strategic flexibility, turbulent environments and strategic positioning, and
finally determines the ultimate results of competition. Given that core
competences are complex, the capability to weave the individual strands, both
internal and external, into one complex thread, requires a rich pattern of cross
discipline communication and learning, which is very important strategically.
JMD Furthermore, as there is no value for customers if marketing competences or
22,6 technological competences are isolated, it is vital for the firm to integrate both
competences to reflect both customer demands and technological trends, and to
use new technology to realize innovative services and products. In addition,
since internalization of skills and knowledge gained from outside and their
integration with internal resources has become central to a resource-based
502 strategy, integrative competences are playing an ever more important role. In
turbulent environments, firms must analyze products and services beyond the
industry boundary, especially those complementary to current offerings, define
or even redefine the targeted customer segmentation, identify attributes whose
performance is either beyond or below the standard level, and integrate them
together to create new market-space continuously. Integrative competences
enable firms to combine the wide-ranging capabilities, information,
perspectives and knowledge necessary to develop products or services in the
market-space (Grant, 1996). Therefore, they are sometimes also called
combinative competences, which often draw on firms’ “architectural
competence” (Henderson and Cockburn, 1994), organizational routines
(Nelson and Winter, 1982) or principles, in order to create, transfer and
combine knowledge from within and outside the firms. In addition, integrative
competences enable firms to generate new applications of existing knowledge
(Kogut and Zander, 1992) and guide the problem-solving strategies that shape
the development of new competence (Henderson and Cockburn, 1994). For
example, marketing competences are developed when the firm’s marketing
employees repeatedly apply their knowledge and skills to solving marketing
problems, or create unique combinations of intangible and tangible resources.
Therefore, integrative competences here have at least four implications:
(1) the ability of the firm to integrate different technological specialties;
(2) the ability to combine different functional specialties;
(3) the ability to exploit synergies across business units or divisions; and
(4) the ability to integrate the whole dynamic competence building and
leveraging process.
P4c. Integrative competences contribute the most to core competences in

customer-oriented environments.
However, whichever category of competences they belong to, to sustain those
advantages, core competences must add value, must be difficult to replace by
substitute processes, be difficult for competitors to imitate and should be
immobile across firm boundaries (Barney, 1991; Grant, 1991, 1996).
Furthermore, at least four mechanisms-related core competence such as
time-compression diseconomies, asset mass efficiencies, asset
interconnectedness and causal ambiguity (Dierickx and Cool, 1989) help to
impede cheap and rapid asset accumulation and sustain the competitive
advantage resulting from core competences. In addition to quality as a core Customer-
competence, a capability meets the requirements as follows: It must be focused
integration of skills or technologies, be competitively unique and must performance
contribute to customer perceived value and provides an entry into new markets
(Prahalad and Hamel, 1990; Hamel and Heene, 1994).
503
4.3 Organizational learning
Organizational learning was addressed by Cyert and March (1963) over 30
years ago as a process by which organizations as collectives learn through
interaction with their environments. Members within the organization share

information, creating organizational memory in the form of shared beliefs,
assumptions and norms, which will guide individual and organizational
actions. The ability for organizations to learn is determined by competences
relevant to information processing, communication, knowledge transfer,
inter-unit coordination, and the ability to develop trusting relationships and
negotiation. In fact, it is one of the hallmarks of competence development for
business to learn through repetition and doing (Grant, 1991; Prahalad and
Hamel, 1990; Sinkula, 1994; Tuominen et al., 1997). As Chaston and Badger
(1999) have noted, organizational learning functions as an antecedent of
organizational competences. It brings employees and other resources together,
firms develop the processes on which competences are built, and employees
continuously apply their knowledge and skills to operational or strategic
problems so that a deeper knowledge base develops, which will also enhance
competences.
Competence building and upgrading can only be achieved by organizational
learning. By learning we mean the acquisition, integration and application of
new and unique knowledge through experimentation, improvement and
innovation by ways of internal activities, such as learning by doing, using,
failing and reflecting, and by learning outside in resource markets and product
markets from customers, competitors, suppliers, technological sources and
other key stakeholders. In practice, not only do firms seek specific information
to remain competitive and continue their core competences, but they also learn
how to acquire, process, store and retrieve information effectively and
efficiently. This enables a firm to determine the information needed to upgrade,
redeploy or reconfigure its core competences after careful and continuous
environmental scanning and sensing. For example, it has been concluded that
competences lie in the embedded knowledge and skills of the firm and are
accumulated through the processes of continuous learning (Hamel and
Prahalad, 1993), and also that the process of experimentation and improvement
is the key to competitive success (Senge and Sterman, 1992). Indeed, given the
nature of the cumulative development of competences, their improvement
requires continuous and collective learning. Therefore, learning is a process
that allows a continuous adaptation of firm-specific competences in the light of
JMD experience and further information (Pavitt, 1990), and can be defined as the
22,6 way firms build and supplement their knowledge bases in technologies,
marketing, products and processes, and develop and improve the use of the
broad skills of their workforce (Dodgson, 1991). It is no wonder that many
researchers have drawn the same conclusion that, in today’s knowledge
intensive society, the only ultimate source of competitive advantages for a firm
504 is to learn faster than its competitor. It must gather market intelligence, analyze
and disseminate the marketing knowledge developed across departments and
work groups, identify technological market development trends and use them
to develop appropriate strategies and tactics to combine both market
knowledge and sensitive technological knowledge skillfully and timely.

However, it is not enough for firms to compete successfully. To succeed, they
have to meet three requirements as follows. First, in the long run, enterprises
must be able to learn at a rate at least equal to environment change if they are
to develop and maintain core competences that have value in the market.
Second, the rate of learning within an organization must be at least equal to
that of competitors if changes in market performance are to be expected. Third,
the success of the learning activities should be addressed by performance
measures (Prahalad and Hamel, 1990), which means that learning activities
have influential impacts on business competitiveness. Only in this way, can
businesses that possess the ability to learn rapidly about changing
environments and act timely on them, be best positioned to achieve
competitive advantage.
P5. Organizational learning influences positively the core competences of a
firm.
Each organization is likely to have its own unique style and ability to learn and
different ways of learning, such as adaptive, single-loop learning and
generative, double-loop learning. The former is sufficient to motivate tactical
adjustments to operations, production and planning. The latter is typically
prerequisite to more fundamental strategic shifts in these areas, which is
pivotal in that it reflects an organization’s capacity to change its “view of the
world” by unlearning obsolete perspectives, systems and procedures, and
proactively replacing them with approaches that are capable of creating or
maintaining competitive advantages (Day, 1991; Dickson, 1996). However, no
well-accepted scale of organizational learning has been identified up to now
among the limited empirical studies in this field. Huber (1991) describes the
following four organizational learning-related constructs: knowledge
acquisition, information distribution, information interpretation, and
organizational memory[4]. It has been suggested that the learning process
includes three basic stages: knowledge acquisition, knowledge sharing and
knowledge utilization, for which they have developed a comprehensive model
of organizational learning that includes seven learning orientation and ten
facilitating factors. Later, Boydell and Leary (1996) and Chaston and Badger, Customer-
(1999) operationalize and test this using a short form of the organizational focused
learning modes questionnaire, which consists of implementing, improving and performance
integrating. A 21-item scale of five dimensions: clarity of purpose and mission,
leadership commitment and empowerment, experimentation, transfer of
knowledge and teamwork and group-problem solving was used. Tomas et al.
(1997) develop a scale of global organization learning in purchasing, with four
505
dimensions: team orientation, systems orientation, learning orientation and
memory orientation. Sinkula (1994) and Baker and Sinkula (1999) measure and
test learning orientation using three dimensions: commitment to learning,
shared vision and open-mindedness, with 18 items.
4.4 Strategic flexibility

The increasing speed and cost of technological change, the rapid shifting of
customer preferences and market upheavals, the discontinuous innovations,
the convergence of high-technology industries, and the emergence of new
global competitors all promise an increasingly uncertain business
environment[5].These dynamically interactive forces demand organizations
to be not only efficient and innovative, but also to be strategically flexible.
However, despite increasing recognition of the importance of strategic
flexibility as a new competitive advantage, there have, to date, been few
influential studies exploring the major dimensions of strategic flexibility, or
examining its relationship with business performance or competitiveness.
The term strategic flexibility has been widely used by researchers and
practitioners to denote a firm’s ability to respond to various demands in
dynamic competitive environments. Accordingly, research on strategic
flexibility has ranged from limited empirical investigations of the relative
flexibility of firms, to managing environment volatilities, to conceptual
assessments of the freedom available to managers to do things differently. For
example, strategic flexibility has been defined by Aaker and Mascarenhas
(1984) as “the ability of the organization to adapt to substantial, uncertain, and
fast occurring environmental changes that have a meaningful impact on the
organizational performance, which enables firms to manage uncertain and
fast-occurring markets effectively”. Harrigan (1985) studies the flexibility of
alliances and vertically integrated firms and looks at strategic flexibility in
terms of a firm’s ability to reposition itself in a market, or to change its
strategies when its customers cease to be attracted. Carlsson (1989) considers
strategic flexibility as one of the three dimensions of flexibility: operational
flexibility, tactical flexibility and strategic flexibility; and argues that two
aspects of strategic flexibility are particularly important. One is the way in
which firms position themselves with respect to future changes in products and
the concomitant changes in the manufacturing process, and the other is the
attitude towards change and how that is fostered or encumbered by
JMD organizational structure. Evans (1991) studies the strategic flexibility in high
22,6 technology product markets characterized by “products, manufacturing
processes, markets, distribution channels, and competitive boundaries that
are in a state of continuous flux”, and points to strategic flexibility as an
expedient capability for managing capricious settings. Sanchez (1991, 1993,
1995) sees strategic flexibility as alternative courses of action or strategic
506 options available to the firm for competing in a dynamic market, which can
bestow on a firm the ability to respond promptly to market opportunities and
changing technologies. He also proposes models for strategic flexibility in
product competition. A further study is made of strategic flexibility in the home
appliance area, and effective ways of organizing for strategic flexibility is

noted. Ybarra and Wiersema (1999) look at strategic flexibility in information
technology alliances from a perspective of both transaction cost economics and
social exchange theory, and try to find the main determinants of two types of
strategic flexibility (exit and modification).
In the studies mentioned above, flexibility is usually hypothesized to have a
positive influence on the competitiveness of enterprises in unstable
environments. In these environments, business units need to quickly adjust
existing operations or strategic orientation to dynamic environmental changes
such as frequent demand fluctuation and technological innovation. Strategic
flexibility is also expected to increase the effectiveness of both communication
and of plans and strategies, which, coupled with adapted product offerings and
other aspects of market mix, should enhance firm performance (Miles and
Snow, 1978). Furthermore, Das (1995) considers strategic flexibility as key to
effective performance. Michael et al. (1998) conclude that success in the
twenty-first century organization will depend first on building strategic
flexibility, which, interacting with core competences, contributes significantly
to business competitiveness. However, on the other hand, in stable
environment, the impact of flexibility on competitiveness is hypothesized to
be negative because business units may incur more costs than benefits by
maintaining strategic flexibility.
P6. Strategic flexibility has significant positive influence on core
competences and customer-focused performance, directly or
indirectly, in turbulent environments.
Therefore, strategic flexibility is the ability of an organization to respond to
changes in the environment in a timely and appropriate manner with due regard
to the competitive forces in the marketplace, which will have significant influence
on business competitiveness and performance. Das (1995) argues that strategic
flexibility needs to be understood in terms of three major dimensions: speed of
change, cost of change and degree of change. Speed of change means how quickly
the firm can adapt to change in the market, which can be measured by the time
required for implementing changes in key elements of the firm’s strategy. Cost
efficiency means that the cost incurred by the firm should be less, or at least not Customer-
greater than, the benefits of the expected increased flexibility, which results in focused
reasonable cost structure and lower overall cost of delivering products when performance
compared with major competitors. The degree of change is another important
factor in the assessment of strategic flexibility. Once the firm is committed to a
particular degree of flexibility in its strategy, it becomes a constraining element,
507
which implies that strategic flexibility does not mean infinite choices for a firm.
Similarly, Sanchez (1995) notes that strategic flexibility can be represented by
resource flexibility and coordination flexibility. As for resource flexibility, there
are three key influential dimensions: the range of alternative uses, the cost and
difficulty of switching from one use of a resource to an alternative use, and the
time required in switching to an alternative resource use. On the other hand,
coordination flexibility involves three processes as follows:
(1) defining the firm’s product strategies in terms of which products the firm
intends to offer and which market segments it will target;
(2) configuring chains of resources the firm can use in developing,
distributing, and marketing its intended products to targeted markets;
and
(3) deploying resources through organizational structures that support the
firm’s strategies.
Ybarra and Wiersema (1999) identify two types of strategic flexibility and
measure them independently in their study of strategic flexibility in
information technology alliances:
(1) Modification flexibility
.
the willingness of the parties to modify the agreement when
unexpected situations arise;
.
flexibility in response to requests for changes; and
.
the willingness of the parties to make adjustments in the ongoing
relationship to cope with changing circumstances.
(2) Exit flexibility
.
the probability of the firm to terminate the alliance within the next
year; and
.
performance.
More recently, Grewal and Tansuhaj (2001) use the following four items to
measure strategic flexibility:
(1) building excess resources by hedging and sharing investments across
business activities;
(2) a firm’s emphasis on deriving benefits from diversity in the
environment;
JMD (3) the importance the firm puts on benefiting from opportunities arising
22,6 from variability in environments; and
(4) a firm’s emphasis on managing macro environment risk.
4.5 Moderating effects of environment turbulence

508 Although the key resource-based determinants interact with one another and
should have significant influence on customer-focused performance as proposed
above, the process to enhance core competences, upgrading organizational
leaning capability and improve strategic flexibility always means the increment
the costs of a firm. Therefore, if environment turbulence moderates the

interactive relationship among them, a firm can achieve superior
customer-focused performance in a more cost effective manner by seeking the
appropriate level of each determinant based on the level of environment
turbulence. According to the resource dependence theory, the technological
environment is perceived, interpreted and evaluated by human actors in
organizations. Managers’ perceptions become their reality, which makes
environment conditions important to the extent that they are perceived by
managers and always results in distinct managerial actions (Hall, 1991; Weick,
1979). It is argued that the basic information-gathering activities required for
successful innovation differ in emphasis according to the level of perceived
environment uncertainty. In fact, the impact of rapid technological change
coupled with radical market changes has become more evident in
customer-focused performance improvement process than ever, since it has
been widely recognized that successful firms have to reflect both market change
and technology change at the same time. As suggested by the resource-based
view, various factors external and internal to a firm can neutralize or dissipate a
resource’s comparative advantage (Barney, 1991; Reed and DeFillippi, 1990). For
example, a firm may fail to modify its resources in response to a change in the
technological environment. As a result, a capability or resource that was once an
asset can become a liability if it is no longer appropriate for a given NPD project.
Similarly, Leonard-Barton (1992) contend that core capability in new product
development can become core rigidities in the face of changing technological
environments. However, although the significant roles of organizational learning,
core competences and strategic flexibility in customer-focused performance are
escalating, less empirical studies can be found, up to now, to examine the
influence environment turbulence on their interactive relationship.
Past research suggests that there are various types of environment
turbulence, e.g. technological turbulence, market/consumer turbulence,
competitive turbulence, resource turbulence (Clark, 1985; Ducan, 1972; Jauch
and Kraft, 1986; Milliken, 1987). In this paper we believe at least two measures
of environment turbulence should be utilized and studied, i.e. technological
turbulence and market turbulence (Milliken, 1987; Houston, 1986; Kohli and
Jaworski, 1990). The former refers to an individual’s perception that he/she is
unable to accurately predict or completely understand some aspect of the Customer-
technological environment (Milliken, 1987). It is obvious that technology is focused
creating new imperatives for the conduct and restructuring of superior performance
customer value delivery processes because new knowledge is applied at a
faster rate, greater numbers of new products are being introduced over time,
more real-time customer information can be collected, analyzed and applied, the
time between innovations is decreasing, and technology fusion is occurring
509
across and within industries. The latter represents changes in the composition
of customers and their preferences and competition intensity, which
corresponds to elements of the environment turbulence construct (Kohli and
Jaworski, 1990). Houston (1986) and Kohli and Jaworski (1990) observe, in the
absence of competition an organization performs well even if it has no strong
core competences because customers are “stuck” with the organization’s
products and services. By contrast, under conditions of high competition,
customers have many alternative options to satisfy their needs and wants. To
put it more concretely, similar to what has been examined in some studies of
the moderating effects of environment turbulence on market
orientation-performance relationship (Kohli and Jaworski, 1990),
organizations that operate in more turbulent markets are likely to have to
modify their strategies, products and services continually according to
different levels of environmental turbulence, in order to satisfactorily cater to
customers’ changing preferences and competitors’ attacks.
P7. Both technological turbulence and market turbulence moderate the
relationships among organizational learning, core competences,
strategic flexibility and customer-focused performance..
4.6 Moderating effects of strategic orientations

The review of literature suggests the existence of moderating role of
strategic orientations. As Walker and Ruekert (1987) argue, strategic
orientation performance on particular dimensions and business activities
have contingent relationships. Firms choose a strategy orientation to excel in
particular dimensions of performance and execute relevant strategies by the
most appropriate business activities. Strategic orientation, as a general
direction of the firm’s response based on the filtered or distilled
environmental information, therefore, can conceivably explain the varying
magnitude of relationship between performance measures and a firm’s
specific response mechanism (Jennings and Zandbergen, 1995), such as
organizational learning, technological competences, marketing competences,
integrative competences and strategic flexibility. In fact, the central logic is
that implementing a particular strategic orientation is essentially a process
of organizational adaptation to the market environment (Miles and Snow,
1978), in which organizational learning, core competences and strategic
JMD flexibility should play a fundamental role. For example, a customer intimacy
22,6 oriented firm will definitely focus on marketing competences, emphasize
activities of learning from targeting customers and lead users, and enhance
the capability to respond timely to continual changes of customer demands,
which, accordingly, influences the relationships among constructs such as
organizational learning, marketing competences, technological competences,
510 integrative competences, strategic flexibility and their impacts on customer
focused performance.
P8. Strategic orientations moderate the relationships among
organizational learning, core competences, strategic flexibility and

customer-focused performance.
4.7 Methodology of model testing

In order to link the two major parts together, i.e. key determinants and
customer-focused performance, and test the propositions mentioned above,
data needs to be collected from two kinds of sources respectively in order to
build a structural equation model or conduct path analysis, so that all the
relationships shown in Figure 3 can be estimated and tested. On the one hand,
data from the chosen companies is needed to test the interactive relationships
among different key determinants; on the other hand, data from key customers
is to be used for testing the interactive relationships among different
components of customer-focused performance. However, the most important
here is that all the customers in this study should be customers of chosen
companies which data concerning specific firms derives from in order to link
and test the relationships among different determinants and components of
customer-focused performance. For firm sample, it is better to ensure that both
manufacturing companies and service firms are chosen randomly, and that one
president, chairman or vice president from each selected firm is asked to
complete the specifically designed survey instrument for the firm, in order to
compare the relationship difference between the two major groups. For the
customer sample, more than 20 main customers per firm can be selected from
the firm’s key customer list, based on certain criteria, and asked to complete the
other specially designed survey instrument in order to collect data on
customer-based performance.
These data can then be processed and analyzed step by step with the data
analysis to proceed according to a two-step approach. First, the measurement
model is estimated. In this study, the measurement model consists of ten latent
factors, described earlier. An assessment of the reliability, discriminant validity
and convergent validity of these scales is included in the model assessment,
especially for those newly developed scales such as core competences and
strategic flexibility. Second, a structural equation model representing a series
of path relationships linking the four customer-based performance constructs
and their six key determinant constructs, is specified. The path coefficients Customer-
among those latent variables are then estimated in this analysis using AMOS, focused
LISREL or PLS. performance
5. Implications and conclusions
In this paper, we have proposed that today’s turbulent environment requires 511
firms to give highest priority to customer-focused performance, with the actual
customer perspective as the focus, so that interests of other stakeholders can
also be met. Despite a close relationship, there is a research gap between what
the resource-based view advocates, such as the sources of sustainable

competitive advantages, heterogeneous resources and core competences, and
what the service management view emphasizes, such as customer perceived
quality, customer satisfaction and customer value. By bridging the gap and
integrating these views, this study seeks to identify and recognize the closely
intertwined competence building and leveraging process, which consists of
organizational learning, strategic flexibility and core competences, which
determines customer-focused performance and further sustainable competitive
advantages in turbulent environments, and also assists in realizing superior
performance. In addition, understanding their special roles and contributions in
the dynamic process and with achieving superior internal fit is also beneficial
to both researchers and managers.
The perspectives presented in this paper also highlight the need for
thorough exploration of how organizational learning, strategic flexibility, core
competences and related strategic positioning achieve superior internal fit and
determine customer-focused performance. For example, what is the unique
contribution and priority of each broad type of competences, especially for
firms with different environments, knowledge bases, or strategic positioning?
Are these conditions all necessary for firms to achieve superior
customer-focused performance and sustainable competitive advantages? If
not, which one is indispensable? Should marketing competences always be seen
as the most important? With the strong trend towards outsourcing, alliances
and networks, greater numbers of firms are focusing on the development of one
type of competence, and integrating this with firms that have complementary
competences (Hagel and Singer, 1999) by acquiring competences and
knowledge from outside. But how are firms to decide which type of
competences to choose and how to integrate them effectively and efficiently?
What are the differences between integrating newly developed competences
and combining new competences from beyond the firm’s boundary? Additional
research is needed on how to create infrastructure and systems that reflect new
organizational forms or rapid information technology and reward the
management of strategic flexibility, organizational learning and competence
building and leveraging. In this framework, organizational learning, strategic
flexibility and core competences are identified as central to achieving superior
JMD customer-focused performance and sustainable competitive advantages
22,6 because these three form the basis for the development of new products or
services, with superior attributes performance going beyond threshold level
and reflecting what targeted customers value. However, other complementary
capabilities, such as those in financial management or human resources, may
be also necessary because they support or enable the firm to leverage or build
512 its marketing competences, technological competences, integrative
competences, organizational learning activities and strategic flexibility
(Argyris, 1990; Boydell and Leary, 1996; Rucci et al. (1998). While most of
these factors can be assigned to integrative competences and organizational
learning capabilities, this will make them too broad and complex to understand
thoroughly.
Finally, challenges associated with exploring the wide range of research
questions and managerial challenges that accompany resource-based views,
are also significant. Measurement issues abound for both researchers and
managers, although much effort has been given to scales development.
Managers have to identify and understand strategic resources and the
underlying knowledge in a firm if they are to make decisions that lead to
superior customer-focused performance and sustainable competitive
advantages. Given that core competences, organizational learning
capabilities and strategic flexibility are all soft assets that do not appear
on the balance sheet and are always dynamic, this is easier in theory than in
practice. Clearly, significant studies are necessary to better describe and
measure marketing competences, technological competences, integrative
competences, organizational learning and strategic flexibility. Furthermore,
the dependent variable in our model, customer-focused performance, also
raises measurement problems. What should be included besides the three
interrelated components? What reasonable weights should be given
respectively? Will the intangible and dynamic nature of customer-focused
performance, competences, organizational learning and strategic flexibility
call into question the current practices to assess them, especially if the firm’s
environment is complex, unpredictable and dynamic. In Table I we offer
some possibilities that may spur the development of more meaningful
measures of these constructs.
The critical nature of the research subject, crossing the boundaries of
multiple academic disciplines such as technology and marketing, innovation
and change management, strategic management, epistemology and
psychology, necessitates a rich and diverse research method for empirical
testing. A series of detailed empirical studies may provide other fertile contexts
in which to test the dynamic relationships we propose and may also offer
constructive insights into processes which high performance organizations
employ to enhance and upgrade their dynamic competences and strategic
flexibility. In this paper we have integrated findings from a variety of
Customer-
Sources Construct Items or scales
focused
Barney, 1986, 1991; Core competences 1. Our competences can provide superior performance
Hamel and Prahalad, 1989, customer value
1992; Leonard-Barton, 1992; 2. We have strong capability to support
Bogner and Thomas, 1994; multi-market entry
Grant, 1991 3. We have strong capability to respond to 513
customers’ demand
4. Our competences are difficult to be imitated,
copied, mobiled or transferred
Grewal and Tansuhaj, 2001; Strategic 1. Capability to build excess resources by

Ybarra and Wiersema, flexibility hedging and sharing investments across
1999; Sanchez, 1993, 1995; business activities
Das, 1995 2. Capability to derive benefits from diversity
in the environment
3. Capability to redirect the strategic
positioning quickly and effectively
4. Capability to redeploy strategic resources
5. Capability to respond to environmental
changes such as customers’ demands and
competitors’ actions
Buzzell and Gale, 1987; Technology 1. The relative level of R&D investment when
Lapierre, 2000; Miyazaki, competences compared with our largest competitor
1994; Dosi, 1984, 1988; 2. The technological strength when compared
Tyler, 2001 with our largest competitor
3. Employees’ specialized expertise in your
activity sector
4. The way employees use new technology to
generate solutions
5. Employees’ ability to provide system
solution in response to your problems
Han et al., 1998 Integrative 1. We benefit less from the new offerings in the
competences past three years
2. We rarely communicate and cooperate for
new products/service design
3. We rarely share information on customers
and competitors’ products/services and
strategies
4. We rarely cooperate in evaluating and
refining new product/service
5. Technological knowledge and marketing Table I.
knowledge are never integrated in new Literature sources
product development for different
6. There is no functional integration in constructs and their
strategy measurements or
(continued) scales proposed
JMD Sources Construct Items or scales
22,6
Jaworski and Kohli, 1993; Market-driven 1. Customer knowledge process
Narver and Slater, 1990 competences our knowledge of customer needs is scant
we rarely use research procedures such
as personal interviews, surveys, focus
514 groups to gather customer information
we casually process and analyze
customer information
we seldom use customers to test and
evaluate new products/services
customer information is barely integrated

in new product or service design
2. Competitor knowledge process
we rarely search and collect information
about our competitors, and their
product/services
we causally analyze information about
competitors
information about competitors’
products/services is scarcely integrated
into our product/service design
our knowledge about competitors’
strength and weakness is scarce
McDougall and Levesque, Customer 1. The offerings always meet customers’
2000; Patterson et al., 1997; satisfaction expectation
Taylor and Baker, 1994; 2. The customer is extremely satisfied with the
Gotlieb et al., 1994; offerings
Dabholkar, 1995, 2000 3. The customer is delighted with the offerings
4. Taking the experience of the customers with
other companies, he/she is satisfied with our
offerings and us
Sujan et al., 1994; Sinkula, Organizational 1. Continuous learning of market and
1994, Tuominen et al., 1997; learning technological trends and change
Huber, 1991; Boydell and 2. Benchmarking experience
Leary, 1996; Tomas et al., 3. Alliance or network experience
1997; Sinkula, 1994 4. Knowledge sharing practice
5. Knowledge acquisition practice
6. Learning orientation
7. Organization memory
Parasuraman et al., 1985, Service quality Modified SERVQUAL/SERVPERF
1990; Cronin and Taylor,
1992; Brown et al., 1993;
Oliver, 1993; Teas, 1993;
Spreng and Olshavsky,
1992; Dabholkar, 2000;
Dabholkar et al., 1996;
Spreng and Mackoy, 1996;
Taylor and Baker, 1994
(continued)
Table I.
Customer-
Sources Construct Items or scales
focused
McDougall and Levesque, Customer value 1. The provider offered good value for money performance
2000; Patterson et al., 1997; 2. Considering the time, efforts, energy, and
Lapierre, 2000 other non-monetary factors, overall the
customer believe he/she received fair value
3. Taking what our competitors’ product or
515
service the customer has received, he/she
believes what we offer is worth
Ruyter et al. 1997; Barney, Customer 1. The customer has to spend more time and
1991; Chang et al., 1994; perceived sacrifice energy to get or use the offerings
Cronin et al., 1997; Lapierre, 2. The customer has to take great effort to get
2000 and use the offerings
3. The customer feels the price is too expensive
Weick, 1979; Daft, 1981; Environment 1. Extent of market turbulence in the
Milliken, 1987; Houston, turbulence environment
1986; Jauch and Kraft, 1986; 2. Predictability of market demand and
Miller 1987; Clark, 1985; consumer tastes
Hall, 1991; Kohl and 3. Activities of major competitors and
Jaworski, 1990 competition intensity
4. Speed and pace of the change of
technologies
5. Predictability of technological changes
6. Impact of new technology on operations and
competition
Miles and Snow, 1978; Strategic 1. Customer intimacy orientation
Jennings and Zandbergen, orientations 2. Competitor orientation
1995; Walker and Ruekert, 3. Product leadership
1987; Hambrick, 1982; 4. Operational excellence
Jemison, 1984 Table I.
disciplines to clarify and suggest relationships that may provoke thought and
add value to studies concerning learning, knowledge management,
competence-based competition and performance. We hope that the research
presented here forms a basis for improved understanding of customer-focused
performance and of related challenges faced by businesses and managers in the
turbulent environment to come.
Notes
1. In fact, all the attributes of the performance of products or services have to meet the
threshold level in competition to survive. See Bogner, W.C. and Thomas, H. (1996), From
skills to competences: the “play-out” of resource bundles across firms, In Dynamics of
Competence-Based Competition: Theory and Practice in the new Strategic Management,
Sanchez, R., Heene, A. and Thomas, H. (Eds), John Wiley & Sons, New York, NY, pp. 101-117.
2. Operational excellence implicates companies excel at competitive pricing, product and
service quality, and on-time delivery; customer intimacy implicates companies excel at
JMD offering personalized service to customers and at building long-term relations with them;
product leadership implicates companies excel at creating unique products that push the
22,6 envelope.
3. Time-compression diseconomies refer to the extra cost associated with accumulating the
required assets under time pressure. Asset mass efficiencies mean that some types of assets
are more costly to accumulate when the firm’s existing stock of that asset is small. Asset
516 interconnectedness means that the lack of complementary assets can prevent a firm from
accumulating an asset that it needs to compete successfully. Causal ambiguity refers to the
uncertainty associated with pinpointing which specific factors or processes are required to
accumulate a required asset.
4. Among them, knowledge acquisition is the process by which knowledge is obtained;
information distribution is the process by which information from different sources is shared
and thereby leads to new information or understanding; information interpretation is the
process by which distributed information is given one or more commonly understood
interpretations; organizational memory is the means by which knowledge is stored for future
use.
5. Those innovations result from revolutionary breakthrough rather than incremental
improvements and are characterized by making existing technologies, products or practices
outdated.
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Managing Service Quality: An International Journal 14:2/3, 169-182. [Abstract] [Full Text] [PDF]
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model for competence building 483

Revised May 2002

Keywords Customer orientation, Organizational learning, Strategic planning,

perspective of customers totally externally and identifying its key

2. Customer-focused performance and its significant role in success

2.1 Customer-focused performance

inevitably a priority for top management, which reinforces the significance of

2.2 The embarrassed context of financial measures

2.3 The whole company performance system based on different perspectives

2.4 The interactions of different dimensions of company performance

dimensions act as the basis of the customer-focused dimension, enabling the

P1. Firms with superior customer-focused performance usually have

3. Dynamics and key components of customer-focused performance

3.1 Key components of customer-focused performance

establishing reputation, delivering superior customer value and realizing other

3.3 Customer satisfaction

3.4 Customer value

Although the significance of customer value is widely recognized, the

perceived sacrifice. Sacrifice refers to what is given up or sacrificed to acquire a

4. The dynamic model for excellence in turbulent environments

or competitive advantages and require organizations to make continual

It should be noted that this conceptual model is applicable not only to

4.2 Core competences

strategic positioning of a firm. Even though these competences are in large

administrative competence and technical competence. Leonard-Barton (1992)

500 Technological competences. Technological competences refer to the ability to

mastery of technological capabilities; they are the capability to deploy and

competitive advantage. To help organizations deal with market events and

P4c. Integrative competences contribute the most to core competences in

interaction with their environments. Members within the organization share

knowledge and sensitive technological knowledge skillfully and timely.

shared vision and open-mindedness, with 18 items.

4.4 Strategic flexibility

appliance area, and effective ways of organizing for strategic flexibility is

4.5 Moderating effects of environment turbulence

the costs of a firm. Therefore, if environment turbulence moderates the

4.6 Moderating effects of strategic orientations

organizational learning, core competences, strategic flexibility and

4.7 Methodology of model testing

the resource-based view advocates, such as the sources of sustainable

Grewal and Tansuhaj, 2001; Strategic 1. Capability to build excess resources by

customer information is barely integrated

Industrial Training, Vol. 19 No. 3, pp. 31-42.

Journal of Marketing, Vol. 54 No. 4, pp. 20-35.

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