06-03-2013, 03:15 PM
Customer Relationship Management and Firm Performance
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Abstract
In this paper, we examine the impact of customer relationship management (CRM) on firm
performance using a hierarchical construct model. Following the resource-based view of the firm,
strategic CRM is conceptualized as an endogenously determined function of the organization’s ability
to harness and orchestrate lower order capabilities that comprise physical assets, such as IT
infrastructure, and organizational capabilities, such as human analytics and business architecture. Our
results reveal a positive and significant path between a superior CRM capability and firm
performance. In turn, superior CRM capability is positively associated with human analytics and
business architecture. However, our results suggest the impact of IT infrastructure on superior CRM
capability is indirect and fully mediated by human analytics and business architecture. We also find
that CRM initiatives jointly emphasizing customer intimacy and cost reduction outperform those
taking a less balanced approach. Overall, this paper helps explain why some CRM programs are more
successful than others and what capabilities are required to support success.
INTRODUCTION
Customer relationship management (CRM) is increasingly important to firms as they seek to improve
their profits through longer-term relationships with customers. In recent years, many have invested
heavily in information technology (IT) assets to better manage their interactions with customers
before, during and after purchase (Bohling et al. 2006). Yet, measurable returns from IT investment
programs rarely arise from a narrow concentration on IT alone, with the most successful programs
combining technology with the effective organization of people and their skills (Bharadwaj 2000;
Piccoli and Ives 2005). It follows that the greater the knowledge about how firms successfully build
and combine their technological and organizational capabilities, the greater will be our understanding
of how CRM influences performance.
Although the market for CRM software and support is strong (Maoz et al. 2007), there remains
considerable scepticism on the part of business commentators and academics as to its ultimate value
to the corporation and customers. Surveys of IT executives in the business press report that CRM is
an overhyped technology (e.g. Bligh and Turk 2004) and some academics claim the concept is
fundamentally flawed because CRM ignores the reality that many customers do not want to engage in
relationships (Dowling 2002, Danaher et al. 2008).
THEORETICAL BACKGROUND, RESEARCH MODEL AND HYPOTHESES
Prior research in strategy and management has observed that the degree to which a firm will prosper
is, in part, dependent upon the extent to which they possess capabilities and resources that can be
employed to enhance the competitiveness of the business. Considerable empirical work in IT has
sought to examine the direct connection between investment in IT and firm performance. However,
the findings from this work have been mixed. Some (Weill 1992; Powell and Dent-Micallef, A. 1997;
Mendelson and Pillai 1998) report a negative relationship between IT investment and aspects of firm
success, while others have demonstrated a positive relationship between IT investment and firm
performance. The lack of consistency in these findings is independent of whether performance is
defined as financial (Devaraj and Kohli 2003), productivity driven (Markus and Robey 1988),
process-related (Ray et al 2005) or the degree of organisational learning (Tippins and Sohi 2003).
Although this research provides evidence of a general relationship, our knowledge of the specific IT
infrastructure and organizational factors driving these general results remains limited.
Conceptual Model of CRM Performance
CRM represents a strategy for creating value for both the firm and its customers through the
appropriate use of technology, data and customer knowledge (Payne and Frow 2005). This strategy
requires focus, training, and investment in new technology and software to aid in the development of
value adding CRM systems (Day and Van den Bulte 2001). Hence, CRM brings together people,
technology and organizational capabilities to ensure connectivity between the company, its customers
and collaborating firms.
Several scholars have expressed concerns with the lack of empirical work on the specific IT
resources or combination of capabilities that deliver most business value (Bhatt and Grover 2005;
Aral and Weill 2007; Mithas et al. 2010). Our conceptual model draws heavily on the strategy
literature and the strategic necessity hypothesis in asserting that although IT is a necessary factor, it
rarely, in-and-of-itself, generates sustainable performance advantages (Clemons and Row 1991). In
other words, the business value that is generated by IT is dependent upon the combination of
complementary technical, organizational and human resources (Francalanci and Morabito 2008).
Figure 1 illustrates the proposed combination of lower- and meta-capabilities to explain hierarchically
how CRM contributes to firm performance.
Development of Hypotheses
IT Infrastructure
Rapid advances in hardware and software provide firms with a wide range of solutions designed to
support CRM (e.g., SAP’s CRM suite, Teradata’s Enterprise Data Warehouse, etc.). The key IT
components are the front office applications that support sales, marketing and service, a data
repository that supports collection of customer data, and back office applications that help integrate
and analyze the data (Greenberg 2001). In the case of CRM, business value is unlikely to exist in the
technology alone but rather in the capability to draw information from all customer touch-points—
including websites, telesales, service departments, direct sales forces and channel partners. The
capability to build a coherent picture of the customer is costly for firms to imitate and, in many cases,
highly idiosyncratic to the firm. This is critical because recent work demonstrates that firms working
with incomplete customer data and imprecise metrics for evaluating customers run the risk of
alienating, rather than satisfying, customers (Boulding et al. 2005) and, as a consequence, experience
lower profitability (Ryals 2005).
Human Analytics
In the case of CRM, it is unreasonable to expect that an IT capability alone is sufficient to generate
performance outcomes. Customer data needs to be interpreted correctly within the context of the
business, informing the decision-making process sufficiently that good decisions emerge. In this
respect, the skills and know-how that employees possess in converting data to customer knowledge is
also crucial to success. For example, managers must increasingly cope with vast amounts of rapidly
changing and often conflicting market information. While analytic algorithms and data mining
techniques can assist this, making sense of such data often requires human judgment.
Viewed from the resource perspective, this human ability: (1) enables companies to manage the
technical and business risks associated with their investment in CRM programs (Bharadwaj 2000), (2)
is based on accumulated experience that takes time to develop, and (3) results from socially complex
processes that require investment in a cycle of learning and knowledge codification. This makes it
difficult for competitors to know which aspects of a rival’s know-how and/or interpersonal
relationships make them truly effective (Mata et al. 1995).
Measures
The survey questionnaire contained items to measure all the constructs and controls in our model,
together with definitions for each of the various capabilities, and descriptive items on the respondent
and company. Most questions used 5-point or 7-point Likert or semantic differential scales. In those
cases where the directionality was reversed to reduce response bias, the results are presented here in a
manner that ensures directionality is consistent and logical. The questionnaire items and descriptive
statistics for these data are shown in Table 1. The full questionnaire is available from the authors
upon request.
Dependent Variable and Control Variables
Performance was measured using subjective assessments of the business unit’s performance relative
to other competitors in the same industry along four dimensions: return-on-investment, success at
generating revenue from new products, reduction in the cost of transacting with customers, and level
of repeat business with valuable customers. To overcome problems of short-term fluctuations in
performance, the respondents were asked to evaluate the relative competitive performance over the
“last three years”. It should be noted that this definition of performance is one relevant to our domain
of interest, CRM, and to testing the validity of our theoretical model. These four dimensions
represent the performance outcomes the literature expects to see from successful CRM initiatives (e.g.
Payne and Frow 2005, Iriana and Buttle 2006).
CONCLUSION
Customer relationship management suffers when it is poorly understood, improperly applied, and
incorrectly measured and managed. This study reveals the combination of investment commitments
in human, technological and business capabilities required to create a superior CRM capability. The
exact extent of these capabilities is ex ante indeterminate and should be guided by a strategic
emphasis that combines customer intimacy and operational excellence. By integrating two schools of
thought—capabilities and strategic emphasis—we build a more managerially relevant theory of CRM
performance that shows why CRM programs can be successful and what capabilities are required to
support success.