Customer Relationship Management

and Firm Performance

_______________
Tim R. COLTMAN
Timothy M. DEVINNEY
David F. MIDGLEY
2009/18/MKT

Customer Relationship Management and Firm

Performance

by
Tim R. Coltman*
Timothy M. Devinney**
and
David F. Midgley***

Corresponding author:
Tim Coltman, School of Information Systems and Technology, University of Wollongong,
Northfields Ave, Wollongong, N.S.W. 2522, Australia. Phone: +61 2 42 213912, Fax: +61 2
42 21 4170, e-mail: [email protected].

Associate Professor, School of Information Technology and Computer Science, University of

Wollongong, Wollong 2521 NSW Australia Email: Tim_coltman @uow.edu.au Ph: +61 (2) 42213912

**

Professor of Strategy, Member of the School of Strategy and Entrepreneurship, Australian School of
Business, University of New South Wales, Sydney 2052 Australia Email: [email protected] Ph:
+61 (2) 99319382

***

Professor of Marketing at INSEAD, Boulevard de Constance 77305 Fontainebleau, France

Email: [email protected] Ph: + 33 (0)1 60 71 26 38

A working paper in the IN SEAD Working Paper Series is intended as a means whereby a fac ulty researcher's
thoughts and findings ma y be communicated to interested readers. The paper should be considered preliminary in
nature and may require revision.
Printed a t INSEAD, Fontainebleau, France. Kindly do not reproduce or circulate without permission.

CRM and Performance

Customer Relationship Management and Firm Performance

Abstract
In this paper, we examine the impact of customer relationship management (CRM) on firm
performance using a hierarchical construct model. Using the resource-based view (RBV) of
the firm, strategic CRM is conceptualized as an endogenously determined function of the
organizations ability to harness and orchestrate lower order capabilities that comprise
physical assets such as IT and organizational capabilities. The results reveal a positive and
significant path between a superior CRM capability and firm performance. It is shown that
CRM initiatives that jointly emphasize customer intimacy, cost reduction and analytic
intelligence outperform those that take a less balanced approach. The results help to explain
why CRM programs can be successful and what capabilities are required to support success.

Keywords: Customer Relationship Management, Strategic IT, Capabilities, Performance.

CRM and Performance

INTRODUCTION
It is well established within the management information systems literature that a
narrow concentration on information technology (IT) as a source of firm advantage and
performanceas often assumed in the business press (Carr 2003)is misleading (Piccoli
and Ives 2005). Measurable returns from IT investment programs rarely arise from the
technology alone, with the most successful programs combining technology with the
effective organization of people and their skills (Bharadwaj 2000). 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 IT influences
performance.
From a practical and empirical perspective, there are important conceptual and
analytic issues that must be addressed when we attempt to measure technological and
organizational capabilities. One school of thought holds that a holistic representation is
necessary when we examine complex phenomena such as IT (e.g., Swanson and Ramiller
1997).

Others contend that such holistic representations are conceptually ambiguous,

potentially confounding the relationship between performance and the various dimensions of
IT (e.g., Barua et al. 1995; Sambamurthy 2001). These authors favor a more disaggregate
line of empirical analysis as exemplified by Ray and Muhanna (2005, p. 626), who state that
the impact of IT should be assessed where the first-order effects are expected to be
realized.
The holistic/disaggregation debate presents a dilemma for IT researchers who want:
(1) the breadth, comprehensiveness and generalizability of a multidimensional construct to
better represent the interdependent nature of IT, and (2) the clarity and precision associated
with an examination of the role of specific IT resources that underlie the construct. Edwards
(2001) argues that the protagonists in this debate disagree over the degree of aggregation, a

CRM and Performance

fact that is best resolved empirically. For example, it is possible to combine higher order
multidimensional constructs and their lower order dimensions within a single analytic
framework. Unfortunately, such frameworks have received little attention in the IT literature
to date (see Wetzels et al. 2009 for a recent exception). Equally, the appropriateness of
different measurement models for the constructs in these frameworks is only just beginning
to be discussed (Petter et al. 2007; Coltman et al. 2008).
Customer relationship management (CRM) represents a singularly good example of a
firm-level capability that is underpinned by specific technological, organizational and human
capabilities. CRM is based on a broad range of business practices, each of which can be
regarded as a lower-level capability in itself. Payne and Frow (2005) list the following
practices underpinning CRM: (1) the intelligent use of technology, data and analytic methods
to acquire customer knowledge; (2) the transmission of this knowledge to those managers and
employees making decisions about customers; (3) the use of this knowledge by managers and
employees to select and target customers for marketing purposes; and (4) creating
connections across departments to support collaboration and generate new customer value.
CRM is increasingly important to corporations as they continue to invest in technical
assets to better manage their interactions and pre- and post-transactions with customers
(Bohling et al. 2006). However, although the market for CRM software and support remains
strong (Maoz et al. 2007), there is considerable skepticism 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 most customers do not desire a relationship with a firm (Dowling 2002). Empirical
studies examining the success of CRM technology have failed to alleviate this skepticism as
investigations to date span a limited range of activities (Bohling and Klein 2006; Sutton and

CRM and Performance

Klein 2003) and are noticeably silent on the extent to which CRM investment contributes to
firm performance (Boulding et al. 2005). Zablah et al. (2003, p. 116) argue that CRM
research is neglected by decision makers and that further efforts to address its mobilization
and alignment are not only warranted but desperately needed.
This discussion reveals two critical issues that are the focus of the current research.
First, is there evidence that CRM matters? Put more empirically, does CRM contribute to
higher firm performance based on standard measures understood by managers? Second,
given that there is a CRM-performance relationship, what lower- and higher-order
capabilities are critical to develop and maintain superior CRM? In other words, what is the
structural capability path to improved performance?
In addressing these questions we make additional contributions to IT research and
practice by resolving methodological issues that have previously limited our understanding of
the relationship between IT, CRM and firm performance. First, we show that CRM is best
conceptualized as a second-order or meta-capability. That is, CRM is an endogenously
determined function of the firms ability to harness and orchestrate lower-order capabilities.
Three lower-order capabilities provide the basis for our measure of a superior CRM
capability.

These are (1) IT infrastructure, (2) human knowledge and (3) business

architecture. The first of these capabilities represents the technology, while the other two
encapsulate the companys organizational capabilities that complement the technology.
Second, by accounting for the strategic objectives of the firm, we are able to address the fact
that organizations are heterogeneous and will subsume their CRM activities within an
overarching strategic imperative. We show that CRM investments can be understood better
by accounting for the degree to which firms view CRM as a mechanism aimed at reducing
customer management costs or increasing customer intimacy.

CRM and Performance

In terms of practice, the present study offers managers seeking to invest in CRM a fresh
insight into what it means to be IT savvy. Weill and Aral (2006, p. 40) define this
colloquial term as the set of interlocking business practices and competencies that
collectively derive superior value from IT investments. Our results imply that CRM has the
greatest impact on firm performance when IT resources are combined with organizational
capabilities and the firm sets objectives for its CRM initiatives that jointly emphasize
customer intimacy and cost reduction. In our particular sample of firms the organizational
capabilities had more impact on superior CRM than the IT technology itself.
The paper is organized as follows. The next section outlines the theoretical background
to our work and presents the research model and hypotheses. The ensuing section discusses
the research methodology and presents the specific measures used to test our model. A
section on data analysis and results precedes the final section, which lays out our main
conclusions and the implications of this work for both scholarship and practice.
THEORETICAL BACKGROUND, RESEARCH MODEL AND HYPOTHESES
Corporate unease with CRM technology investment is not unlike the disillusionment
encountered with general IT investment in the late 1980s (e.g., Strassman 1997).

The

conceptual and analytic debate over the best way to specify and measure IT-related
performance remains unresolved and to this day no consensus exists regarding the strategic
value of IT (Oh and Pinsonneault 2007). This debate is, to a greater or lesser degree, being
repeated with regard to CRM investment. Without clear and generalizable guidance as to the
expected return from CRM investment, why do firms invest so heavily in it?
In this paper we use the resource-centered and contingency perspectives as the
conceptual basis to investigate CRM performance. These perspectives dominate research in
strategy and IT (Melville et al. 2004) and provide complementary understanding when
evaluating the strategic value of IT (Oh and Pinsonneault 2007). Each is discussed in turn.

CRM and Performance

The Resource-Centered Perspective

The resource-centered perspective can be divided into two streams: the production
function view and the resource-based view (RBV). The production function view (Dewan
and Min 1997) focuses on explaining variation in firm performance by reference to a
collection of production resources (e.g., IT capital) and capabilities (e.g., labor). Although
studies in this stream have reported positive relationships between the size of IT investment
and organizational performance (e.g., Brynjolfsson and Hitt 1996), IT investment is generally
regarded as a necessary but not sufficient factor in explaining organizational performance
(Bharadwaj et al. 1999). In contrast, the RBV literature places greater emphasis on the
identification of the different degrees and qualities of tangible and intangible resources. Put
succinctly, the argument is that although a firms competitive position is driven directly by its
products and services, it is indirectly (and ultimately) driven by the resources and capabilities
that go into their production (Newbert 2007).
The RBV is well suited to the assessment of IT investment because it emphasizes the
possibilities and options that IT creates and, more importantly, the way firms make the best
use of IT resources (Melville et al. 2004). Although aspects of IT can be ubiquitous, it is the
combination of human skills and organizational context that is important to harness the full
potential of IT. This combination of capabilities is not so evenly distributed between firms
and has not been well developed in the theory (Wade and Hulland 2004).
Finally, the RBV of the firm implies that just because investment in IT resources and
capabilities can improve the absolute operational performance of a particular process, this
does not mean that investment in these capabilities will improve the competitive and financial
performance of this process relative to the competition. This crucial point has not been well
integrated theoretically by IT researchers, nor has it been incorporated in the measurement
models used. For example, Bharadwaj (2000), Barua et al; (2004) and Ray et al. (2005) refer

CRM and Performance

to a superior IT capability but measure IT capabilities independently without reference to the

firms competitors. Yet as a firms performance is largely determined by its strengths and
weaknesses relative to its competitors, unless one or more of the firms capabilities is
superior to the competition, it is unlikely to achieve better performance. For this reason we
measure capabilities relative to competitors in what follows.
The Contingency-Based Perspective
Researchers in IT acknowledge that despite considerable investigation, the nature of the
complex relationship between IT and organization context remains only partially understood
(Oh and Pinsonneault 2007). [C]ontext matters in MIS research (Carte and Russel 2003, p.
480) and contingency theory posits that the internal alignment of strategy and organizational
capabilities leads to superior organizational performance.
Contingency theorists have devoted considerable effort to studying the link between IT,
business strategy and firm performance. This work has shown that investments in IT are
frequently designed to serve different strategic objectives, with some firms targeting
efficiency gains through cost reduction while others target sales growth through customer
satisfaction and retention strategies (Ross and Beath 2002).

The empirical evidence,

however, remains mixed as to which strategy is the better option (Mittal et al. 2005). It
follows that failure to account for strategic heterogeneity will weaken our ability to predict
the investment-to-performance link.

In the case of CRM, two specific and potentially

independent strategic orientations are relevant. First, the firm may be seeking to build and
enhance longer-term customer relationships, independent of the cost of doing so. Second, the
firm may be attempting to be more cost efficient in maintaining these relations, whether
through better data collection and analysis, automation of customer-facing processes or the
targeting of marketing campaigns.
Conceptual Model of CRM Performance

CRM and Performance

Our conceptual model combines lower- and meta-capabilities to explain hierarchically

how CRM contributes to firm performance (see Figure 1). A general consensus regarding
what constitutes lower-order CRM capabilities has begun to emerge in the strategy, IT and
marketing literatures. For example, in a study of Chaparral Steel Corporation, Leonard
(1998) found four distinct clusters of core technological capabilities: technical systems,
human skills, managerial systems, and values. Tippins and Sohi (2003) provide a consistent
definition of IT competency as the body of technical knowledge about IT systems, the extent
to which the firm uses IT, and the number of IT-related artifacts. In marketing, CRM
capabilities have been defined based on: employee values, behaviors and mindsets; customer
information availability, quality and depth; and the supporting organizational structures,
incentives and controls (Day 2003).
We conceptualize the foundations of CRM in terms of three lower-order capabilities.
The first is IT technology and infrastructure capabilities, representing the CRM technology
that underpins the availability, quality and depth of customer information. The second is
human knowledge-based capabilities comprising the diverse skills and experience of
employees that are necessary to interpret CRM data effectively. The third is the business
architecture and structural capabilities that embody action in the form of incentives and
controls for employee behavior that supports CRM. This conceptualization is similar to prior
definitions of CRM in the marketing literature (e.g., Day 2003) and complements work in IT
that emphasizes this level of analysis (e.g., Ray et al. 2005). For brevity, these capabilities
will be referred to as IT infrastructure (IT), human knowledge (HK) and business
architecture (BA).
Additionally, our model identifies a higher-order construct or meta-capability, superior
CRM capability. This measures the contribution of each of the three lower-level capabilities
(IT, HK and BA) relative to the competition, whilst also combining the three into one overall

CRM and Performance

construct in an empirically weighted manner. This construct parallels the way firms combine
diverse resources to form lower-level capabilities, which are, in turn, combined and managed
in the organizations overall capability to execute CRM. It is the extent to which this metacapability is superior to that of competitors that will influence firm performance, ceteris
paribus.
Studies of IT value have also reported mixed results when investigating the question of
whether firms are better off pursuing a strategic emphasis based on revenue growth, cost
reduction, or both (e.g., Mittal et al. 2005). The particular CRM strategic emphasis is
germane to this study because CRM programs can focus on customer intimacy (i.e.,
relationship orientation, catering to individual customer service requirements, etc.), cost
reduction, data analytics or a mix of all three (Buttle 2004). The type of strategic emphasis is
included in our conceptual model as we expect it to influence overall performance. Finally,
since firm performance is influenced by many other factors than CRM capability, we include
standard control variables to account for these. These controls reduce the likelihood that we
are attributing firm performance to superior CRM when in fact it is due to some other factor.

Figure 1 Model of CRM Performance

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10

Business Unit
Performance

Strategic Emphasis

Controls

H3
H2

Enterprise level capability

Lower level
capability

H1b

H1c

Human
Knowledge

Business
Architecture

H1a

IT Infrastructure

Resources

Superior CRM
Capability

Resources

Resources

Resources

Resources

Resources

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., SAPs CRM suite, Teradatas Enterprise Data Warehouse,
etc.). The key 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).
The capability to draw information from all customer touch-pointsincluding websites,
telesales, service departments, direct sales forces and channel partnersto build a coherent
picture of the customer is costly for firms to imitate and, in many cases, highly idiosyncratic
to the firm. To the extent that IT systems must span the firms business functions and
hierarchical levels (Grant 1996) or become an essential part of the firms knowledge base
(Kogut and Zander 1992), they become embedded in the firm as a competitive capability.

CRM and Performance

11

This can lead to a level of causal ambiguity and structural complexity that competitors find
hard to imitate, thereby enhancing the firms potential for sustainable competitive advantage
(Dierickx et al. 1989). Indeed, empirical evidence suggests that performance improvements
derive not from IT expenditure alone but when firms use IT to support customer service
processes (Ray et al. 2005). Where IT infrastructure includes both hardware and software,
this line of reasoning allows us to hypothesize that:
H1a: Highly developed IT infrastructure (IT) is required to build a CRM capability
that is superior to competitors.
Human Knowledge
In the case of CRM, it is unreasonable to expect that an IT capability alone is sufficient.
Customer data need 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 RBV, this human capability: (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 (Katz 1974), 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
rivals know-how and/or interpersonal relationships make them effective (Mata et al. 1995).
Although it may be possible for competitors to develop similar skills and experience, it takes
considerable time for these capabilities to mature (Lado and Wilson 1994).

CRM and Performance

12

Building on the RBVs notions of value, rarity and inimitability, the knowledge-based
view (Grant 1996) emphasizes that humans with unique abilities to convert data into wisdom
can create competitive advantages that enhance firm performance. In the context of customer
relationships, such knowledge may include the experience and skills of employees, the
models they develop to analyze data, procedures and policies they derive to manage these
relationships, and so forth. Overall, the knowledge-based view allows us to derive the
following hypothesis:
H1b: Highly developed human knowledge (HK) in converting data to customer
knowledge is necessary to build a CRM capability that is superior to competitors.
Business Architecture
Simply possessing valuable, rare, inimitable capabilities based on sophisticated CRM systems
and gaining insight through complex human skills and experience will have little impact on
the business unless action is taken. In other words, to improve performance the outputs of
any CRM program have to be deployed at scale across the business. Many firms will own the
same basic technology and possess similar skills.

However, few will possess the

organizational architecture of control systems and incentive policies required to fully exploit
these resources (Barney and Mackey 2005). This ability to exploit investment in CRM is
observed in an overall business architecture that supports action before, during, and after
implementation. It not only ensures that customer knowledge is effectively generated, but
more importantly, it ensures that the information is used within the organization to influence
competitive advantage. For example, front-line employees are motivated to act on reports
generated by the CRM system when making tactical decisions about customers. In the
context of CRM, other aspects of this architecture could include training in systems and
policies, or control systems that focus on a relationship rather than a transactional view of the
customer. Following this line of reasoning we hypothesize that:

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13

H1c: Highly developed customer-oriented business architecture (BA) is necessary to build

a CRM capability that is superior to competitors.
The Effect of a Higher-Order CRM Capability on Performance
There is a temptation to be normative about the pursuit of competitive advantage by
directing attention and resources to each of these lower-level CRM capabilities. However,
well-developed IT, HK and BA capabilities in isolation are insufficient to generate
competitive superiority. Indeed, they confer competitive advantage only to the extent that the
managers of the firm can leverage their interrelationships and produce a combination that is
superior to that of their competitors (Wade and Hulland 2004). Amit and Schoemaker (1993)
define such second-order or meta-capabilities as the firms overall ability to efficiently
combine a number of resources that engage in productive activity. In other words, the lowerorder capabilities such as IT, HK and BA are necessary, but not sufficient, to improve firm
performance relative to competitors. Accordingly, we hypothesize that:
H2: High performing organizations are characterized by a superior combination of
IT, HK and BA, resulting in a superior meta-capability of CRM.
The Role of Strategic Emphasis in CRM
Context matters in IT research, and IT investments have been shown to influence both
revenue growth and cost reduction. Investments in IT facilitate revenue growth through: (1)
new value propositions, (2) new channels to the customer, and (3) better management of
customer segments. It has also been shown that IT can help firms to reduce operational,
transactional and marketing costs. In some cases, empirical evidence suggests that firms that
focus on either cost reduction or revenue growth outperform those that focus on both. In
other cases, empirical evidence indicates that firms are better off when a dual emphasis is
deployed (Mittal et al. 2005).

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14

As noted earlier, firms see CRM as part of a revenue enhancement strategy, part of a
cost reduction strategy, or some combination of the two (Payne and Frow 2005). Iriana and
Buttle (2006) suggest that there are three basic approaches to CRM: (1) a top down strategy
of customer intimacy to support relationship building through more individualized offers; (2)
automation of customer-facing processes to capture cost savings; and (3) a bottom up
approach that focuses on the analysis of data to enhance customer understanding, enable
appropriate cross-selling attempts or the better targeting of offers, and so forth. They label
these three approaches: strategic, operational and analytic CRM. It is equally plausible that
firms pursue some combination of strategic, operational and analytic CRM to achieve their
goals. Such combinations, being reliant on different lower-order capabilities, may also be
difficult to imitate, and thus also a source of competitive advantage.
It is important, therefore, to distinguish between the effects on performance due to the
CRM meta-capability and those due to the firms strategic emphasis. Further, it is notable
that strategic CRM places greater emphasis on customer value through relationship building
and service customization in order to enhance revenues. Operational CRM has a clear focus
on costs. Although analytic CRM can enhance revenues, it typically fits more into the cost
reduction approach. This is because its main emphasis is on replacing a mass approach to
marketing with more targeted, and thus less costly, campaigns. Increasing revenues while
lowering costs would clearly have the biggest impact on firm profitability. Accordingly, and
building on Mittal et al. (2005), we hypothesize that:
H3: A dual strategic emphasis on enhancing revenue while reducing costs will have the
greatest positive effect on firm performance, and this effect will be distinct from that of
CRM capability.

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15

RESEARCH METHOD AND MEASURES

Sample Characteristics, Unit of Analysis and Data Collection
We tested our hypotheses on a cross-sectional sample of business-to-consumer firms
based in Australia. The consumer markets selected shared some common features in their
application of CRM technology (i.e., they are moderate to heavy users), size of customer base
(i.e., they have a large customer base) and exposure to market pressures to differentiate them
from the competition. Based upon these criteria, a sample of financial services, airlines,
direct insurers, telecommunication utilities, hotels and casinos, and retail companies were
chosen. Prior reports had shown that these industries displayed a strong commitment to
CRM through high penetration of senior CRM appointments, loyalty programs and database
marketing managers (MarketingUK 2003).
We identified a competent key informant as: a marketing or sales director, chief
information officer, chief financial officer, or management executive typically at the general
manager level in a strategic business unit (SBU). In addition to being well-informed on CRM
initiatives, such informants are also able to compare their own unit to direct competitors.
This is important in order to be able to identify both superior capabilities and performance.
Furthermore, the business unit, rather than the firm, is the appropriate unit of analysis
because the way CRM is implemented in one unit of a firm can differ from another. For
example, CRM in Corporate and Institutional Banking will be different from CRM in Retail
Banking.
Respondents were randomly sourced from a commercial contact list. Ninety-seven
executives responded to our survey questionnaire, yielding a 21% response rate. Eliminating
responses with missing data, firms without CRM programs, and one government organization
identified as an outlier in standard tests, left 86 respondents across 50 organizations with
significant CRM programs. These organizations were primarily traditional users of CRM;

CRM and Performance

16

half were in banking and insurance (25 firms), followed by IT products and services (6
firms), the hotel and travel industry (5 firms), telecommunications (4 firms), and various
other service industries (10 firms). One business unit responded from each firm, with followup calls indicating that this unit was the most involved in CRM within the firm. The median
business unit in our data had 160 employees and the average unit 1,440. As our concern was
with differential CRM performance within firms operating on a competitive scale, our sample
distribution was skewed towards those firms using CRM extensively and was not meant to be
representative of all firms.
Research has found that multiple informants from the same business unit will, when
averaged and weighted appropriately, yield response data that are superior to single informant
reports (Van Bruggen et al. 2002). Our survey collected multiple responses from each
business unit, with a mode of two and maximum of four key informants. Averaging the
responses of each business units informants provides a better estimate of that business units
true response. Weighting the data according to how many informants answered for each unit
then increases the robustness of analyses by favoring business units with more informants
over those with less. Practically, this is achieved by replacing each row (informant) in the
analysis database with a row containing the mean values for that business unit on the relevant
questions. Thus, for example, a business unit with three informants would appear as three
identical rows in the database. This procedure improves the quality of the data and the
validity of the research findings (Van Bruggen et al. 2002).
Sample Size and Statistical Power
Hence we used N = 50 business units in our hypothesis tests and not the (larger) number
of individual respondents. While this is a small sample size, it is important to note that: (1)
our sample includes the majority of the firms that are the major users of CRM in their
respective industries, and (2) we expect strong effect sizes. The former provides confidence

CRM and Performance

17

that the sample is sufficiently representative of the population strata to support hypothesis
testing.

The latter expectation is based on CRM consulting reports indicating large

differences between best-in-class and more typical firms (e.g., Aberdeen Group 2007). For
example, with N = 50, strong effect sizes (multiple correlation of 0.25, f2 = 0.33) and four
predictor variables, a multiple regression would have a more than acceptable power of 0.89
(using

the

G*Power

duesseldorf.de/aap/projects/gpower/).

3.0

software,

http://www.psycho.uni-

However, we use a structural equation modeling

approach, in particular partial least squares (PLS), and not ordinary regression.

As

Marcoulides and Saunders (2006) point out, much more needs to be done to justify
conclusions drawn from small samples using PLS. They recommend a five-step approach
that we follow here, which shows that small samples can be appropriate given certain
conditions. We discuss the results of applying their approach in the section Analysis and
Results and find that N = 50 firms can be justified, given our theory, accuracy of
measurement and effect sizes.
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
Performance was measured using subjective assessments of the business units performance
relative to other competitors in the same industry along four dimensions: return-on-

CRM and Performance

18

investment, success at generating revenue from new products, cost reduction, 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.
Independent Variables
To capture the lower-level capabilities of human knowledge, IT infrastructure and business
architecture, we developed three sets of measures (scales). For human knowledge, we took
four scale items from Davenport et al. (2001) that capture the human processes and
procedures used to extract raw data and convert them into customer knowledge. For the IT
infrastructure scale, we used four items from the IT (Bharadwaj 2000) and marketing
literatures (Reinartz et al. 2004) that place strong emphasis on the effectiveness of the
integrated IT infrastructure and its ability to generate an accurate picture of the customer. For
the business architecture scale, we adapted three items from Day and Van den Bulte (2002)
capturing the business influence that incentives, training and culture play in converting
customer knowledge into action.
To develop the second-order construct, superior CRM capability, we used an approach
similar to Marchand et al.s (2000) concept of information orientation or Day and Van den
Bultes concept of customer relating capability. In this case, respondents were asked to
compare their overall capability on, for example, human knowledge directly with their
competitors. The question posed was: Compared to your direct competitors, how do you
rate your organization overall on human knowledge? This was repeated for each of the
three capabilities. This procedure allowed us to measure superior CRM capability as an
empirically weighted composite of these three overall comparisons, as well as to investigate
the relationships between this composite and the three lower-level scales discussed above.
This dual measurement approach at the higher and lower levels also allowed the structural

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19

equation model to be identified for the purposes of estimation. This provided an alternative
to the repeated indicator approach that is commonly used to measure higher-order constructs
(Lohmoller 1989; Wetzels et al. 2009).
The strategic emphasis construct was measured by asking respondents to allocate 100
points across customer intimacy, operational excellence and analytical objectives for their
CRM program. Few firms in this sample emphasized analytical objectives. Rather, firms
commonly placed an emphasis on customer intimacy (revenue enhancement), operational
excellence (cost reduction) or some balance between the two. Given this finding, these data
were transformed into a single-item measure, namely the ratio of the emphasis placed on
customer intimacy to that placed on other objectives. Because this ratio showed a skewed
distribution, we used the natural log transformation in our analyses. As Marcoulides and
Saunders (2006) note, departure from normality is a problem for small samples. However,
after transformation, the distribution of this ratio was normal.

Finally, firm size was

operationalized both as the number of customers and the number of employees (Amburgey
and Rao 1996). Again, because these distributions were skewed, we used log transformations
of these two variables. Other control variables, such as industry sector, did not explain any
variance in relative performance.
ANALYSIS AND RESULTS
A two-step approach to data analysis was performed that included: (1) a detailed
assessment of the measurement model, and (2) estimation of the structural equation model
and hypothesis tests.
Assessment of the Measurement Model
To ensure the validity of all measures, we examined key informant bias, non-response
bias, common method bias and convergent and discriminant validity. We also examined the

CRM and Performance

20

correlation between our subjective measure of performance and objective performance data
when available.
To measure the impact of key informant bias, t-tests were used to examine differences
of opinion between top (n = 37) and middle management (n = 49) on several variables
(including performance). No significant differences were detected. Similarly, to test for nonresponse bias, we used the extrapolation procedure proposed by Armstrong and Overton
(1977). No systematic differences existed between early and late respondents, suggesting
that this bias was not a major concern.
Two approaches were used to examine common method bias. First, multiple responses
were received from the business units in this study. This allowed us to compare measures of
the independent variablesmade by a particular respondentwith a measure of the
dependent variable formed from an average of all the responses from that business unit.
There was little difference between the coefficients of a model estimated from such data and
those reported here, indicating that there was no general factor in these data that might be
associated with common method bias. Second, we also used the more traditional Harmons
ex post one-factor test to assess common method bias (Podsakoff and Organ 1986). The
results of this test indicated that we needed seven distinct factors to explain 78% of the
variance in the total set of 21 items. Again, the lack of a dominant single factor suggested
that common factor bias was probably not an issue.
Preliminary scale development followed Churchills (1979) procedure with its
emphasis on exploratory factor analysis (Spearman 1904) and internal consistency (Cronbach
1951).

Exploratory factor analyses of the underlying questionnaire items indicated one

strong dimension for each construct, making it legitimate to regard them as unitary constructs
and compute reliabilities.

The five constructs based on multi-item measures all had

composite reliabilities greater than the acceptable threshold of 0.70; with four of the five

CRM and Performance

21

having reliabilities above 0.80. The loadings and bootstrap t-statistics for each item are
shown in Table 1, together with these reliabilities and the average variance extracted (AVE).
The lowest loading was 0.64, with 14 of the 18 loadings above the norm of 0.70. The lowest
t-statistic was 3.3, with 14 of the 18 being above 5, indicating stable estimates. In all cases
the AVE was above the norm of 50%. Overall, our measures appeared to have acceptable
convergent validity.

CRM and Performance

22

Table 1 Questionnaire Items, Descriptive Statistics & Measurement Model Results for Multi-Item Constructs
Construct and Item Measures
Performance (5-point scale)
Relative to the highest performer in your industry, how has your business performed over the last three
years?
Return on investment (after tax)
Success at generating revenues from new products
Reduction in cost of transacting with customers
Level of repeat business with valuable customers
Superior CRM Capability (7-point scale)
Compared to your direct competitors, how do you rate your organizations overall
skills and experience at converting data to customer knowledge?
Customer information infrastructure
Organizational architecture (i.e., alignment of incentives, customer strategy and structure)
Human Knowledge Capability (5-point scale)
To assist staff in extracting, manipulating, analyzing, and presenting data in your organization, we have
extensive documentation and procedures
Sophisticated models are frequently used to analyze customer data
We have formal procedures for cross-selling and up-selling to customers
When extracting data from CRM systems & databases, most people involved have extensive knowledge of
the business issues facing our firm
IT Infrastructure Capability (5-point scale)
Our relational databases or data warehouse provides a full picture of individual customer histories,
purchasing activity and problems
When interacting with our organization, customers see one seamless face
CRM software allows us to differentiate among customer profitability
We are very good at adapting our IT applications and responding to unplanned customer demands
Business architecture capability (5-point scale)
To what extent are employee/management incentives used in your organization to support customer
relationship building?
Investment in training and other resources to support CRM-related initiatives has been extensive
We take a long term view to the formation of customer relationships
CRM Strategic Emphasis (single item)
Log of the ratio of the percentage emphasis placed on customer intimacy to that placed on all other goals
Controls (log of number of employees, log of the number of customers)

CRM and Performance

PLS
Loading

0.78
0.67
0.83
0.68

Bootstrap
t-statistic

AVE

0.83

55%

0.85

66%

0.87

62%

0.84

56%

0.76

51%

7.4
4.8
8.8
5.1

0.85
0.79
0.79

10.7
5.7
7.3

0.83

15.8

0.84
0.74
0.74

16.0
7.6
9.6

0.82

5.7

0.64
0.77
0.75

3.5
4.7
6.1

0.75

6.1

0.75
0.64

5.5
3.3

N/A
N/A

N/A
N/A

23

Composite
Reliability

We assessed discriminant validity by comparing the correlation between latent

constructs and the square root of the AVE for each (Fornell and Larcker 1981).

The

correlation matrix in Table 2 shows that these square rootsshown on the diagonalare
greater than the corresponding off-diagonal elements. Thus it is possible to conclude that
each measure is tapping a distinct and different construct. For completeness, Table 2 also
includes the single-item construct of strategic emphasis, together with the two control
variables.
Table 2 Correlation of Latent Constructs (diagonal elements are square roots of average
variance extracted)
1

1. Human Knowledge Capability

0.79

2. IT Infrastructure capability

0.55

0.75

3. Business Architecture Capability

0.54

0.47

0.71

4. Superior CRM Capability

0.58

0.46

0.56

0.81

5. Performance

0.41

0.30

0.40

0.46

0.74

6. CRM Strategic Emphasis*

0.10

-0.05

-0.06

0.08

-0.20

1.00

7. Control: Number of Customers*

0.02

-0.02

-0.06

-0.05

-0.26

-0.34

1.00

8. Control: Number of Employees*

0.23

0.01

0.15

0.34

0.30

-0.01

0.16

* Log transformed to reduce skewness.

Despite the potential for reporting biases, research has shown that self reported
performance data are generally reliable (e.g., Dess and Robinson 1984; Fryxell and Wang
1994). We did our own validation comparing the self reported measures with objective
measures of financial performance obtained from a commercially available database. The
objective measures included profit and sales revenuecommon accounting-based
measuresand Economic Value Added (EVA)a common market-based measure.

We

obtained these data for half of the firms in our sample. One issue is that the appropriate unit

CRM and Market Orientation

Page 24

of analysis for our purposes is a business unit, while these commercially available data are for
the overall organization. However, we observed correlations of approximately 0.3 between
the subjective and objective measures of performance. This gave us some added confidence
in the validity of the measures.
The Structural Model
We tested the conceptual model shown in Figure 1 and its associated hypotheses using
partial least squares (PLS). Here, we used Smart PLS (http://www.smartpls.de/forum/). PLS
relies on bootstrapping techniques to obtain t-statistics for the path coefficients and hypothesis
tests.

Following standard heuristics, we resampled 200 times to obtain these statistics.

However, to be conservative, we did not allow the software to optimize the alignment of the
signs of coefficients from these samples.
PLS and Sample Size
Marcoulides and Saunders (2006) set out five steps for assessing the adequacy of the sample
size for PLS modeling. The five steps and the implications for our model follow.
1. Screen the data. Missing data, outliers and non-normally distributed variables can
pose problems in PLS analyses of small samples. Here, we eliminated firms with missing
data and one obvious outlier. Both graphical inspection and skewness and kurtosis statistics
indicate that the variables for the remaining firms are normally distributed (after log
transformation in the case of strategic emphasis and size controls).
2. Examine the psychometric properties of all the variables in the model. Poorly
measured variables can also pose problems in small samples.

However, as discussed

previously, all our constructs are well-measured, showing more than adequate convergent and
discriminant validity.
3. Examine the magnitude of the relationships and effects between the variables in
the model. If weak effects are expected and the variables are poorly measured, larger sample

CRM and Market Orientation

Page 25

sizes will be needed to reject hypotheses. As noted, the variables used here are well-measured
and we expect substantial effects. As will be discussed in detail later, the observed effects are
substantial. We are able to explain 43% and 39% of the variance in our two principal
constructs, superior CRM capability and performance, respectively, and the majority of the
path coefficients relating to the hypotheses exceed 0.30.
4. Examine the magnitude of the standard errors of the estimates considered in
the proposed model and construct confidence intervals for the population parameters of
interest. Unstable coefficients and wide confidence intervals can be a sign of inadequate
sample size. Our use of bootstrapping reveals the majority of coefficients to be stable with
narrow confidence intervals. In the outer (measurement) model the bootstrap t-statistics range
from 3.3 to 16.0, and in the inner (structural) model the t-statistics on the principal paths are
all greater than the norm of 2.
5. Assess and report the power of the study. Using the G*Power software, post hoc
power analyses indicate that the power of this study is greater than the accepted norm of 0.80,
with achieved powers in the high 0.9s. These analyses include F-tests on the proportion of
variance explained in the two principal constructs and one sample t-test on the paths relating
to hypotheses (where the null hypothesis is that population values are zero).
Overall, the five-step procedure of Marcoulides and Saunders (2006) indicates that our
sample of 50 business units is adequate for hypothesis testing.
Effect of CRM on Firm Performance
The main effects model (see Figure 2) reveals a number of interesting findings.

First,

although PLS does not have an overall index of model fit, the fact that the key constructs are
well explained and most path coefficients are statistically greater than zero and in the
predicted direction lends support to the model. The three lower-level capabilities explain
43% of the variance in the enterprise-level capability of Superior CRM.

In turn, this

capability, along with Strategic Emphasis and the two controls, explains 39% of business unit
CRM and Market Orientation

Page 26

performance. 43% and 39% are relatively high levels of explanation for a model from crosssectional survey data.
Using Cohens (1988) procedure for determining effect sizes on R2 and comparing the full
theoretical model on performance with one containing just the control variables gives an
effect size of 0.26. Cohen suggests a moderate effect size is 0.15 and a strong one 0.35.
Second, the impact of IT infrastructure is only weakly related to CRM capability ( =
0.13 p = n/s). Although the standardized beta score is positive as hypothesized, it is not
significantly different from zero and H1a receives no support. For these business units, and
once we account for the other effects, IT infrastructure is not an important determinant of the
enterprise-level capability. Third, consistent with our other hypotheses, CRM capability is
driven primarily by human knowledge ( = 0.34, p < 0.01) and appropriate business
architecture ( = 0.32, p < 0.01). These positive and significant standardized beta scores
provide support for H1b and H1c.

CRM and Market Orientation

Page 27

Figure 2 Direct Effect Model with Control Measures

-0.39 (t=3.3)
LN
Strategic Emphasis

H3: -0.31
(t=2.3)

Controls
LN Customers

Business Unit
Performance
R2=39%

LN Employees
0.25 (t=1.8)

H2: 0.33 (t=2.6)

Superior
CRM Capability
R2=43%
H1a: 0.13 (t=1.1)
Not significant

H1c: 0.32 (t=2.8)

H1b: 0.34 (t=2.7)

IT
Infrastructure

Business
Architecture

Human
Knowledge

As we argued in H2, individual capabilities are necessary but not sufficient for superior
performance. What is required is the orchestration of individual capabilitiesthat do not
individually need to be superior to the competitioninto a higher-order capability that is
superior to the competition. The results in Figure 2 are as theoretically expected. Superior
CRM capability has a significant impact on performance ( = 0.33 p < 0.01), providing
support for hypothesis H2.
Finally, the direct effect of CRM strategic emphasis on performance requires discussion.
Our data support H3 and indicate that the most optimal strategy is one based on both revenue
growth and cost reduction. Figure 3 illustrates this effect by relating overall performance to
the quartiles of the distribution of strategic emphasis. Quartile 1 represents those business
CRM and Market Orientation

Page 28

units which place their dominant emphasis on operational excellence (cost reduction) and
quartile 4 those which place their dominant emphasis on customer intimacy (revenue
enhancement). As can be seen, both of these groups perform poorly. It is the business units
with greater balance between revenue enhancement and cost reduction goals (quartiles 2 and
3) that perform better. In particular, quartile 3which has a 1:1 balance between the two
performs by far the best. Hence H3 is confirmed.
Figure 3 Performance and Strategic Orientation

Within Quartile Mean

Within Quartile Median

0.40

S tan d ard iz ed P erfo rm a n ce

(L aten t C o n stru ct)

0.20
0.00

Q1

Q2

Q3

Q4

-0.20
-0.40
-0.60
-0.80
Quartiles: Strategic Emphasis

Emphasis on
operational
excellence

CRM and Market Orientation

Emphasis on
customer
intimacy

Page 29

DISCUSSION AND THEORETICAL CONTRIBUTIONS

Organizations frequently assume that advances in IT infrastructure and software will not
only generate an economic return but also serve to define a business and its competitive
strategy (Bharadwaj 2000; Santhanam and Hartono 2003). This study makes three important
contributions to understanding this supposition by addressing: (1) how to empirically measure
the impact of IT, (2) the specific role that IT actually plays in supporting a CRM program, and
(3) the contribution of CRM programs to firm performance. Each of these points is discussed
in turn.
First, our study reveals that the contribution of IT to a CRM program is best measured
as a higher-order combination of IT, human and business capabilities. This follows because
CRM is embedded in a web of capabilities, none of which is superior alone, but when
combined with appropriate resources, other capabilities and an organizing context, creates a
higher-order capability that can make a significant contribution to firm performance. This
approach is consistent with the current state of RBV theory (Newbert 2007). Few companies
master these socially complex capabilities effectively, which is exactly why CRM capability
is potentially a source of competitive advantageit takes time and effort to develop, it is rare
and difficult to imitate, and is causally ambiguous.
Second, the marginal contribution of IT to a superior CRM capability stands in
contrast to what the sales people of companies like Siebel, Oracle, SAP and SAS would like
us to believe. Alone, IT offers no significant competitive advantage to the firm, but this does
not negate its fundamental operational importance to CRM in all sectors of industry.
Information technology is clearly necessary to automate customer touch-points, to combine
data silos and to enable customer data interpretation. However, this aspect of IT is effectively
commoditized and alone adds nothing to competitive advantage.

Our findings validate

existing wisdom in the literature, where scholars have concluded that in order to be

CRM and Market Orientation

Page 30

successful, organizations must combine IT with another capability (Day 2003; Powell and
Dent-Medcalfe 1997).
The results also support work by Zuboff (1988), who claims that one of the primary
reasons many organizations fail when implementing new forms of IT is because they simply
do not have the requisite skills and experience necessary to use the available data. The
specific human capabilities and business structures revealed in this study are critical to
transform what is essentially a passive resource (i.e., IT-enabled customer data) into
actionable decisions such as whether a customer is more or less important, whether an idea for
a new product is attractive or marginal, and so on. In other words, firm performance is
improved not through the simple possession of capabilities but because the firm makes better
use of its capabilities.
Third, the survey results confirm that a higher-order superior CRM capability is a
robust indicator of firm performance. It provides greater theoretical parsimony and reduced
model complexity (Marcoulides et al. 2009) and reinforces the finding that IT business value
is represented in those behaviors manifested as a consequence of IT investment (Seddon
1997). This is particularly important because although companies are under constant pressure
to engage in a plethora of IT-based initiatives, few have the potential to use those initiatives to
create positions of sustained measureable advantage.
Finally, our results reveal that an optimal CRM strategy should jointly emphasize
revenue growth and cost reduction. This is important in providing a consistency not seen in
prior research. For example, Rust et al. (2002) stress that there can be conflict between a
revenue expansion and cost reduction strategy, whereas Homburg et al. (2008) report that a
dual strategic emphasis has a positive impact on customer profitability.
Managerial Implications
There is a temptation for managers to be normative about the pursuit of competitive
advantage and direct attention and resources toward particular CRM capabilities, mainly
CRM and Market Orientation

Page 31

because it allows managers to simplify complex CRM implementation and concentrate their
efforts on getting it right, one capability at a time. This approach, however, would seem to
be flawed, as well-developed technical, human and business capabilities in isolation are
insufficient to generate competitive superiority. In the specific case of CRM, each capability
is nested within an intricate organizational system of interrelated and interdependent
resources.
By comparing capabilities relative to competitors, we offer benchmark data that show
managers the necessary conditions for success. However, knowledge of what is required per
se is not sufficient for success. For these capabilities to be exercised involves a series of
judgments about the particular CRM strategic emphasis. An indiscriminant emphasis on
customer intimacy to the exclusion of operational efficiency and analytic orientations will
actually diminish performance. This observation reaffirms a growing consensus that the
context within which IT is applied is an important feature of overall performance (Ray et al.
2005). In other words, to start dating customers with the promise ofbut not the capability
to efficiently fulfilla genuine relationship, is a dangerous strategy: customers expectations
are not met, staff become frustrated and executives walk away disappointed.
Limitations and Direction for Further Research
This study has limitations that qualify our findings and present opportunities for future
research. Although it is often argued that cross-sectional designs are justified in exploratory
studies that seek to identify emerging theoretical perspectives, there is always the issue of
capturing causality. Therefore the results of this study should be viewed as preliminary
evidence that the main constructs (i.e., CRM capabilities) influence performance. This echoes
the now customary call for the use of longitudinal studies to corroborate cross-sectional
findings and examine performance prior to and after a CRM program implementation.
Longitudinal studies would provide the necessary insight required to evaluate this effect.
Finally, because our study is representative of large, high-performing organizations that
CRM and Market Orientation

Page 32

aggressively use CRM, one could reasonably argue that such organizations benefit through
the reinvestment of profits enabling them to devote considerable resources to CRM programs,
thereby reinforcing their success.

Future work should seek to control for resource

munificence (Klein 1990).

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 indeterminant and
should be guided by a strategic emphasis that combines customer intimacy, operational
excellence and data analytics.

By integrating two schools of thoughtcapabilities and

strategic emphasiswe 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.

CRM and Market Orientation

Page 33

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