Market orientation, strategic flexibility, and

performance: implications for services providers

Rajshekhar (Raj) G. Javalgi, Thomas W. Whipple and Amit K. Ghosh
James J. Nance College of Business Administration, Cleveland State University, Cleveland, Ohio, USA, and
Robert B. Young
Business Division, Lorain County Community College, Elyria, Ohio, USA

Abstract
Purpose – This article proposes investigating implications for service providers who adopt a market orientation. It hopes to extend current thinking by
integrating market orientation and market-focused strategic flexibility.
Design/methodology/approach – A model is extended to apply to services marketing. The “strategic wheel of service performance” provides a
framework to discuss the managerial implications from integration of market orientation, strategic flexibility, competitive advantage, and service
performance.
Findings – The impact of developing a market orientation should be higher levels of customer relationship marketing (CRM), retention, satisfaction,
loyalty, and lifetime value (LTV). Increases in one or more of these interrelated variables should help service providers improve their judgmental and
objective performance.
Research limitations/implications – More research needs to be conducted to expand the market orientation philosophy to the service provider.
Subjecting the framework to analytic rigor would allow scholars and practitioners to understand more fully the inter-relatedness of the service
implications.
Practical implications – Practice implications of the paper are: the service economy is an opportunity to practice market orientation; investments in
customer profitability, retention, and loyalty programs pay dividends; A market orientation enhances financial and strategic performance; integration of
principles across organizational boundaries requires a long time; financial and strategic business performance criteria need to be quantified; cross-
functional customer feedback mechanisms need to be designed; and market orientation must be integrated across all service function providers.
Originality/value – The conceptual framework integrates market orientation, market-focused strategic flexibility, strategic competitive advantage,
and subjective and objective performance outcomes as applied to service providers. The discussion strengthens the strategic value of market orientation
and provides managerial implications for the services sector.

Keywords Market orientation, Marketing strategy, Response flexibility, Competitive advantage, Services, Performance measurement (quality)

Paper type Conceptual paper

An executive summary for managers and executive
readers can be found at the end of this article.
Introduction
In the era of globalization, which has brought about
unprecedented changes in the service economy, organizations
of all sizes and structures are searching for strategies to improve
performance without sacrificing quality. A market orientation
that provides for market-focused strategic flexibility to sustain
competitive advantage is a strategic solution. Characteristically,
the service sector is diverse, ranging from large multinational
corporations to small-and-medium enterprises. With the
increasing importance of the service sector, the quality,
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Journal of Services Marketing
19/4 (2005) 212– 221
q Emerald Group Publishing Limited [ISSN 0887-6045]
[DOI 10.1108/08876040510605244]
competitiveness, and efficiency in service companies are
predicted to be key drivers of growth and performance.
Competitiveness in the service industry, rather than in
manufacturing, will propel the global economy in the twenty-
first century. A popular belief among consumers is that the
service economy is new and is only recently replacing the
obsolete manufacturing base developed in the twentieth
century. Zeithaml and Bitner (2003) provide a more accurate
picture of the long-term influence of the service economy:
.
as early as 1929, more than half of the working population
was employed in the service sector;
.
approximately 54 percent of gross national product
(GNP) was generated by services as early as 1948; and
.
the trend has continued and as of 1999 services
represented 80 percent of employment and 78 percent
of gross domestic product (GDP).
The USA is the world leader and champion in the
transformation to a service economy. The transformation
from a manufacturing-based to a service-centered economy
seems to be nearly complete. The fastest growth rates in job
formation and in number of jobs are in service industries. In
2000, there was an $81 billion US trade surplus in services
while manufactured goods remained in the red (Bach, 2001).
A great deal of customer communication, interaction, and
knowledge transfer relies on a consistent and committed use

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Rajshekhar (Raj) G. Javalgi et al.
of the market orientation philosophy. Since service delivery
requires human interaction with external and internal
customers, a market orientation should be particularly
important for a service firm (Schneider, 1987). What are
the implications of a market orientation for the growing
number of service providers? Should service providers utilize
the market orientation philosophy differently than their goods
producing counterparts? Managers, employees, and other
stakeholders need to be asking these questions given the
significance of the service sector. The importance of a market-
oriented culture is crucial to all levels of the modern
organization (Day, 1990; Deshpandé and Webster, 1989).
Service providers should be part of this universe of modern
organizations. However, service marketing is different. When
purchasing goods, the consumer employs many tangible cues
to judge quality, including color, style, finish, package, and fit.
When customers purchase services, fewer tangible cues exist.
In many cases, tangible evidence is limited to the service
provider’s physical facilities, equipment, and personnel.
Differences in the inseparability, intangibility, heterogeneity,
and perishability of services underscore the importance of a
market orientation (Lovelock, 2001).
This article draws on the literature in market orientation
and services marketing to suggest implications for service
providers who adopt a market orientation. According to
Caruana et al. (1999), the constructs of market orientation
and service quality are related. Market orientation’s positive
association with market performance provides the critical
foundation (Narver and Slater, 1990). However, research
focusing on market orientation concepts as they relate to the
service sector is sparse (Van Egeren and O’Connor, 1998).
This investigation extends current thinking by integrating
market orientation and market-focused strategic flexibility
within the services marketing arena. A model Johnson et al.
(2003) developed for goods marketing has been adapted and
extended to apply to services marketing. Discussion of this
new model for service providers is the basis for the framework
development contribution of this paper. In addition, the
“strategic wheel of service performance” provides a
framework to discuss the managerial implications that are
forthcoming from an integration of thinking regarding market
orientation, strategic flexibility, competitive advantage, and
service performance. The focus and contribution of this
research is framework development and managerial
implications, not empirical testing.
Market orientation, strategic flexibility, and
services framework
Market orientation
Scholarly attention has focused on the definition,
measurement, impact, and organizational drivers of market
orientation and its enhancements (Jaworski and Kohli, 1996).
One definition of marketing orientation states that: “market
orientation consists of three behavioral components: 1)
customer orientation, 2) competitor orientation, and 3)
inter-functional coordination and two decision criteria: 1)
long-term focus and 2) profitability” (Narver and Slater,
1990). Another definition, by Jaworski and Kohli (1993), is:
“the organization wide generation of market intelligence
pertaining to current and future needs of the customers,
dissemination of intelligence horizontally and vertically within
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the organization, and organization wide action or
responsiveness to it”.
A market orientation is valuable because it focuses the
organization on continuously collecting information about
target customers’ needs and competitors’ capabilities and
using this information to create continuously superior
customer value (Slater and Narver, 1995). Researchers
developed comprehensive theories that explain the nature
and consequences of a market orientation (Kohli and
Jaworski, 1990; Narver and Slater, 1990), resulting in a
body of research that investigated the relationship between
market orientation and performance (Deshpandé et al., 1993;
Ruekert, 1992; Slater and Narver, 2000). Market orientation
is also central to discussions about marketing management
and strategy (Day, 1992).
Studies that explore the effect of market orientation on
performance are well known in the extant literature. While
some studies found significant relationships, others did not,
suggesting that perhaps some mediating factor may be
involved. Johnson et al. (2003) proposed that market-
focused strategic flexibility might be a potential mediator of
the market orientation, performance relationship. We extend
their model and apply it to the context of service providers.
This extension makes intuitive sense for at least two reasons.
First, service providers are increasingly important to the
overall marketplace in terms of both the number of
organizations involved in services and overall job growth.
Second, the nature of services marketing, with its emphasis on
personal interactions with customers, lends itself well to
developing and maintaining a strategy based on the concept of
market orientation.
The conceptual framework shown in Figure 1 integrates the
market orientation and strategic flexibility constructs, as well
as environmental turbulence, sustainable competitive
advantage, and service performance, into a single model.
The framework begins with the three components of market
orientation, consisting of customer and competitor
orientations and inter-functional coordination (Narver and
Slater, 1990). Market orientation is an antecedent to market-
focused strategic flexibility that in turn provides a sustainable
competitive advantage and influences service performance.
Strategic flexibility
Johnson et al. (2003, p. 77) explore the concept of market-
focused strategic flexibility and its relationship to a firm’s
market orientation. These authors define market-focused
strategic flexibility “as the firm’s intent and capabilities to
generate firm-specific real options for the configuration and
reconfiguration of appreciably superior customer value
propositions”. Without a market focus, any type of
flexibility, whether strategic, tactical, or operational, will not
help the firm create superior value and sustainable
competitive advantage. They argue that market-focused
strategic flexibility plays a critical role in the firm’s success.
Moreover, the authors suggest that these successes are related
to the firm’s market orientation.
If a service firm’s organizational objective is to create a
superior value proposition for its customer base, and therefore
a sustainable competitive advantage, an advanced
conceptualization of strategic flexibility should incorporate a
market-focused perspective and directly consider a firm’s
options with regard to services and markets (Johnson et al.,
2003). Market-focused strategic flexibility could provide the
 Market orientation, strategic flexibility, and performance
Rajshekhar (Raj) G. Javalgi et al.
Figure 1 Framework for market-focused strategic flexibility and service providers
organization with the appropriate structure necessary for
long-term survival and prosperity.
Environmental turbulence
Turbulence in the environment has an affect on both the
organization’s market orientation and its competitive
advantage. Glazer and Weiss (1993) define environmental
turbulence in terms of high levels of change in magnitude and/
or direction in the values of key environmental variables and
considerable uncertainty and unpredictability as to the future
values of these variables. Environmental turbulence
moderates the impact of market orientation on market-
focused strategic flexibility (Johnson et al., 2003). Factors
included in environmental turbulence are macro influences
such as political, economic, legal, technological, and
demographic changes that can affect the organization.
Sustainable competitive advantage
To achieve superior performance, a business must develop
and sustain a competitive advantage (Porter, 1985).
Organizations have long sought how to achieve a
competitive advantage in uncertain and swiftly changing
environments (Dobni and Luffman, 2000). Some authors
believe that gaining a competitive advantage will be achieved
by placing a renewed emphasis on delivering superior quality
products and services to customers (Bitner, 1992; Day and
Wensley, 1988; Parasuraman et al., 1985). Others feel that
organizations should take a more pragmatic approach by
considering tradeoffs between the external environment and
strategic initiatives in search of “best practices” (McKee et al.,
1989; Narver et al., 1992; Venkatraman and Prescott, 1990).
Whereas competitive advantage was previously based on
structural characteristics, such as market power, economies of
scale, or a broad product line, the emphasis today is
capabilities that enable a business to deliver superior value
consistently to its customers (Slater and Narver, 2000). To do
so requires that a seller understand a buyer’s entire value
chain as it evolves over time. Competitive advantage is not
just a function of how well a company plays by the existing
rules of the game. More importantly, it depends on the firm’s
ability to change those rules radically. Govindarajan and
Gupta (2001) discuss one way for changing those rules
through a customer knowledge advantage. They cite direct
contact with customers as having helped Dell Computer gain
a superior understanding of specific customer needs. By
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organizing its marketing and sales functions around distinct
customer segments, Dell was able to address varying
customer needs with greater precision and speed.
In most industries, a few firms are superior performers.
Those firms conceivably possess something special and
difficult to imitate that allows them to outperform their
rivals. Researchers generally distinguish between two broad
sources of competitive advantage:
1 unique resources or assets; and
2 distinctive skills or capabilities (Bharadwaj et al., 1993).
Barney (1991) lists four essential requirements for a resource/
skill to be a source of sustainable competitive advantage. It
must be:
1 valuable;
2 rare among a firm’s current and potential competitors;
3 imperfectly imitable; and
4 there must not be any strategically equivalent substitutes
for this resource/skill.
A competitive advantage becomes sustainable if the advantage
resists erosion by competitor behavior over time (Porter,
1985).
Service performance
It is acknowledged that performance is a multidimensional
construct, consisting of two broad measures: judgmental
performance (e.g. customer service loyalty) and objective
performance (e.g. ROA) (Guo, 2002; Agarwal et al., 2003).
Scholars have noted that while judgmental measures of
performance are important to profitability, objective measures
of performance provide the link to profitability in service
organizations (Heskett et al., 1994; Agarwal et al., 2003).
Heskett et al. (1994) note that performance ultimately is
measured by profitability. For example, it is driven by such
strategic variables as customer retention and customer
satisfaction. Measuring customer profitability is common
among banking organizations. Garland (2002) examined
1,100 retail bank customers to determine the non-financial
drivers of customer profitability. Jarrar and Neely (2002)
looked at cross-selling in the financial services sector,
Sutherland (2001) provided guidelines about what is
considered to be important in a bank account and customer
profitability valuation, Narayanan and Brem (2002) examined
customer profitability and customer relationship management
(CRM) at RBC Financial Group, and Hasapidis (2001)
 Market orientation, strategic flexibility, and performance
Rajshekhar (Raj) G. Javalgi et al.
investigated using the Marketing Customer Information File
(MCIF) as a database to help determine customer
profitability. Niraj et al. (2001) extended customer
profitability analysis to an intermediary in a supply chain.
Performance implications for service providers
A service firm’s judgmental and objective performance can be
enhanced by improving the organization’s CRM, retention,
satisfaction, loyalty, and lifetime value (LTV). Specific
customer-focused strategies for each performance type
depend on the service organization’s strategic flexibility,
adaptability to environmental turbulence, and achievement of
a competitive advantage. The following discussion focuses on
managerial implications in these areas, as depicted in the
“strategic wheel of service performance” (Figure 2), with
specific company examples.
CRM
The marketing discipline has undergone a radical change over
the past two decades. The most significant of these shifts is
the movement away from transaction-oriented strategies to
more relationship-oriented strategies. CRM is defined as
establishing, developing, and maintaining successful relational
exchanges (Morgan and Hunt, 1994). It is part of the
developing “network paradigm” which recognizes that global
competition occurs increasingly between networks of firms
(Thorelli, 1986). Berry (1983) states “relationship marketing
is attracting, maintaining and – in multi-service organizations
– enhancing customer relationships”.
Proponents of relationship marketing encourage
organizations to seek partners for long-term marketing
relationships (Morgan and Hunt, 1999). For example,
focusing on customer retention rather than customer
capture is one of the cornerstones of relationship marketing
(Vavra, 1992). Many scholars are in agreement about the
central focus on the customer in the relationship-marketing
framework (Christopher et al., 1991; McKenna, 1991; Sheth,
Figure 2 Strategic wheel of service performance
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1994). The retention of customers by building relationships
receives top priority in organizations that adopt the
relationship marketing philosophy.
Palmer and Mayer (1996) propose that relationship
marketing can be characterized in terms of three principal
orientations: a tactical relationship orientation, a strategic
relationship orientation, and a philosophical orientation
which sees relationship marketing as going to the core of
marketing. It is the philosophical orientation that is most
relevant to the current discussion about market orientation. It
follows that the concepts of relationship marketing and
market orientation are closely intertwined with each other
especially as they relate to service providers.
The tactical level is linked to customer transactions, databases,
and information technology found, for example, in financial
service organizations. The use of frequent flyer programs by
airlines is an example of relationship marketing at a tactical level.
Increasing the costs and complexities of switching providers is an
example of the strategic orientation to relationship marketing.
For example, mortgage penalties for early payoff represent a high
switching cost, thereby keeping customers over a longer term. A
more recent strategic conceptualization of relationship marketing
sees the process of relationship development as being essentially
about sellers’ attempts to restrict the choice set of buyers (Palmer
and Mayer, 1996). This restriction can come about
consensually, where buyers limit their choices due to earlier
satisfaction, or non-consensually, where customers are effectively
prevented access to suitable alternative providers. Sheth and
Parvatiyar (1995) describe a firm’s motivation to develop
ongoing relationships as being based primarily on choice
reduction. At a more philosophical level, relationship
marketing goes to the heart of the marketing philosophy
(Palmer and Mayer, 1996). Traditional definitions of marketing
focus on the primacy of customer needs, while relationship
marketing refocuses marketing strategy away from products and
their lifecycles towards customer relationship lifecycles. Recent
conceptualizations of market orientation stress the use of all
employees of an organization to meet profitably the lifetime
needs of targeted customers better than the competition.
Company example: Amazon.com
The 2000 American Customer Satisfaction Index reflected a
rating of 84 for Amazon – one of the highest ratings of any
company in any industry, and certainly higher than the 73
average rating for e-commerce endeavors and the 60-70 point
ratings for many other service businesses. Jeff Bezos, CEO of
Amazon, believes that his customers come first. With a
continued focus on customers, relationships, value, and the
brand itself, Bezos and others believe that sales will continue
to grow and profits will continue. Amazon allows customers
to find related books on virtually any topic by simply typing
key words and initiating a search of its massive database. Its
one-to-one marketing system allows the company to track
what individual consumers buy and let them know of
additional titles that might interest them. This is done while
the customer is shopping as well as through periodic direct e-
mail that identifies books specifically related to the customer’s
past purchase patterns and interests (Zeithaml and Bitner,
2003).
Customer retention
Most organizations spend a disproportionate amount of their
time and resources courting new customers. Many advertising
 Market orientation, strategic flexibility, and performance
Rajshekhar (Raj) G. Javalgi et al.
campaigns and strategies are designed to attract new clients
rather than retain current customers. Some departments are
dedicated to developing what has become known as “new
business”. In reality, 80 percent or more of marketing budgets
are often earmarked for attracting new customers, leaving
only 20 percent allocated to retaining existing customers
(Weinstein, 2002).
While it is critical to replace lost customers and discover
expanding markets, this objective should be secondary to the
primary goal of maintaining relationships and retaining
existing customers. Keaveney (1995) found that service-
related problems such as inconvenience, core service failures,
failed service encounters, and response to failed service
accounted for more than two-thirds of the reasons why
customers switch service providers. Pricing was related to only
17 percent of the switching occasions. Once marketers realize
that many customers leave primarily due to service related
reasons, these issues become highly controllable from the
firm’s perspective (Weinstein, 2002).
Reichheld (1996) builds a case for why organizations
should develop and use customer retention strategies. He
shares the following insights related to customer retention:
.
the typical organization loses 10-30 percent of its
customers every year;
.
increasing the customer retention rate by 5 percent can
increase the value of an average customer (lifetime profits)
by 25-100 percent; and
.
on average, US corporations lose one-half of their
customers over five years.
Aspinall et al. (2001) examined how organizations approach
the topic of customer retention. Respondents were asked if
their organization had an agreed on a definition of what
constitutes customer retention. Results indicate that over half
of the sample of 314 considered customer retention to be
more important than customer acquisition, but only one
quarter of the sample claimed that the company had a
definition of customer retention. Moreover, 20 percent of
those with a claimed definition stated that they did not know
it. It appears that as companies espouse the importance of
customer retention, they do not do much to define, measure,
or manage it.
Reibstein (2002) discusses several potential measures
related to customer retention for internet shoppers,
including customer satisfaction, repeat buying, share of
requirements, and likelihood to purchase again. Customer
satisfaction should be an indication of how well customers like
their online shopping experience, and it is probably the best
indication of their willingness to return to the site in the
future. He refers to repeat buying in terms of the frequency of
specific site visits, while share of requirements refers to the
portion of purchases for a specific customer that is conducted
at one particular site. It follows from his discussion that the
likelihood to repurchase should be related directly to higher
levels of satisfaction, repeat buying, and share of
requirements.
Company example: USAA Insurance
USAA is a preeminent example of a company focused on
building long-term relationships with customers. Customer
retention has been a core value of the company since long
before customer loyalty became a popular business concept.
In business since 1922, USAA provides for the insurance
needs of a highly targeted market segment: current and
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former US military personnel and their families. USAA owns
and manages more than $60 billion in assets. It consistently
appears on Fortune magazine’s list of the 100 best companies
to work for in the USA, and customer retention figures
approach 100 percent. In fact, the most likely reason for a
customer to leave the company is death. USAA believes so
strongly in the importance of customer retention that
managers’ and executives’ bonuses are based on this metric
(Zeithaml and Bitner, 2003).
Customer satisfaction
Reviews of the literature on satisfaction suggest that two
constructs, performance-specific expectation and expectancy
disconfirmation, play a major role in satisfaction decisions
(Oliver, 1980). Satisfaction became a popular topic in
marketing during the 1980s and is a debated topic during
both business expansions and recessions. Most discussions on
customer satisfaction involve customer expectation of the
service delivery, actual delivery of the customer experience,
and expectations that are either exceeded or unmet. If
expectations are exceeded, positive disconfirmation results,
while a negative disconfirmation results when customer
experience is poorer than expected.
Customer satisfaction with a service is influenced
significantly by the customer’s evaluation of service features.
For a luxury hotel, features may include restaurants, room
amenities, staff courtesy, and sports facilities (pools, fitness
rooms, and golf) (Oliver, 1997). In addition, satisfaction is
influenced by customers’ perceptions of equity and emotional
responses (Zeithaml and Bitner, 2003). Perceptions include
price and value comparisons as well as equity assessments
among other customers. Emotional evaluations are related to
temporary mood states including the overall positive frame of
mind consumers have when they are on vacation.
According to Oliver (1980), antecedents of customer
satisfaction include expectations and disconfirmations.
Consequences of customer satisfaction include positive
influences on post-purchase attitude and intentions. Other
researchers discussed additional outcomes of customer
satisfaction (Zeithaml and Bitner, 2003). For example, some
public policy makers believe that customer satisfaction is an
important indicator of national economic health. They believe
that satisfaction levels may be as important as economic
efficiency and pricing statistics. Satisfaction may be related to
a better quality of life. Moreover, customer satisfaction may
be correlated with other measures of economic health, such as
corporate earnings and stock prices.
Company example: Marriott Corporation
How important is customer satisfaction to the Marriott
Corporation? According to the founder of Marriott, J. Willard
Marriott, Sr, what has defined his company’s greatness are the
following principles:
.
timeless core values and enduring purpose;
.
a relentless drive for progress; and
.
strength beyond the presence of any one individual.
The Marriott staff is constantly looking for ways to improve
the customer experience at its hotels. After making the
observation that overnight guests were throwing away pizza
boxes from local pizza chains, Marriott decided to offer pizza
delivered via room service along with the full room service
menu. Marriott is known for its passionate business practices.
One of the best known is its procedural manual covering 66
 Market orientation, strategic flexibility, and performance
Rajshekhar (Raj) G. Javalgi et al.
separate steps for cleaning a hotel room and all in less than
half an hour. Over the past 40 years, this dedication to
customer satisfaction has contributed to Marriott’s growth
from a $50 million restaurant and airline catering chain with
one hotel into a $12 billion global company managing more
than 1,500 hotels, resorts, and time-share properties; dozens
of senior living communities; and thousands of food service
contracts and other special services. (Marriott and Brown,
1997).
Customer loyalty
Most research investigating brand loyalty examines loyalty
focused on goods rather than on services (Dick and Basu,
1994). In an analysis of how consumers evaluate products and
services, Zeithaml (1981) concluded that some of the main
determinants of brand loyalty for products and services are
past satisfaction with a brand, perceived risk associated with a
purchase, availability of substitutes, and the costs of switching
brands. Since services have distinct characteristics that result
in differences in strategic orientation, it follows that the most
effective strategies for building and retaining loyalty may vary
between product and service providers (Javalgi and Moberg,
1997). Furthermore, these differences imply that a market
orientation may indeed have different implications for service
providers as opposed to product marketers.
The difficulty of evaluating quality of services makes
switching brands of service less likely as customers become
familiar with a particular service (Javalgi and Moberg, 1997).
Inseparability of provider and customer in many service
settings results in less switching after customers develop a
relationship with a service provider. Since services are
intangible and heterogeneous, most consumers perceive a
higher risk in services than in goods. As perceived risk
increases, the likelihood of loyalty to a brand increases
(Cunningham, 1966; Guseman, 1981; Roselius, 1971). The
intangibility of services makes the evaluation of service quality
more difficult. Thus, consumers often depend on credence
qualities to evaluate services (Zeithaml, 1981). Intangibility
makes it more difficult and expensive to gather information
about services. The higher cost may lead to less consumer
information about services than about goods. Therefore, it
appears that brand loyalty may be more important for services
than it is for products (Zeithaml, 1981).
Company example: Southwest Airlines
Southwest Airlines occupies a solid position in the minds of
US air travelers as a reliable, convenient, fun, low-fare, no-
frills airline. Translated, this position means high value. It has
maintained this position consistently over 30 years while
making money every year; no other US airline comes close to
this record. The Dallas based carrier has managed to be the
low-cost provider and a preferred employer while enjoying
high levels of customer satisfaction and strong customer
loyalty. Southwest Airlines has the best customer service
record in the airline industry and has won the industry’s
“Triple Crown” for best baggage handling, on-time
performance, and best customer complaint statistics many
years in a row. This is a feat accomplished by no other airline.
The consistent positioning using the services marketing mix
reinforces the unique image in the customer’s mind, giving
Southwest Airlines its high-value position, which has resulted
in a huge and committed following of satisfied customers and
consistently increasing profits (Zeithaml and Bitner, 2003).
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Customer LTV
Organizations are realizing that losing a profitable customer
translates to more than losing a single sale. It means losing the
future revenue stream of that customer over his entire
lifetime. According to Bitran and Mondschein’s (1997)
definition, customer LTV is the total net worth of a
customer to an organization over the duration of the
relationship. Customer LTV is at the core of the
relationship approach to marketing strategy. When
marketers understand how much a customer may be worth
over a long period of time, they can begin to customize
marketing offerings to achieve overall profitability. The
numbers are compelling when considering the long-term
value of a customer. For example, Stew Leonard estimates
that if a given customer spends $100 per week in his/her
supermarket, shops 50 weeks per year, and lives in the local
area for ten years, he/she loses $50,000 if that customer is
lost. Similarly, Taco Bell has estimated that the LTV of a
customer exceeds $12,000, while Lexus estimates that a single
customer is worth $600,000 in lifetime sales (Kotler, 2001).
LTV analysis can be used to drive the following four
management decisions (Sargeant, 2001):
1 assigning acquisition costs;
2 choosing media for initial customer acquisition;
3 setting selection criteria for customer marketing; and
4 investing in the reactivation of lapsed customers.
Assigning acquisition costs
An understanding of LTV helps firms to determine how much
to spend on new customer recruitment. Customer segments
that are worth more over their lifetime may be more expensive
to recruit initially, but these early marketing investments
should be more than compensated for over the longer term.
Choosing media for initial customer acquisition
Marketers searching for new customers routinely ask media
questions, such as “Which media should be used for
recruiting new customers?” or “How can the various media
options be prioritized in terms of spending amounts?”
Traditional analysis to answer these questions needs to be
reversed. Rather than conducting a return on investment
(ROI) for each medium and allocating budget to the highest
scoring media options according to ROI, LTV analysis begins
by analyzing customers first and only then prioritizing media
options based on which ones deliver the most profitable
customers over time.
Setting selection criteria for customer marketing
LTV analysis can be used to evaluate contract strategies for
ongoing customer development as well as to recruit new
customers. By projecting an estimated LTV for new
customers, an organization can segment its database into
different LTV strata. Marketing approaches that are more
customized to these different segments based on projected
LTV can be developed and implemented. Conversely,
segmenting the customer database based on LTV may
indicate segments that may be unprofitable over the long
term and therefore the organization should consider de-
marketing strategies. Dunn and Bradstreet estimate that the
first time an organization calculates a LTV analysis of its
customer base, between 5 and 15 percent of the database will
be labeled as unprofitable (Sargeant, 2001). Organizations
must then determine if these customers can become profitable
over a short period of time, or consider alternative
 Market orientation, strategic flexibility, and performance
Rajshekhar (Raj) G. Javalgi et al.
distribution channels that are less costly to the organization,
or decide to terminate the relationship with that specific
customer segment.
Investing in the reactivation of lapsed customers
The argument that a former customer is more likely to return
to the organization than the person who has never purchased
is supported by marketing logic. Most organizations would
support the strategy of marketing to former customers. LTV
analysis can help determine which specific segments of former
customers are worth the targeting effort. Customer metrics
such as amount of last purchase, total value of former
purchases, or length of time since defection can be used along
with LTV projections to help determine which segments of
defectors should be targeted. The inherent risk is that
companies will reactivate unprofitable customers that that
they are better off having lost. Using LTV analysis can help
prioritize the appropriate segments that would be profitable
over the long term.
Company example: Lexus. Lexus, the luxury division of
Toyota, has consistently established itself as one of the premier
automotive brands in the USA. In its own words, Lexus’ goal is
to become the royalty of loyalty. Although Lexus is the first
brand ever to win all three of the industry’s customer
satisfaction awards in the same year, the division is not
content with mere satisfaction. According to Lexus, the only
meaningful measure of satisfaction in this industry is
repurchasing loyalty. On average, auto dealers retain only 30-
40 percent of the post-warranty service dollars spent on the
cars they sell. To address this opportunity Lexus has developed
a computer system that estimates how much service work the
cars a dealer has sold should generate. The system compares
dealers’ service billings to its estimates and also checks which
customers have not returned for their first two checkups, which
are free. The system also calculates the additional profit a
dealership would have earned if its loyalty performance had
been in the top quartile. Results indicate that industry norms
for same brand car repurchase rates are in the 30-40 percent
range. In contrast, Lexus repurchase rates are double the
industry norm at approximately 68 percent. Moreover,
financial indicators show that Lexus accounts for just 2
percent of Toyota’s unit sales but delivers one-third of the
corporation’s operating profits (Reichheld, 1996).
Conclusions and guidelines for managers
The impact of developing a market orientation for service
providers should be higher levels of CRM, retention,
satisfaction, loyalty, and LTV. Moreover, these implications
should be even more visible and meaningful for service
providers as opposed to goods marketers due to the nature of
services themselves. The saliency of market orientation in
service firms is underscored by the pivotal role that it plays.
Caruana et al. (1999) found empirical support that the
reliability of a service firm is positively related to its
judgmental and objective performance.
The context of this framework is further complicated by the
fact that many, if not most, of the service implications are
interrelated. They all would not necessarily change in unison.
However, it follows that increases in customer retention, for
example, should be related to increases in satisfaction and
loyalty (Figure 2). Increases in one or more of these variables
should help service providers improve their judgmental and
objective performance.
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Volume 19 · Number 4 · 2005 · 212 –221
The following guidelines should be useful to service
provider managers who plan to develop a business
philosophy based on market orientation:
.
The service economy is large, growing, and represents an
ample opportunity to practice market orientation
principles to determine their extended applicability to
service providers.
. The market orientation literature offers many insights into
competing in today’s competitive marketplace for service
providers. Investments in customer profitability, retention,
and loyalty programs should pay significant dividends for
service marketers.
.
Developing a market orientation has the potential to
provide several positive financial and strategic
performance consequences for service firms who are
successful at integrating this philosophy across their
organizations.
.
Managers working on integrating a market orientation
into their organizations should not expect gains in specific
financial and strategic business performance over the
short term. To integrate these principles properly across
organizational boundaries requires a longer-term time
horizon.
.
Service organizations will need to develop accurate
measurement instruments to quantify the levels of the
financial and strategic business performance criteria
discussed.
.
Managers will need to design customer metric feedback
mechanisms that are cross-functional to help determine
when marketing strategies need to be modified.
.
Developing and maintaining a market orientation cannot
be the responsibility of the internal marketing department
alone, but must be fully integrated across all functions of
service providers.
Limitations and future research
Service providers will greatly benefit from such a framework
that embraces the marketing orientation construct, strategic
flexibility, and service performance. Research emphasizing
market orientation concepts as they relate to the service sector
is sparse. Clearly, more conceptual and empirical research
needs to be conducted to expand the market orientation
philosophy from product marketer to service provider.
As with most articles based on conceptual arguments, this
paper is subject to certain limitations. The framework
discussed here has not been tested empirically. Empirical
evidence based on a cross-section of service providers would
extend this initial discussion further. Subjecting the
framework to analytic rigor would allow scholars, as well as
practitioners, to understand more fully the inter-relatedness of
the service implications discussed.
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Executive summary and implications for
managers and executives
This summary has been provided to allow managers and executives
a rapid appreciation of the content of this article. Those with a
particular interest in the topic covered may then read the article in
toto to take advantage of the more comprehensive description of the
research undertaken and its results to get the full benefits of the
material present.
In an era of globalization, which has brought about
unprecedented changes in the service economy, organizations
of all sizes and structures are searching for strategies to improve
performance without sacrificing quality. Javalgi et al., argue that
a market orientation that provides for market focused strategic
flexibility to sustain competitive advantage is a strategic
solution.
Market orientation
A market orientation involves customer orientation,
competitor orientation, inter-functional co-ordination and
two decision criteria – long-term focus and profitability. A
market orientation is valuable because it focuses the
organization on continuously collecting information about
target customers’ needs and competitors’ capabilities, and
using this information to create continuously superior
customer value. A great deal of customer communication,
interaction and knowledge transfer relies on a consistent and
committed use of the market orientation philosophy. Since
service delivery requires human interaction with external and
internal customers, a market orientation should be
particularly important for a service firm.
Market-focused strategic flexibility
Market-focused strategic flexibility is “the firm’s intent and
capabilities to generate firm-specific real options for the
configuration and reconfiguration of appreciably superior
customer value propositions”. Without a market focus,
flexibility will not help the firm to create superior value and
sustainable competitive advantage. A firm that aims to create
superior value for its customers, and therefore a sustainable
competitive advantage, should have an advanced
conceptualization of strategic flexibility that incorporates a
market-focused perspective and directly considers the firm’s
 Market orientation, strategic flexibility, and performance
Rajshekhar (Raj) G. Javalgi et al.
options with regard to services and markets. Market-focused
strategic flexibility could provide the organization with the
appropriate structure necessary for long-term survival and
prosperity. However, turbulence in the environment – such as
political, economic, legal, technological and demographic
changes that can affect an organization – moderates the
impact of market orientation on market-focused strategic
flexibility.
Sustainable competitive advantage
Companies that manage to achieve a sustainable competitive
advantage are able consistently to deliver superior value to
their customers. Two broad sources of competitive advantage
are a company’s unique resources or assets, and a firm’s
distinctive skills or capabilities. A competitive advantage
becomes sustainable if it resists erosion by the behavior of
competitors over time.
Service performance
Sustainable competitive advantage is closely linked, then, with
service performance. This consists of two broad measures:
judgmental performance (such as customer service loyalty)
and objective performance (such as return on assets). While
judgmental measures of performance are important to
profitability, objective measures of performance provide the
link to profitability in service organizations. Performance,
ultimately, is measured by profitability.
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Volume 19 · Number 4 · 2005 · 212 –221
Performance implications for service managers
Improving the organization’s customer relationship
management, customer retention, customer satisfaction,
customer loyalty and customer lifetime value can enhance a
service firm’s judgmental and objective performance. Specific
customer-focused strategies for each performance type
depend on the service organization’s strategic flexibility,
adaptability to environmental turbulence, and achievement of
a competitive advantage.
Javalgi and Young conclude that investments in customer
profitability, retention, and loyalty programs should pay
significant dividends for service marketers. Developing a
market orientation has the potential to provide several positive
financial and strategic performance consequences for service
firms that successfully integrate this philosophy across their
organizations. However, properly integrating market-
orientation principles across organizational boundaries can
take a long time. Service organizations need to develop
accurate ways of measuring any improvements. Developing
and maintaining a market orientation cannot be the
responsibility of the internal marketing department alone,
but must be fully integrated across all functions of service
providers.
(A précis of the article“Market orientation, strategic flexibility, and
performance: implications for services providers”. Supplied by
Marketing Consultants for Emerald.)