Reports

Effect of Customer-Centric Structure on Firm Performance

Ju-Yeon Lee, Shrihari Sridhar, Conor M. Henderson, and Robert W. Palmatier, 2012, 12-111

Over the past decade, 22% of Fortune 500 firms—acting on the assumption that structuring divisions around customers can improve customer centricity—have shifted toward a more customer-aligned organizational structure. But does a customer-centric structure ultimately improve financial performance? A dearth of empirical evidence on this issue has prompted the Marketing Science Institute to ask, “How do organizational structure and marketing capabilities influence business performance?” in its 2010–2012 Research Priorities.

Accordingly, this study’s objective is to understand how and when a customer-centric structure improves firm performance. Ju-Yeon Lee, Shrihari Sridhar, Conor Henderson, and Robert Palmatier investigate 13 years of secondary data (1998–2010) that links 174 firms’ structural alignment to performance, and find evidence supporting the prevailing wisdom that structural types increasingly aligned with customers improve performance by enhancing customer satisfaction. However, such structures simultaneously degrade performance by reducing internal efficiencies. Understanding this cost-benefit tradeoff inherent to a customer-centric structural alignment is critical to discovering when such an alignment will pay off.

Given this, the authors investigate contingent factors that would reveal when a customer-centric structure is worthwhile. They point to the presence of two alternative structural sources of customer alignment as the key determinants. Results suggest if a firm competes in many different end markets or is organized in large divisions, then a customer-centric structural alignment is a worthwhile remedy, and all else being equal, it does pay off financially. The proposed conceptual framework is supported by a model of mediated moderation, rigorous robustness checks, and post hoc analyses generalizable to all Fortune 500 firms.

Overall, this study provides theoretical and empirical insights to clarify the mixed picture that emerges from high profile stories of some firms enjoying the fruits of restructuring around customer groups (e.g., IBM, Fidelity Investments), while others see their business plummet after making similar changes (e.g., Cisco, Xerox). These findings offer boardroom executives some caveats to consider before changing their structural alignment. First, there is a cost-benefit tradeoff inherent in structural alignment, such that customer-centric structural alignment enhances customer satisfaction but sacrifices internal efficiencies. Second, the customer-centric benefits outweigh the associated costs when the firm already (1) has relatively large divisions or (2) serves many diverse end markets.

Ju-Yeon Lee is a Ph.D. candidate in marketing, Foster School of Business, University of Washington. Shrihari Sridhar is Assistant Professor of Marketing, Smeal College of Business, Pennsylvania State University. Conor M. Henderson is Ph.D. candidate in marketing, Foster School of Business, University of Washington. Robert W. Palmatier is Professor of Marketing, Foster School of Business, University of Washington.

Acknowledgments
The authors thank Ajay Kohli, Rajdeep Grewal, Eric Fang, Oliver Rutz, Jonathan Zhang, the Marketing Science Institute, and attendees of the University of Washington Marketing Seminar Series for their valuable comments and suggestions.

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Related links

Does Customer-centric Realignment Pay off? (2013) [Article]

Relationship Marketing
Robert W. Palmatier (2008) [Book]

What Drives Interfirm Relationship Performance (2007) [Article]

 

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