Marketing-Case Study

Pergamon 0969-5931(95)00018--6

International Business R e v i e w Vo|. 4, No. 4, pp. 397-418, 1995 Elsevier Science Ltd. Printed in Great Britain

0969-5931/95 $9.50 + 0.00

The Evolution of Relationship Marketing

Jagdish N. Sheth* and Atul Parvatiyar* Goizueta Business School, Emory University,

Atlanta, GA 30322, USA

The Evolution of Relationship

Marketing

Abstract -- Relationship Marketing is emerging as a new phenomenon. However, relationship oriented marketing practices date back to the pre-Industrial era. In this article, we trace the history of marketing practices and illustrate how the advent of mass production, the emergence of middlemen, and the separation of the producer from the consumer in the Industrial era led to a transactional focus of marketing. Now, due to technological advances, direct marketing is staging a comeback, leading to a relationship orientation. The authors contend that with the evolution of Relationship Marketing, the hitherto prominent exchange paradigm of marketing will be insufficient to explain the growing marketing phenomena of collaborative involvement of customers in the production process. An alternate paradigm of marketing needs to be developed that is more process rather than outcome oriented, and emphasizes value creation rather than value distribution.

Key Words -- Relationship Marketing, Relational Orientation, Transaction Orientation.

I n t r o d u c t i o n A l t h o u g h m a r k e t i n g p r a c t i c e s c a n b e t r a c e d b a c k as f a r as 7 0 0 0 B . C . ( C a r r a t u , 1987), m a r k e t i n g t h o u g h t as a d i s t i n c t d i s c i p l i n e w a s b o r n e o u t o f e c o n o m i c s a r o u n d the b e g i n n i n g o f this c e n t u r y . A s the d i s c i p l i n e g a i n e d m o m e n t u m , a n d d e v e l o p e d t h r o u g h the first t h r e e q u a r t e r s o f the t w e n t i e t h c e n t u r y , the p r i m a r y f o c u s w a s o n t r a n s a c t i o n s a n d e x c h a n g e s . H o w e v e r , t h e d e v e l o p m e n t o f m a r k e t i n g as a f i e l d o f s t u d y a n d p r a c t i c e is u n d e r g o i n g a r e c o n c e p t u a l i z a t i o n in its o r i e n t a t i o n f r o m t r a n s a c t i o n s to r e l a t i o n s h i p s ( K o t l e r , 1990; W e b s t e r , 1 9 9 2 ) . T h e e m p h a s i s o n r e l a t i o n s h i p s as o p p o s e d t o t r a n s a c t i o n b a s e d e x c h a n g e s is v e r y l i k e l y to r e d e f i n e the d o m a i n o f m a r k e t i n g ( S h e t h e t a l . , 1988). I n d e e d , the e m e r g e n c e o f a r e l a t i o n s h i p m a r k e t i n g s c h o o l o f t h o u g h t is i m m i n e n t g i v e n the g r o w i n g i n t e r e s t o f m a r k e t i n g s c h o l a r s in t h e r e l a t i o n a l p a r a d i g m .

In this p a p e r , w e o b s e r v e , t h a t t h e p a r a d i g m s h i f t f r o m t r a n s a c t i o n s t o r e l a t i o n s h i p s is a s s o c i a t e d w i t h t h e r e t u r n o f d i r e c t m a r k e t i n g b o t h i n b u s i n e s s - t o - b u s i n e s s ( B T B ) a n d b u s i n e s s - t o - c o n s u m e r ( B T C ) m a r k e t s . A s in t h e p r e - i n d u s t r i a l e r a ( c h a r a c t e r i z e d b y d i r e c t m a r k e t i n g p r a c t i c e s o f a g r i c u l t u r a l a n d a r t i f a c t p r o d u c e r s ) o n c e a g a i n d i r e c t m a r k e t i n g , a l b e i t in a d i f f e r e n t f o r m , is b e c o m i n g p o p u l a r , a n d c o n s e q u e n t l y so is t h e r e l a t i o n s h i p

*Jagdish N. Sheth is the Charles H. Kellstadt Professor of Marketing and Atul Parvatiyar is Assistant Professor of Marketing.

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orientation o f marketers. W h e n producers and consumers directly deal with each other, there is a greater potential for emotional bonding that transcends e c o n o m i c e x c h a n g e . T h e y can understand and appreciate each others' needs and constraints better, are m o r e inclined to cooperate with one another, and thus, b e c o m e m o r e relationship oriented. This is in contrast to the e x c h a n g e o r i e n t a t i o n o f t h e m i d d l e m e n ( b u y e r s and s e l l e r s ) . To t h e m i d d l e m e n , e s p e c i a l l y t h e w h o l e s a l e r s , t h e e c o n o m i c s o f t r a n s a c t i o n s a r e m o r e i m p o r t a n t , a n d t h e r e f o r e , t h e y are less e m o t i o n a l l y a t t a c h e d to p r o d u c t s . I n d e e d , m a n y m i d d l e m e n do not p h y s i c a l l y see, feel, t o u c h , products but s i m p l y act as a g e n t s a n d t a k e title to the g o o d s f o r f i n a n c i n g a n d risk sharing.

The separation o f the producers from the users was a natural outgrowth o f the industrial era. On the one hand, mass production forced producers to sell t h r o u g h m i d d l e m e n , a n d on t h e o t h e r , i n d u s t r i a l o r g a n i z a t i o n s , d u e to s p e c i a l i z a t i o n o f c o r p o r a t e f u n c t i o n s , c r e a t e d s p e c i a l i s t p u r c h a s i n g d e p a r t m e n t s and b u y e r p r o f e s s i o n a l s , thus separating the users f r o m the p r o d u c e r s . H o w e v e r , t o d a y ' s t e c h n o l o g i c a l a d v a n c e m e n t s t h a t p e r m i t producers to interact directly with large numbers o f users (for example, Levi's making custom products directly for the users), and because o f a variety o f organizational d e v e l o p m e n t processes, such as e m p o w e r m e n t and total quality programs, direct interface between producers and users has returned in both c o n s u m e r and industrial markets, leading to a greater relational orientation a m o n g m a r k e t e r s . A c a d e m i c r e s e a r c h e r s are r e f l e c t i n g t h e s e t r e n d s in marketing practice, and searching for a new paradigm o f the discipline that can better describe and explain it.

As with each n e w shift in the focus o f marketing, there are advocates and critics o f the relationship focus in marketing. However, in the same w a y as Kotler (1972, p. 46) observed about other shifts in marketing, we believe that the emergence o f a relationship focus will provide a "refreshed and expanded s e l f c o n c e p t " to m a r k e t i n g . O u r o p t i m i s m s t e m s f r o m at l e a s t f o u r observations: (i) relationship marketing has caught the fancy o f scholars in m a n y parts o f the world, including North A m e r i c a , E u r o p e , Australia and Asia, as is evident from the participation in some o f the recent conferences held on this subject (Sheth and Parvatiyar, 1994); (ii) its scope is wide enough to c o v e r t h e e n t i r e s p e c t r u m o f m a r k e t i n g ' s s u b d i s c i p l i n e s , i n c l u d i n g channels, BTB marketing, services marketing, marketing research, customer b e h a v i o r , m a r k e t i n g c o m m u n i c a t i o n , m a r k e t i n g s t r a t e g y , i n t e r n a t i o n a l m a r k e t i n g and d i r e c t m a r k e t i n g ; (iii) like o t h e r s c i e n c e s , m a r k e t i n g is an evolving discipline, and has developed a system o f extension, revision and updating its fundamental knowledge (Bass, 1993); and (iv) scholars w h o at one time were leading proponents o f the exchange paradigm, such as Bagozzi (1974), Kotler (1972), and Hunt (1983), are now intrigued by the relational aspects o f marketing (Bagozzi, 1994; Kotler, 1994; Morgan and Hunt, 1994).

In the context o f these developments, the purpose o f this paper is to trace the evolution o f relationship marketing and to identify its antecedents. We plan to demonstrate that while relationship focus in the post-industrial era is a

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clear paradigm shift from the exchange focus of the industrial era, it is really a rebirth of marketing practices o f the pre-industrial age when the producers and users were also sellers and buyers and engaged in market behaviors that reduced the uncertainty o f future supply and demand assurances which could not be o t h e r w i s e guaranteed due to the u n p r e d i c t a b i l i t y o f weather, raw materials, and customers' buying power. Our approach mirrors the activities recommended by Savitt (1980) as the appropriate methodology for conducting historical research.

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Axioms and Purpose of Relationship Marketing Relationship marketing attempts to involve and integrate customers, suppliers and other infrastructural partners into a firm's developmental and marketing activities (McKenna, 1991; Shani and Chalasani, 1991). Such involvement results in close interactive relationships with suppliers, customers or other value chain partners of the firm. Interactive relationships between marketing actors are inherent as c o m p a r e d to the a r m ' s length relationships implied under the transactional orientation (Parvatiyar et al., 1992). An integrative relationship assumes overlap in the plans and processes o f the interacting parties and suggests close economic, emotional and structural bonds among them. It reflects interdependence rather than independence o f choice among the parties; and it e m p h a s i z e s c o o p e r a t i o n r a t h e r than c o m p e t i t i o n and consequent conflict among the parties; and it emphasizes cooperation rather than competition and consequent conflict among the marketing actors. Thus, d e v e l o p m e n t o f relationship m a r k e t i n g points to a significant shift in the axioms o f marketing: competition a n d conflict to m u t u a l cooperation, and choice independence to mutual interdependence, as illustrated in Fig. 1.

One axiom o f transactional marketing is the belief that competition and self-interest are the drivers o f value creation. Through competition, buyers can be offered a choice, and this choice o f suppliers motivates marketers to c r e a t e a h i g h e r v a l u e o f f e r i n g f o r t h e i r s e l f - i n t e r e s t . T h i s a x i o m o f competition is now challenged by the proponents o f relationship marketing w h o b e l i e v e that m u t u a l c o o p e r a t i o n , as o p p o s e d to c o m p e t i t i o n a n d conflict, leads to higher value creation (Morgan and Hunt, 1994). In fact, some social psychologists have gone so far as to suggest that competition is inherently destructive and mutual cooperation inherently more productive (Kohn, 1986).

The second axiom of transactions marketing is the belief that independence o f choice among marketing actors creates a more efficient system for creating and distributing marketing value. Maintaining an 'arm's length relationship' is c o n s i d e r e d vital for m a r k e t i n g e f f i c i e n c y . I n d u s t r i a l o r g a n i z a t i o n s and g o v e r n m e n t policy makers believe that i n d e p e n d e n c e o f marketing actors provide each actor freedom to choose his/her transactional partners on the basis of preserving their own self-interests at each decision point. This results in the efficiency o f lowest cost purchases through bargaining and bidding. However, this belief is also challenged recently in economics (Williamson, 1975). It argues that every transaction involves transaction costs in search,

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Figure 1. Axioms of Transactional Marketing and Relationship Marketing

Mutual interdepeadence

Rel~ommPraaflmting [

~oe~fion Mutual and conflict cooperation

I Trllauctional

Inck-lmlde.~ and choice

negotiation and other associated activities, which add to, rather than reduce the cost, and thus lead to inefficiencies instead of efficiencies for the firms engaged in exchange transactions. Relationship marketers, therefore, believe that interdependencies reduce transaction costs and generate higher quality while keeping governance costs lower than exchange marketing (Heide and John, 1992; Williamson, 1985). In short, better quality at a lower cost is achieved through interdependence and partnering among the value chain actors.

The purpose of relationship marketing is, therefore, to enhance marketing productivity by achieving efficiency and effectiveness (Sheth and Sisodia, 1995). Several relationship marketing practices can help achieve efficiency, such as customer retention, efficient c o n s u m e r response (ECR), and the sharing of resources between marketing partners. Each of these activities have the potential to reduce operating costs of the marketer. Similarly, greater marketing effectiveness can be achieved because it attempts to involve

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customers in the early stages o f marketing program development, facilitating the future marketing efforts o f the company. Also, through individualized m a r k e t i n g and a d o p t i o n o f m a s s c u s t o m i z a t i o n p r o c e s s e s , r e l a t i o n s h i p marketers can better address the needs o f each selected customer, making marketing more effective.

To what extent is the above purpose of relationship marketing a totally new p h e n o m e n o n a n d , h a v e n ' t t h e s e o b j e c t i v e s a l w a y s b e e n i m p o r t a n t in m a r k e t i n g ? If yes, how is relationship marketing different than exchange m a r k e t i n g ? We will try to address these questions by first agreeing that m a r k e t i n g has i n d e e d always b e e n c o n c e r n e d w i t h r e t a i n i n g p r o f i t a b l e c u s t o m e r s and w i t h f a c i l i t a t i n g f u t u r e m a r k e t i n g a c t i v i t i e s . H o w e v e r , m a r k e t i n g practices that were a d o p t e d to a c h i e v e these o b j e c t i v e s have changed over a period o f time. The reasons for this change can be attributed to the prevailing context and conditions o f each time period and its influence on the marketing thought. We examine, in the subsequent sections o f this paper, the causes o f marketing practices during the pre-industrial, industrial and post-industrial eras.

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Shifts in Marketing's Orientation As is widely known, the discipline o f marketing grew out o f economics, and the growth was motivated by lack o f interest among the economists in the details o f market behavior, especially those related to the functions o f the middlemen (Bartels, 1976; Houston, e t al., 1992; Hunt and Goolsby, 1988). It coincided with the growth in the number o f middlemen and the importance o f distribution during the industrial era. The first courses offered on the subject area o f marketing at University o f Michigan in 1902 and at The Ohio State U n i v e r s i t y in 1906, t h e r e f o r e , f o c u s e d on the i n t e r - r e l a t i o n s h i p s a m o n g marketing institutions and among various divisions o f the firm in performing the distributive task (see Bartels, 1976, pp. 22-23).

Unlike mainstream economists o f the late nineteenth century, who were preoccupied with public policy and economic effects o f market institutions, early marketing thinkers had operational interests (Bartels, 1976). Most of this centered around efficiency o f marketing channels and the services performed by them in transporting and transforming the goods from the producers to the consumers (Shaw, 1912; Weld, 1916, 1917). The process o f marketing was t h o u g h t to generate additional f o r m s o f utility including t i m e , place and possession utilities to the consumer (Macklin, 1924).

T h u s , m a r k e t i n g as a discipline got o r g a n i z e d around the institutional school o f t h o u g h t , and its m a i n c o n c e r n s c e n t e r e d a r o u n d the f u n c t i o n s performed by wholesalers and retailers as marketing institutions (Sheth et al., 1988). The founders o f the institutional m a r k e t i n g j u s t i f i e d the need for independent middlemen role on the grounds o f specialization and division o f labor, although both producers and consumers believed that the middlemen r e c e i v e d h i g h e r m a r g i n s t h a n t h e y d e s e r v e d . T h u s , m i d d l e m e n w e r e perceived as adding no value and creating economic inefficiencies by having

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l o c a t i o n m o n o p o l i e s . W e l d (1916) a d d r e s s e d this issue of m a r k e t i n g efficiency, thus:

When the statement is made that there are too many middlemen, it may mean one o f the two things: either that the process o f subdivision already described has gone too far so that there are too m a n y s u c c e s s i v e steps, o r there are too m a n y o f each class, such as t o o m a n y country buyers, too many wholesalers, or too many retailers. The discussion in the preceding paragraphs bears directly on the question as to whether there are too many successive steps, and this is what most people mean when they glibly state that there are too many middlemen. It was pointed out that such subdivision is merely an example o f the w e l l - k n o w n doctrine o f division o f labor, and that the e c o n o m i e s result from specialization by functions . . . . Those who have really made firsthand studies o f the marketing system in an impartial and unprejudiced w a y realize that on the whole the system o f m a r k e t i n g that has d e v e l o p e d is e f f i c i e n t , rather than ' e x t r e m e l y c u m b e r s o m e ' and wasteful, and that there are very good practical reasons for the form o f organization that has developed. It is necessary to realize these fundamental facts before the reader can approach a study o f the marketing problem with a sane point o f v i e w . (Weld, 1916, pp. 2 1 - 2 2 )

Other authors of that period b e l o n g i n g to the institutional school of marketing thought, such as Butler (1923), B r e y e r (1934), Converse and Huegy (1940), and Alderson (1954) also espoused the value and functions of m i d d l e m e n in a c h i e v i n g marketing efficiency. T h e y utilized e c o n o m i c theories to design effective and efficient institutional frameworks. Because of their grounding in economic theory, institutional marketing thinkers viewed the phenomena of value determination as fundamentally linked to exchange (Duddy and Revzan, 1947). Alderson (1954) elaborated on this institutional t h i n k i n g by p l a c i n g the i n t e r m e d i a r i e s at the c e n t e r of e x c h a n g e and marketing:

The justification for the middleman rests on specialized skill in a variety o f activities and particularly in various aspects o f sorting. The principle o f the discrepancy o f assortments explains w h y the successive stages in marketing are so c o m m o n l y operated as independent a g e n c i e s . W h i l e e c o n o m i s t s a s s u m e f o r c e r t a i n p u r p o s e s that e x c h a n g e is c o s t l e s s , transactions o c c u p y time and utilize resources in the real world. Intermediary traders are said to create time, place and possession utility because transactions can be carried out at l o w e r c o s t t h r o u g h t h e m than t h r o u g h d i r e c t e x c h a n g e . In o u r m o d e r n e c o n o m y , the distribution network makes possible specialized mass production on the one hand and the satisfaction o f the differentiated tastes o f consuraers on the other. ( A l d e r s o n , 1954, pp. 13-14)

Although the institutional thought of marketing was later modified by the organizational dynamics viewpoint, and marketing thinking was influenced by other social sciences, such as psychology, sociology and anthropology, exchange remained and still remains the central tenet of marketing (Alderson, 1965; Bagozzi, 1974, 1978, 1979; Houston, 1994; Kotler, 1972). Formal marketing theory developed around the idea of e x c h a n g e and exchange relationships, placing considerable emphasis on outcomes, experiences and actions related to transactions (Bagozzi, 1979).

Recently several scholars have begun to question the exchange paradigm, and its ability to explain the growing phenomena of relational engagement of

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firms (e.g. Grrnroos 1990; Sheth et al., 1988; Webster, 1992). In the recent past, researchers have tried to develop frameworks for relational engagement of buyers and sellers, often contrasting it with the exchange mode inherent in transactions (Arndt, 1979; Ganesan, 1994; Lyons et al., 1990).

Business practice exhorts both customer and supplier firms to seek close, c o l l a b o r a t i v e r e l a t i o n s h i p s with each o t h e r ( C o p u l s k y and Wolf, 1990; Goldberg, 1988; Katz, 1988). This change in focus from value exchanges to value creation relationships have led companies to develop a more integrative approach in marketing, one in which other firms are not always competitors and rivals but, are considered partners in providing value to the consumer. This has resulted in the growth o f m a n y partnering relationships such as business alliances and cooperative marketing ventures (Anderson and Narus, 1990; Johnston and Lawrence, 1988). Close, cooperative and interdependent relationships are seen to be o f greater value than purely transactions based relationship (Kalwani and N a r a y a n d a s , 1995). H o w e v e r , the relationship orientation of marketing is not entirely a new phenomena. If we look back to the p r a c t i c e o f m a r k e t i n g b e f o r e the 1900s, we f i n d that r e l a t i o n s h i p orientation to marketing was quite prevalent. Although history of marketing t h o u g h t dates back to o n l y the early 1900s (Bartels, 1962), m a r k e t i n g practices existed in history, even pre-history (Nevett and Nevett, 1987; Pryor, 1977; Walle, 1987). During the agricultural era, the concept of 'domesticated markets' and relationship orientation were equally prevalent. In short, current p o p u l a r i t y o f relationship m a r k e t i n g is a r e i n c a r n a t i o n o f the m a r k e t i n g p r a c t i c e s o f the p r e - i n d u s t r i a l era in w h i c h p r o d u c e r s and c o n s u m e r s interacted directly with each other and developed emotional and structural bonds in their economic market behaviors.

Orientation o f Marketing Practice in the Pre-Industrial Era Pre-industrial society was largely based on agricultural economy and the trade o f art and artifacts. During the agricultural days, m o s t farmers sold their produce directly in the bazaars. Similarly, artisans sold their arts and artifacts at these markets. Consumers and producers gathered together face to face for trading products. The role o f the producer was not separated from that o f the trader and the producer functioned as both 'manufacturer' and 'retailer' o f its own products. Also, producers and consumers developed strong relationships that led to the production o f customized products made by the artisans for each customer.

Similarly, relational b o n d i n g b e t w e e n traders was also quite prevalent, partly because of the need to do business with others you could trust. Thus, ongoing trade relationships were a critical element o f business practices in the p r e - i n d u s t r i a l era w h e r e o w n e r s h i p was l i n k e d with the m a n a g e m e n t o f business. Most traders o f Africa traded only with selected clans on a regular basis. So important was the element o f trust in these clan-trade relationships that outsiders could rarely enter into the system (Mwamula-Lubandi, 1992).

The evidence of such clan based trading exists even today within the clan- o r i e n t e d n e t w o r k o f traders in d i a m o n d s and o t h e r p r e c i o u s metals. For

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example, the Palanpuri clan (from Gujurat, India) have dominated the trade of diamonds all over the world along with the Orthodox Jews (Rothermund, 1988). Economic and anthropological studies indicate that the Jews were not really outcasts left to perform trading activities; rather, they chose to control trade amongst themselves as they could trust no others (Sombart, 1951). Such clan-oriented trading developed a network of partnerships as their trading activities extended internationally, with the network partners often coming f r o m the same or r e l a t e d clan with w h o m o n g o i n g business c o u l d be conducted.

Similar evidence of the ongoing business relationships can be found in the economic history of the old 'silk route' that flourished during pre- colonial times between China, India and Afghanistan. Economic history books narrate the vigorous efforts of Chinese silk producers toward market development and promotion of ongoing trade activity along the 'silk trade route' (Feltwell, 1991 ; Li, 1981). Relationships between customers and suppliers o f silk were vital because Indian weavers and silk c r a f t s m e n heavily depended on the supply of Chinese silk to produce garments and artifacts required by local kings and nobles. Such relationships once again reflect interdependencies of these marketing actors. In order to facilitate future trade, some traders cooperated with weavers and designers in India, providing them with contemporary designs from China. The influence of Chinese designs in the earlier arts of India bears clear evidence o f the cultural exchange in the interest of promoting future trade of the Chinese silk.

Retaining customers, influencing repeat purchases, fostering trust and facilitating future marketing were also concerns of marketers in the pre- industrial era. The development of 'branding' as a marketing practice could be cited as the best evidence of this concern. Although the history of branding can be traced back for many centuries, the term was derived from the marking of livestock (Carratu, 1987). Owners of livestock started branding their cattle in order to distinguish theirs from other cattle when they brought them to the market for sale. As this system evolved, family names were used as brands, not only to identify the product, but also to give the consumer the satisfaction of knowing the products depicting the name carried a certain 'warranty' of quality because the producers were willing to ascribe their family name to the product (Room, 1987). It became a method of providing quality assurance to the buyer, a system to promote repeat purchase, and a method to facilitate future marketing (Crone, 1989).

Even the development of open-air markets or bazaars in the pre-industrial period was aimed at facilitating ongoing business and trading. Not only did such marketing venues provide a common arena for buyers and sellers to meet, they also aimed at minimizing nomadic trade whereby traders could swindle their customers and escape any form of retribution. Urban trade privileges and guild regulations (De Vries, 1976) in Europe restricted the 'hit and run' sellers from becoming a part of the market system. Those who participated in the market knew and trusted each other (MacKenney, 1987),

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once again providing continuity and security for the repeat purchaser. Producers established permanent retail shops at the marketplace where they could make and sell these goods on a daily basis (Cundiff, 1988). As a consequence, consumers and producers had direct relationship with each other.

We can see that relationship orientation in marketing was evident during the pre-industrial era. Direct interaction between the producers and consumers n e c e s s i t a t e d c o o p e r a t i o n , r e l i a n c e , and trust a m o n g m a r k e t i n g actors. E v i d e n c e s u g g e s t s that these r e l a t i o n s h i p s s o m e t i m e s c o n t i n u e d for generations as producers and consumers trusted each other's family and clans (Kingson e t al., 1986).

The relationship orientation in marketing and trade continued into the early years of the Industrial Revolution and the emergence of capitalism. Fullerton (1988) describes some of the efforts adopted by marketers during this period to build and maintain relationships with buyers. Market development efforts were complemented by close cooperation between business and government which helped develop markets among the nobility, the high clergy, and the growing urban bourgeoisie (Fullerton, 1988). M e r c h a n t s of this period established fixed-location retail shops in cities throughout Europe. This represented their desire to build and retain customers. Fixed location retail outlets meant local buyers could come back time and again allowing the producer and the consumer to establish long-term relationships for repeat purchases over the long term. It also meant direct accountability of each other's actions.

M a r k e t i n g practices during early i n d u s t r i a l i z a t i o n were also h i g h l y individualized, relationship oriented and customized. Many products were manufactured on a custom basis for rich individuals or industrial customers. The design and tailoring of clothes, the creation of jewelry, watches, home furnishings and other consumer products were customized. Marketers rarely had to consider inventories of finished products, and publishers sold textbooks for w h i c h a d e m a n d already e x i s t e d ( F e b v r e and M a r t i n , 1976). Such production, based primarily on customer request and demand, did not require marketing activities such as advertising or price competition. Relationships between customers and suppliers were critical, since the customer depended on the manufacturer or trader to make goods available to him or her as per specifications and expectations. Consumers making a commitment to buy based on the trustworthiness and commitment of the marketers was critical. Reciprocally, the producer relied on the credit worthiness of the consumer and took the risk of making custom products.

Branding became even more popular during this period, as producers and merchants began to attach their own family names to the products they offered, in great symbolic gestures, assuring their personal commitment to a product's quality. This practice of branding based on family names continued in the early years of the industrial era in Europe (Philips, Fiat, Daimler-Benz), North America (Eli Lily, Ford, Johnson & Johnson, Kellogg's, Procter & Gamble) and also in Japan (Toyota, Honda, Matsushita).

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Orientation of Marketing Practice in the Industrial Era It was with the advent of mass production and mass c o n s u m p t i o n that marketers began to adopt a more transactional approach. Emergence of mass production and mass consumption resulted in key consequences. First, people moved away from small subsistence farms to jobs in industrial towns, and needed retailers to supply assortment of basic conveniences of food, shelter and clothing (Cundiff, 1988). Secondly, manufacturers were motivated to produce in mass quantities given the associated economies of scale. On the one hand, economies of scale helped these manufacturers to lower the cost of goods, and hence prices of the products they sold, and on the other hand, it increased the need to find markets for their products. Unable to sell the entire stock of produced goods, producers were confronted with an increased i n v e n t o r y o f f i n i s h e d p r o d u c t s . T h e s e m a r k e t c o n d i t i o n s gave rise to aggressive selling and the development of marketing institutions that were willing to bear the risks and costs of inventory ownership and storage. Wholesalers, distributors and other marketing intermediaries assumed the role of m i d d l e m e n who, on the one hand, stored the e x c e s s p r o d u c t i o n o f manufacturers, and, on the other hand, helped in locating and persuading more buyers to purchase goods and services. So crucial became this function that early marketing thought was developed on the concept of distribution and the creation of time and place utilities. Early marketing thinkers, such as E. D. James, Simon Lifman, and James Hagerty, concentrated on these distributive elements of marketing (Bartels, 1965). This period also gave rise to modern marketing practices, such as sales, advertising and promotion, for the purpose of creating new demand to absorb the oversupply of goods that were being produced. Scholars, such as Ralph Butler, were among the first to articulate this promotional concept of marketing (Bartels, 1965).

Thus emerged the transactions orientation of marketing whereby marketers became more concerned with sales and promotion of goods and less with building ongoing relationships. This shift was further accentuated during the Great Depression of 1929, when the oversupply of goods in the system heightened the pressure on marketers to find and persuade customers to buy their products. Thus the transaction orientation has been a major influence in marketing thought and academic research throughout the industrial era.

During the height of the industrial period, marketing practices were aimed at promoting mass consumption. Developed out of the need to support the mass production machinery, the emphasis was directed at increasing the sale of products. Both personal and impersonal manifestations of the selling 'force' were found increasingly in business, supported by other activities, such as advertising and promotion. Marketing was considered successful only when it resulted in a sale. Measures of marketing performance were linked, as is still the practice today in many companies, to sales and market share. Some marketers resorted to extreme practices of persuasive selling including deceptive advertising and false claims.

As competition intensified with excess capacity, sales transactions further increased. Many engaged in aggressive selling and competitive warfare.

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S h o r t - t e r m o r i e n t a t i o n s d o m i n a t e d m a r k e t i n g p r a c t i c e s ; the d e s i r e to maximize profit in the short run was accentuated as the uncertainties of the f u t u r e m a r k e t a p p e a r e d p e r i l o u s , g i v e n the rise in c o m p e t i t i o n and its consequent effect on industry mortality. Some marketers relented and looked for innovative ways to protect their markets. Aided by the managerial school o f m a r k e t i n g t h o u g h t , two important d e v e l o p m e n t s occurred in the later period of the industrial era.

The first development was the marketer's realization that repeat purchase by customers was critical, making it necessary to foster brand loyalty. Several m a r k e t i n g scholars also b e c a m e interested in repeat p u r c h a s e and brand loyalty behavior as early as World War II (Churchill, 1942; Womer, 1944; Barton, 1946; Patterson and McAnally, 1947). This research was further advanced in the buyer behavior theory of Howard and Sheth (1969), wherein they closely examined repeat purchase behavior and brand loyalty. In order to achieve a brand image, brand differentiation and effective advertising, certain marketing techniques emerged. The development o f market segmentation and targeting b e c a m e i m p o r t a n t tools for m a r k e t i n g p l a n n i n g . In the face o f competition, marketers realized the benefits of focusing on specific groups of c u s t o m e r s for w h o m t h e y c o u l d t a i l o r t h e i r m a r k e t i n g p r o g r a m s and successfully differentiate themselves from their competitors (Peterson, 1962). Brand marketing that grew during this period supported the philosophy that the retailer was not the salesman for the manufacturer but rather the buyer for the c o n s u m e r . S o m e marketers read this c h a n g e and shifted f o c u s f r o m discrete, one time sales to ongoing, repeat-purchase possibilities.

The s e c o n d s i g n i f i c a n t c h a n g e was the d e v e l o p m e n t o f a d m i n i s t e r e d vertical marketing systems (McCammon, 1965), whereby marketers not only gained control over channels o f distribution, but also developed effective means o f blocking competitors from entering into these channels. Vertical m a r k e t i n g s y s t e m s such as f r a n c h i s i n g and e x c l u s i v e distribution rights permitted marketers to extend their representation beyond their own corporate limits to reach final customers (Little, 1970). In many ways, the development o f the vertical channels was a reversal of the practice o f separating producers from the consumers.

These developments represented the re-emergence o f direct marketing and in maintaining a long-term relationship with consumers. Yet, the orientation o f the industrial era was largely transactional, as can be gauged by standard m e a s u r e s used to evaluate m a r k e t i n g p e r f o r m a n c e : m a r k e t shares, sales r e v e n u e s , and profitability per brand, territory and s e g m e n t s (cf. PIMS d a t a b a s e ) . S u c h m e a s u r e s r e f l e c t the c o n c e r n f o r c o m p e t i t i o n and its consequent effects on profits.

In i n d u s t r i a l m a r k e t i n g , t h e t r a n s a c t i o n a l a p p r o a c h w a s f u r t h e r c o m p o u n d e d by the practices o f competitive bidding. On one hand, users of i n d u s t r i a l p r o d u c t s were s e p a r a t e d f r o m the p u r c h a s i n g f u n c t i o n , g i v e n s p e c i a l i s t p r o c u r e m e n t d e p a r t m e n t s in m o s t i n d u s t r i a l a n d b u s i n e s s organizations. On the other, competitive bidding processes forced industrial marketers to prepare bid documents for each transaction. Every transaction

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b e c a m e i m p o r t a n t and it was n e c e s s a r y f o r t h e m to o u t s m a r t o t h e r competitors in such bids so that they can win the customer order. Although 'reciprocity' was practiced to facilitate future sales, emphasis remained on discrete transactions.

However, not all firms were happy concentrating on discrete transactions. Several industrial buyers and sellers began to develop longer-term contracts for supplies and service, creating ongoing interactive relationships between t h e m s e l v e s ( H a k a n s s o n , 1982). S o m e o f t h e m e n g a g e d in l o n g - t e r m partnerships and formed alliances with other companies. For example, a partnering type of relationship between Whirlpool and Sears and McDonalds and Coca-Cola have existed for more than 50 years. Similarly, Mitsubishi E l e c t r i c and W e s t i n g h o u s e E l e c t r i c are e n g a g e d in an a l l i a n c e - t y p e relationship for over 60 years, as are Philips and Matsushita (Business International Corporation, 1987).

Orientation o f Marketing Practice in the Post-Industrial Era Post-industrial era has seen substantial development toward relationship marketing, both in practice and in academic thinking. Marketers started realizing the need to supplement a transaction-orientation with an orientation which showed more concern for customers. It began with the advent of complex products, which gave rise to the systems selling approach. This approach emphasized the integration of parts, supplies and the sale of services with the individual capital equipment. Customers liked the idea of systems integration and sellers were able to sell augmented products and services to customers. The popularity of system integration began to extend to consumer packaged goods, as well as services (Shapiro and Posner, 1979).

At the same time, some companies started to insist upon new purchasing approaches such as national contracts and master purchasing agreements, f o r c i n g major vendors to d e v e l o p k e y a c c o u n t m a n a g e m e n t p r o g r a m s (Shapiro and Wyman, 1981; Shapiro and Moriarty, 1980). These measures forced intimacy and permanence in the buyer-seller relationships. Instead of purchasing a product or service, customers were more interested in buying a relationship with a vendor. The key (or national) account m a n a g e m e n t program designates account managers and account teams that assess the customer's needs and then husband the selling company's resources for the customer's benefit. Still considered a boundary spanning sales activity, key account programs reflect higher commitment of selling organizations toward their major customers. Such programs, concurrently, led to the foundation of strategic partnering relationships that have e m e r g e d under relationship marketing (Anderson and Narus, 1991; Shapiro, 1988).

The growth of relationship orientation of marketing in post-industrial era is due to the rebirth of direct marketing between producers and consumers. Several environmental and organizational development factors are responsible for this rebirth of direct relationships between producers and consumers. At least five macro-environmental forces can be identified: (1) rapid technological advancements, especially in information technology; (ii) the adoption of total

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quality programs by companies; (iii) the growth of the service economy; (iv) organizational development processes leading to empowerment of individuals and teams; and (v) increase in competitive intensity leading to concern for customer retention. These forces are reducing the reliance of producers, as well as c o n s u m e r s , on m i d d l e m e n for effecting the c o n s u m m a t i o n and f a c i l i t a t i o n p r o c e s s e s . We b r i e f l y discuss below h o w these forces are encouraging more direct interactions between producers and consumers of goods and services and is encouraging the growth of relationship marketing.

The impact of technological revolution is changing the nature and activities of the marketing institutions. The current development and introduction of sophisticated electronic and computerized communication systems into our society is m a k i n g it easier for c o n s u m e r s to interact directly with the producers. Producers are also becoming more knowledgeable about their consumers by maintaining and accessing sophisticated databases that capture information related to each interaction with individual consumers, at a very low cost. It gives them the means by which they can practice individual marketing. As a result, the functions formerly performed by the middlemen are now being undertaken by either the consumer or the producers. Producers are building such systems that allow them to undertake quick responses with regard to manufacturing, delivery and customer service, eliminating the need f o r i n v e n t o r y m a n a g e m e n t , f i n a n c i n g and o r d e r p r o c e s s i n g t h r o u g h middlemen. Also, consumers have less time and thus a reduced inclination to go to the store for every purchase. They are willing to undertake some of the responsibilities of direct ordering, personal merchandising, and product use related services with little help from the producers.

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Hence, given the recent technological strides and consumer attitudes, some functions performed by middlemen may be entirely eliminated. For instance, t h e ' j u s t in t i m e ' i n v e n t o r y s y s t e m , m a d e p o s s i b l e by t h e real t i m e transportation and communication systems now available, allows a producer to e l i m i n a t e the n e e d for an i n t e r m e d i a t e i n v e n t o r y h o l d i n g institutions between itself and the consumers or suppliers (Sheth e t a l . , 1988). Other technological systems, such as flexible manufacturing are being used by some to mass-customize their offerings to individual consumers.

Rapid technological developments have also increased the cost of research and development. The window o f time in which it is possible to recover R&D costs has also shortened. This has forced companies to work together in joint research projects and joint p r o d u c t - d e v e l o p m e n t programs. Similarly, the rapid convergence of technologies, such as communication and computers or electronics and home appliances, mandates that companies in such industries work on joint projects to leverage their combined resources and to share risks. Thus, interfirm partnering and alliances is becoming popular.

Another major force driving the adoption o f relationship marketing is the total quality m o v e m e n t that recently revolutionized industry's perspectives regarding quality and cost. Most companies saw the value o f offering quality p r o d u c t s and services to c u s t o m e r s at the lowest p o s s i b l e prices. W h e n companies embraced Total Quality Management (TQM) to improve quality and reduce costs, it became necessary to involve suppliers and customers in implementing the program at all levels o f the value chain. This needed close working relationships with customers, suppliers and other members o f the marketing infrastructure. Thus, several companies, such as Motorola, IBM, X e r o x , F o r d , AT&T, T o y o t a , etc., f o r m e d p a r t n e r i n g r e l a t i o n s h i p s w i t h suppliers and customers in order to practice TQM. Other programs such as Just in Time (JIT) supply and Material-Resource Planning (MRP) also made use o f the i n t e r d e p e n d e n t relationships b e t w e e n suppliers and c u s t o m e r s (Frazier, Spekman, and O'Neal, 1988).

The third force ushering in relationship marketing is the growth o f the service economy, especially in the advanced countries. As more and more organizations depend upon revenues from the services sector, relationship marketing becomes prevalent. One reason being that services are typically produced and delivered by the same institution. Service providers are usually involved in the production and delivery o f their services. For instance, in the case o f personal and professional services, such as haircut, maid services, consulting services, accounting services, and legal services, the individual producer o f the service is also the service provider. In much the same way as the users o f these services are directly engaged in obtaining and using the service thus, minimizing the role o f the middlemen, if any. In such a situation, a greater e m o t i o n a l b o n d b e t w e e n the service p r o v i d e r and service user develops and the need for maintaining and enhancing the relationship. It is therefore evident that relationship marketing is important for scholars and practitioners o f services marketing (Berry, 1983; Crosby and Stephens, 1987; Crosby e t al., 1990).

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Certain organizational changes have facilitated the growth of relationship marketing. Amongst these the most significant is the role definition of the members of the organization. Through a variety of changes in organizational processes, companies are now directly involving users o f products and services in the purchase and acquisition decisions of the company. For a c o n s i d e r a b l e t i m e , these f u n c t i o n s were m a n a g e d by the p r o c u r e m e n t department as a specialized function, with little or no input from the actual users of these products and services. Thus the separation that existed between the producer and the user due to the existence of user middlemen, acting as gatekeepers, is potentially bridged in many cases. Wherever such changes are being made, direct interaction and cooperative relationship between producers and users develop.

Finally, in the post-industrialization period the increase in competitive intensity is forcing marketers to be concerned with customer retention. As several studies have indicated, retaining customers is less expensive and perhaps a m o r e sustainable c o m p e t i t i v e advantage than acquiring new customers. Marketers are realizing that it costs less to retain customers than to compete for new ones (Rosenberg and Czepiel, 1984). On the supply side it pays more to develop closer relationships with a few suppliers than to develop more vendors (Hayes e t a l . , 1988; Spekman, 1988). In addition, several marketers are also concerned with keeping customers for life, rather than merely making a one-time sale (Cannie and Caplin, 1991).

In summary, relationship-orientation in marketing has staged a comeback. It was only during the peak of industrialization that marketing's orientation shifted toward a transactional approach. With the advent of middlemen, and the separation o f producers and users, there was a g r e a t e r transactions orientation. Industrialization led to a reversal in the relationship between supply and demand, when due to mass production efforts producers created excess supply of goods and services and were themselves preoccupied with achieving production efficiencies. Thus, they needed middlemen to service the customer. The middlemen in turn, adopted a transactional approach as they were more interested in the economic benefits of exchange than the value o f p r o d u c t i o n a n d / o r c o n s u m p t i o n . A l t h o u g h e f f i c i e n c i e s in p r o d u c t distribution were achieved through middlemen, effectiveness was not always accomplished as was evident from the literature on channel conflict.

Now with one-to-one connect between the producer and user, relationship orientation in marketing has returned. Figure 3 depicts the changes in the relationship-orientation during pre-industrial, industrial and post-industrial eras.

Consequence of the Relational Paradigm on the Discipline of Marketing The advent of the relational paradigm is likely to alter the basic foundations of marketing anchored on exchange theory. Several marketing scholars are questioning the sufficiency o f the exchange paradigm in explaining the e m e r g i n g r e l a t i o n s h i p m a r k e t i n g p r a c t i c e s ( C a n n o n and S h e t h , 1994; Christopher e t a l . , 1991; G r r n r o o s , 1994; O ' N e a l , 1989). Some of these

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Figure 3. Paradigm Shift in Marketing Orientation

Value distribution

I Exchange

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criticisms are based on the outcome orientation of the exchange paradigm, in which they argue that the concern for quality, customer service and customer retention are lacking.

Although the exchange paradigm has been very useful in the development of marketing theory, it has outlived its utility. Born out of the transactions focus, the exchange paradigm serves a useful purpose in explaining value d i s t r i b u t i o n among marketing actors. In the industrial era, w h e r e only manufacturers created value through their developmental and production activities, and middlemen shared the risk of ownership and provided the time and place utility, e x c h a n g e p a r a d i g m was a useful way to study value distribution among these marketing actors. Consumers derived a surplus and utility from this exchange, but they could not contribute as much in value creation.

H o w e v e r , w h e r e c o n s u m e r s are involved in c o - p r o d u c t i o n and have interdependent relationships with producers, the concern for value creation is p a r a m o u n t . For e x a m p l e , in h o m e b u i l d i n g , b u y e r s get i n v o l v e d and

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emotionally attached with the home building process seeking to create value for themselves. The nature o f interactions between the builder and the home buyer is not related to the exchange as much as it to create a dream h o m e for the buyer. E x c h a n g e p a r a d i g m m a y explain the t r a n s a c t i o n in an existing home sale where value distribution is being undertaken, however, in the h o m e building case or other situations where consumers are directly involved as co- producers, co-designers or c o - m a r k e t e r s , there is a n e e d for an alternative paradigm o f marketing.

There is an implied assumption o f the exchange theory that the seller and the buyer (marketing actors) have well defined roles, that they independently create values, and that there is a place and time o f transaction that can be easily articulated for exchange. However, in the era o f relationship marketing, the roles o f producers, sellers, buyers and consumers are blurring. Consumers are i n c r e a s i n g l y b e c o m i n g co-producers. Not only there is a less need for middlemen in the process, there is less o f a boundary b e t w e e n producers and c o n s u m e r s . In m a n y i n s t a n c e s , m a r k e t p a r t i c i p a n t s j o i n t l y p a r t i c i p a t e in design, d e v e l o p m e n t , production and c o n s u m m a t i o n o f goods and services. They do not seek any particular exchange, but rather the creation o f a greater market value for both through the relationship. Sometimes these relationships and activities b e c o m e so enmeshed that it is difficult to separate the marketing actors from one another.

There is also a blurring o f time and place boundaries b e t w e e n the producer and the c o n s u m e r . For e x a m p l e , Procter & G a m b l e has assigned 20 o f its employees to live and work at Wal-Mart's headquarters to improve the speed o f delivery and reduce the cost o f supplying P & G goods to Wal-Mart's branch stores (Kotler, 1994). It is therefore hard to distinguish the elements as well as the time o f occurrence o f exchange. In relationship marketing, organizational boundaries are hard to distinguish as companies are more likely to be involved in shared relationship with their marketing partners. Some o f these activities relate to joint planning, co-production, co-marketing, co-branding, etc. where the parties in the relationship bring their resources t o g e t h e r for creating a g r e a t e r m a r k e t v a l u e . T h e b o u n d a r i e s o f t i m e , p l a c e a n d t r a n s a c t i o n are unclear in m a n y relational arrangements. For example, in the world o f bits and b y t e s , w h e r e e l e c t r o n i c d a t a i n t e r c h a n g e ( E D I ) is b e c o m i n g c o m m o n , payments transfers are not linked to the transaction any more. P a y m e n t flows, goods and services flows, and knowledge flows between marketing actors are becoming less anchored to exchange.

A l t h o u g h s o m e authors still label this type o f c o o p e r a t i o n as a f o r m o f exchange, and call it 'relational exchange' ( D w y e r e t al., 1987; Gundlach and M u r p h y , 1993; M o r g a n a n d H u n t , 1994), t h e c o o p e r a t i v e r e l a t i o n s h i p s a m o n g s t m a r k e t i n g actors are not always for the p u r p o s e o f e x c h a n g e . As several o f these r e s e a r c h e r s show, the m a r k e t i n g actors c o o p e r a t e to share resources and e n g a g e in joint value creation, such as co-production, research and d e v e l o p m e n t p a r t n e r i n g , c o - m a r k e t i n g , etc. In t h e s e a r r a n g e m e n t s , exchange, if any, is incidental. The primary activity relates to value creation through joint action by participants in a relational e n g a g e m e n t (Heide and

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John, 1990). The outcome o f this e n g a g e m e n t is not necessarily an exchange o f values; it is instead a process o f value creation through cooperative and collaborative effort.

T h e r e f o r e , an alternative paradigm o f m a r k e t i n g is n e e d e d . A p a r a d i g m w h i c h can a c c o u n t for the continuous nature o f relationship o f m a r k e t i n g actors. It might be better for the continuous development o f the discipline to give up the sacred cow o f exchange theory, in search o f some other paradigm. What w o u l d be the nature o f this alternative p a r a d i g m is not clear, but as m a n y s~holars are trying to argue, that such a paradigm ought to be based on value creation instead o f value distribution; and focus on the processes o f r e l a t i o n s h i p e n g a g e m e n t and not on the o u t c o m e o r c o n s e q u e n c e o f the relationship (Fig. 3). In other words, we need to explain the conditions that encourage marketing actors to enter relationships; the purpose o f engaging in such relationships; the processes o f m a n a g i n g the relational e n g a g e m e n t ; process for evaluating the p e r f o r m a n c e o f such relational e n g a g e m e n t ; the process and conditions o f terminating the relationship; and the process o f the e n h a n c e m e n t o f the relationship.

Conclusions In this p a p e r w e h a v e a t t e m p t e d to t r a c e t h e e v o l u t i o n o f r e l a t i o n s h i p marketing. We observe that a relational orientation to marketing existed until the early years o f industrial development. It was only when mass production led to an oversupply o f goods that marketers b e c a m e transaction oriented. However, this transaction orientation in marketing is giving w a y to the return o f relationship orientation in marketing. Beginning with interests in repeat purchase and brand loyalty, there is an increasing group o f scholars who are studying ongoing marketing relationships. This r e - e m e r g e n c e o f relationship marketing has the potential for a new "General T h e o r y o f Marketing" (Sheth e t al., 1988), as its fundamental axioms better explain marketing practice.

The r e - e m e r g e n c e o f the relational perspective in marketing i s primarily caused by the return o f direct producer to c o n s u m e r marketing. This needs a c h a n g e in t h e p a r a d i g m o f m a r k e t i n g t h e o r y . T h e e x c h a n g e p a r a d i g m is i n s u f f i c i e n t in e x p l a i n i n g the c o n t i n u o u s n a t u r e o f r e l a t i o n s h i p b e t w e e n m a r k e t i n g a c t o r s . It is a n c h o r e d on v a l u e d i s t r i b u t i o n a n d o u t c o m e s o f e x c h a n g e , h e n c e , is an i n s u f f i c i e n t p a r a d i g m f o r e x p l a i n i n g m a r k e t i n g r e l a t i o n s h i p s t h a t f o c u s on v a l u e c r e a t i o n a n d w h e r e t h e p r o c e s s o f relationship e n g a g e m e n t is equally, if not more, important than the outcomes o f the exchange.

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