Chapter 2 Literature Review
2.5 Strategic 4C Model
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Stage 1 organization, “the analytically impaired”, have some desire to become more analytical, but lack both the intention and the skill to do so and thus far the goal of analytical competition. They lack either human talents, technical skills to analytical competition or even interest in analytical competition from senior executives. Therefore, they are still focused on putting basic, integrated transaction functionality and high quality data in place, i.e. they do not have a single definition of the customers and hence cannot se customer data across the organization to segment and select the best customers. In shorts, they are not even on the path to becoming analytical competitors.
Davenport and Harris (2007) believe that most organizations need to go through each one of the stages but an organization, with sufficiently motivated sensor executive, may be possible to skip a stage or at least move rapidly through them. However, organization change will still be the most difficult part to overcome.
2.5 Strategic 4C Model
Based on Williamson’s transaction cost theory, classification made by Barny and Ouchi, agency theory and other studies, Chiou (2001, 2006, 2010) has developed a strategic 4C analysis structure that is highly applicable in analyzing marketing exchange relationship from strategic perceptive.
The efficiency of marketing exchange is depending on four costs (1) Explicit unit-utility cost ;(2) Information search cost; (3) Moral hazard cost; and (4)
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Asset specificity cost. The lower these four costs are, the more willing customers are to exchange with sellers, resulting to better efficiency of marketing exchange (Chiou 2010).
Figure 2-7 Marketing exchange functions of 4C (Chiou 2010)
Unit-Utility Cost (C1)
Chiou (2010) defined explicit unit-utility cost as the cost customers paid for acquiring a product and service divided by the total utility gained from the product or service. The total cost of acquiring a product includes price of transaction, transportation fee, service fee, handling fee, and etc. The total utility includes tangible and intangible benefits excluding the utility gained from three implicit costs. However, the utility that Chiou (2010) mentioned here is not excluding the utility created by brand awareness, trust or asset specificity for two reasons: (1) Excluding utility generated from implicit cost allows marketer to understand that three implicit costs are as important as explicit cost when dealing with exchange. More importantly, the approaches to deal with four different costs are not only distinct but also need priority; (2) In practice, excluding utility generated from implicit cost allows deeper analysis.
Chiou (2010) suggests to analyze the explicit cost first, then three implicit costs and finally focus on solving three implicit cost when conducting competitor
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analysis or product competitiveness analysis.
Figure 2-8 Equation of Explicit Unit-utility Cost (Chiou 2010)
Based on the Chiou’s (2010) definitions above, there are two characteristics of explicit unit-utility cost of a company:
1. Company can decide whether to launch a product based on its level of unit-utility cost: Explicit unit-utility cost of a product should be evaluated before its launch. A company may use market research to understand
competitiveness of a product on unit-utility cost compared with those of competitors’ products.
2. Explicit unit-utility cost is one of key sources of competiveness.
Explicit unit-utility cost is essential for a new-established, or less known company. In general, market newcomers or less-known companies are less capable of handling implicit exchange costs than existing competitors or well known companies are. For this type of companies, Chiou (2010) suggests reviewing the definition of explicit unit-utility cost and finding many ways to improve explicit costs. For example, a new company may choose a niche market segment, understand and fulfill customers needs better than
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competitors, and
consequently may
become a master in this segment.There are two directions to reduce unit-utility cost: (1) Reduce a customer’s cost; and (2) Increase a customer’s utility. Chiou (2010) believes these two directions are highly associated with Michael Porter’s (2011) three competitive strategies. Michael Porter (2011) highlighted that a company can compete in three ways: (1) Cost-leadership strategy; (2) Differentiation strategy; or (3) Focus strategy.
When a company aims to be the lowest cost producer for a product, it is taking the cost-leadership strategy. In strategic 4C analysis, it means a customer pays less to gain a certain level of utility. The lower the buyer’s cost is, the lower explicit unit-utility is. Thus, cost-leadership strategy help reduce a customer’s explicit cost.
The company aims to make the product different, and highlights the difference consistently in its branding experience, eventually it can build up a unique position within a customer’s mind, i.e. increasing a customer’s utility.
When a company aims at very specific customer group, product lines or geographical market, it is taking the focus strategy, which increases a customer’s utilities.
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Information Search Cost (C2)
Information search cost occurs when both customers and sellers are not familiar with the object of exchange, and therefore, they need to spend time and money on information collection to reduce the information asymmetry resulted from exchange. The more complex the products are, the higher information search cost are (Chiou 2010). Information asymmetry will decrease the efficiency of marketing exchange.
Involvement is customer’s level of concern about discovering, evaluating, acquiring, consuming, or abandoning a product. The higher the level of
concern is, the higher the level of involvement is. On the contrary, the lower the level of concern is, the lower the level of involvement is (Chiou 2010).
In addition, Sadasivan, C. Rajakumar, and Rajinikanth (2011) believe that involvement has an impact on whether the purchase process consists of formal search (and evaluation) or is more habitual. Low involvement
purchasing tends to be habitual whereas high involvement requires planning.
Therefore, it is understandable for a customer to spend more time and attentions when buying a high price product, a kind of high involvement product. A customer requires planning on purchase processes that often includes formal search. Consequently, a customer’s supervision cost is higher on the high involvement products.
Kotler (2000) summarizes the four best-known response hierarchy models that illustrate different consumer-response stages. All these models assume that
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the customers would pass through a cognitive, affective, and behavioral stage, in that order. When a customer has high involvement with a product category perceived to have high differentiation, the “learn-feel-do” sequence is
appropriate.
McKinsey & Company (Court, Elzinga, Mulder, and Vetvik 2009) introduced another view of looking at how a consumer makes decision. It is believed that this process is more a circular journey, with four primary phases: (1) Initial consideration; (2) Active evaluation; (3) The process of researching potential purchases; (4) Closure.
Figure 2-9 Consumer Decision Journey (Court, Elzinga, Mulder, and Vetvik 2009)
Phase 1: Initial consideration set
Consumers consider an initial set of brands, based on brand perceptions and
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exposure to recent touch points. Facing with overflow of information, consumers tend to fall back on a limited set of brands.
Phase 2: Active evaluation
Consumers add or subtract brands as they evaluate what they want. Contrary to the traditional funnel metaphor, consumers may expand rather than narrow their brand choices during active-evaluation phase when seeking information and shopping a category.
Phase 3 Moment to of purchase (information searching, shopping):
Ultimately consumers select a brand at the moment of purchase.
Phase 4 Post-purchase experiences (ongoing exposure):
After purchasing a product or service, consumers build expectations based on experience to informant their next decision journey.
McKinsey & Company (Court, Elzinga, Mulder, and Vetvik 2009) believes that there are two types of loyalty: active loyalist and passive loyalist. Active loyalist who not only stick with the brand but also recommend it. Passive loyalists who, whether feel lazy or confused by too many choices, stay with a brand without being committed to it and are open to message from competitors who give them a reason to switch. In shorts, active loyalist follow traditional loyalty loop to repeat purchase trip without consider new set of choices while passive loyalists who are open to new set of choice.
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Moral Hazard Cost (C3)
Moral hazard cost is the second cost of implicit exchange cost, which is the customer’s cost of risks that the seller breaks its promise to delivery
functionalities as agreed. When unexpected circumstance occurs, the seller might act in self-interest, not in the customer’s interest, to deal with the scope that contract does not explicitly define. When the customer is aware of high probability of moral hazard cost caused by the seller, the customer will take action, either time or money, to lower risk of being cheated by the seller (Chiou 2010).
In other words, moral hazard cost is the cost of a customer bears to avoid being cheated. Perceive risks is similar to moral hazard cost conceptually, which concern the undesirable consequences that consumers want to avoid when they buy and use products (Peter and Olson 2005). A variety of native consequences might occur. Peter and Olson (2005) summarizs undesirable consequences as followings: (1) Physical risks: for example, side-effect of a product; (2) Financial risk: finding warranty does not cover fixing microwave oven; buying a new product and finding them on sale the next day; (3)
Functional risk: product does function as expected; and (4) Psychosocial risks:
for example, my friends think these sunglasses look weird on me (Peter and Olson 2005).
Chiou (2010) defines four major characteristics of moral hazard cost:
(1) Many companies believe that lower information search cost will lead to lower moral hazard cost naturally. In fact, though lower information search cost
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may reduce part of moral hazard cost, it cannot eliminate moral hazard cost completely. Moral hazard cost will still exist in many transactions. For those customers and sellers who do not have any transactional relationship, the moral hazard cost for both sides are even higher.
(2) Moral hazard cost, like other cost, is the customer’s subjective perception and also the impression remains between the customer and a seller after long-term transactional relationship. This impression, if not taken properly, will create “Halo Effect” in the long run, which will cause the diffusion of moral hazard cost from old products to new products. On the contrary, if company can establishcredibility and image over the long term, the Halo Effect will transfer creditability and image to new products and can help promote customers’ confident and trust in new products.
(3) When a customer has limited motivation and capability, he or she is forced to take peripheral route to measure the moral hazard cost of a product. Brand image, company image, product endorser, packaging, advertisement style, channel price and even selling techniques of sales are examples of peripheral route.
(4) The opportune moment to lower the customer’s moral hazard cost efficiently is not in the moment that the seller finishes the agreement in advance but in the moment that the seller puts the customer’s interest first, especially when the contract is not manifest or exception occurs.
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There are three types of moral hazard costs indicated by Chiou (2010):
1. Costs resulted from customers’ doubts about sellers’ capabilities to implement the contract:
This type of moral hazard cost refers to the cost of risk that the seller does not have capabilities to provide service or products as requested. In many
transactional activities, customer often cannot ensure seller’s capability until the customer actually uses the service or products.
2. Costs resulted from customers’ doubts about sellers’ promise:
This type of moral hazard cost refers to the cost of being cheated even if the seller has capability to implement contract. Due to self-interest or the greedy , sellers may scamp work and stint material in the delivery of services or
products.
3. Costs resulted from customers’ doubts about sellers’ benevolence:
Contact is a consent not a promise. To promise is to commit to do or refrain from doing something. To consent to contract is to commit to be legally responsible for nonperformance of a promise (Barnett 2011). However, the modern transactions become more much complicated than ever and it is unlikely for both customers and sellers to put all possibilities into written contracts.
Besides, all contracts have weakness and under certain circumstances, these contract vulnerabilities could turn customers into disadvantage. When this
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situation happens, whether sellers have benevolence or not can greatly impact customers’ moral hazard cost.
Asset Specificity Cost
Since 1990, more and more companies realized that the cost of retaining existing customers is far less than the cost of acquiring new customers. The focus is shifting from customer retention to customer acquisition. In addition to
“trust”, increasing cost of customer switched to another brand is also an useful approach to keep customers (Chiou 2010).
Asset specificity cost is the cost of fear for asset specificity formed between the customer and the seller after transaction completion. This asset specificity refers the specific, tangible, or intangible assets co-created between the customer and the sell for this transactional relationship after completion of transaction. However, this asset decreases or loses its value as soon as the transactional relationship is ended. Thus, this asset specificity will increase both the customer and the seller’s cost of switching to other exchange relationship (Chiou 2010).
Chiou (2010) classifies asset specificity into six categories: (1) Distinctive usage knowledge; (2) Distinctive physical equipment, software or service; (3) Preferential treatment and benefits for loyal customer; (4) Intangible asset (5) Psychological identification; and (6) Distinctive social pressure.
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Figure 2-10 Occurrence of Asset Specificity (Chiou 2010)