A Measure For Companies' Customer Portfolio Management: Harri Terho

Journal of Business-to-Business Marketing, 16:374411, 2009
Copyright Taylor & Francis Group, LLC

ISSN: 1051-712X print/1547-0628 online
DOI: 10.1080/10517120902762542
A Measure for Companies Customer

1547-0628
1051-712X
WBBM
Journal of Business-to-Business Marketing,
Marketing Vol. 16, No. 4, Oct 2009: pp. 00
Portfolio Management
HARRI TERHO
Customer
H. Terho Portfolio Management
Turku School of Economics, Department of Marketing, Turku, Finland
Purpose/Contribution: Customer portfolio management (CPM) is one

of the key areas of customer-relationship and network management
in business markets. However, there is scant research about the
implementation of this concept in business. This article contributes to
this conceptually rich but empirically nascent field of CPM research
by (1) conceptualizing customer portfolio management, (2) forming
a measure for it, (3) validating the suggested measure, and (4) sug-
gesting implications for future research and management.
Methodology: A CPM construct is proposed based on the synthe-
sizing of the theory and the findings from a qualitative field study of
companies management practices. The suggested construct is
formative and consists of the following four dimensions: analysis
efforts, analysis design, responsiveness efforts, and responsiveness
design. Hence, this conceptualization takes into account both the
strength and style of companies CPM practices. The measure is
validated following Diamantopoulos and Winklhofers (2001)
guidelines for developing formative measures. Together with the
content validity established in the conceptual phase of the research,
the results from a cross-industry survey of 212 companies give sup-
port to the construct validity of the suggested CPM measure. Partial
least squares modeling is applied in validating the measure.
Implications: This study gives an extensive, up-to-date review of
customer portfolio management and provides measures for future
research on companies CPM practices and performance. Further,
the theory and the field study highlighted several central topics
This study is part of the LIKE Research Program Finnish Companies and the Challenge
of Globalisation, tunded by the Academy of Finland.
Address correspondence to Harri Terho, Assistant Professor, Turku School of Economics,
Department of Marketing, Rehtorinpellonkatu 3, FI-20500 Turku, Finland. E-mail: harri.terho
@tse.fi
374
Customer Portfolio Management 375
that should be addressed in future CPM studies. The resulting

managerial implications derive from the discussion on the key
aspects of developing CPM practices in business.
KEYWORDS Customer portfolio management (CPM), customer

relationship management (CRM), formative measurement, partial
least squares (PLS)
Relationship marketing has been one of the main themes in marketing and
industrial markets for over two decades. The main idea behind it is that rela-
tionship building and management are crucial success factors in current
businesses (Grnroos 1994; Morgan and Hunt 1994). However, an increasing
amount of research has been published in recent years indicating that stronger
relationships are not always desirable. The profit distribution of companies
customer relationships is remarkably heterogeneous (Mulhern 1999; Niraj,
Gupta, and Narasimhan 2001), and various relationships represent various roles
or serve different functions in the long term (Cannon and Perreault 1999;
Wilson and Jantrania 1994; Walter, Ritter, and Gemnden 2001). Therefore, the
myopic development of closer relationships, or a strict customer-retention
focus, could be questioned. Many authors have suggested that the firm should
adjust its relationship-management activities to the customers value and
concentrate on managing its whole spectrum of customer relationships
from transactions to strategic partnerships (Johnson and Selnes 2005).
Since the 1980s, a large number of various customer portfolio models
have addressed this essential managerial topic in the B2B context (see
Appendix 1). The recent boom in customer relationship management (CRM)
has made customer-relationship portfolio thinking highly topical for both
companies and academic research (Eng 2004; Johnson and Selnes 2004;
Rajagopal and Sanchez 2005). The starting point in customer portfolio anal-
ysis is the management of the whole portfolio of customers. Because firms
have only a limited amount of resources to use on their customers, it is not
rational to treat and develop all relationships in the same wayit is preferable
to differentiate the allocation in relation to the value of the relationship.
Instead of only managing individual relationships, a firm should manage its
whole portfolio of relationships and consider whether it has the right kind of
portfolio of customers to secure its long-term performance (cf. Turnbull 1990).
Customer portfolio management (CPM), therefore, has a slightly differ-
ent focus than the related CRM in terms of theory and research. Current
CRM studies focus largely on business-to-consumer contexts, therefore,
missing some central aspects of relationship management in business markets.
Most research concentrates mainly on customer satisfaction or on customer
value in strictly financial terms, such as profitability in its management
instead of taking a broader perspective. Further, CRM studies concentrate
376 H. Terho
largely on the treatment of individual relationships in management. Some

studies address the issue of managing customer relationships in different
lifetime cycles, but they do not focus on the future-oriented development of
relationships and the whole portfolio of customers (cf. Bowman and
Narayandas 2004; Reinartz, Krafft, and Hoyer 2004; Ryals 2005; Wilson,
Daniel, and McDonald 2002). These are major issues in business markets in
that companies networks of relationships form a context that both enables
and constrains corporate performance (Ritter, Wilkinson, and Johnston 2004).
Portfolio management has been identified as one of the four key levels in
managing relationships and networks in business markets (Mller and Halinen
1999). Although there is considerable conceptual knowledge about customer
portfolio analysis, there is almost no empirical research on the implementation
of this concept (i.e., CPM) (see Leek, Turnbull, and Naud 2002; and Terho and
Halinen 2007, for exceptions). Further, current studies offer highly contradictory
views about the value of portfolio management for companies. Tests and simu-
lations of theoretical models support the proposition that CPM is of great
importance (e.g., Zolkiewski and Turnbull 2002), whereas other researchers
argue that formal, simplified portfolio analysis may even be counterproductive
in the long run (Armstrong and Brodie 1994; Dubois and Pedersen 2002).
Clearly, new empirical research on CPM is needed. This article contrib-
utes to this crucial area of relationship management by forming and validat-
ing a measure for studying firms CPM practices in business markets. More
specifically, it (1) conceptualizes customer portfolio management, (2) devel-
ops a measure for studying companies CPM practices in business, and (3)
validates this new measure with empirical data. Finally, avenues for future
research and management are suggested.
Current knowledge about CPM is almost entirely based on various customer
portfolio models representing the received viewin other words, ideals
set out in the literatureand may differ from the reality of the business
world. The CPM measure developed here is thus based on the logic behind
the classic works of Kohli and Jaworski (1990) and Jaworski and Kohli (1993).
In other words, this article starts from a theory-based definition of CPM fol-
lowed by a field study of companies CPM practices. This synthesizing of
the theory and the findings leads to the establishment of an operational def-
inition. This definition and some additional interview material are then used
to build up the CPM measure. Finally, cross-industry survey data from 212
companies acting in business markets are used to validate the measure.
THE CUSTOMER PORTFOLIO MANAGEMENT CONSTRUCT

A Theory-Based Definition of Customer Portfolio Management
A large number of customer portfolio models have been developed since
the early 1980s. All these models focus on analyzing customer relationships
in order to help managers allocate scarce organizational resources and

ensure the long-term profitability of the relationships (e.g., Eng 2004). Overall,
the suggested models form a heterogeneous and complex entity, because
portfolio analysis and management can be applied from various perspec-
tives at various levels of aggregation and using different combinations of
factors or portfolio components depending upon the purposes intended
and the specific situations confronting the company (Turnbull 1990, 20).
Consequently, the models vary markedly from each other in their cen-
tral elements of customer analysis and resource allocation strategies (Eng
2004; Johnson and Selnes 2005; Turnbull 1990). For a detailed, analytic sum-
mary of all academic models, including the analysis dimensions and mana-
gerial implications, see Appendix 1. For the most part, the suggested models
are matrix-type tools consisting of two- or three-dimensional axes with sin-
gle, two, or three phases for analyzing the value of customers from the focal
firms point of view (Zolkiewski and Turnbull 2002). The analysis criteria
vary from a strictly financial focus (Storbacka 1997) to very broad views about
customer value (Fiocca 1982). Moreover, the suggested resource-allocation
strategies vary considerably from the allocation of sales-force time (LaForge
and Cravens 1982) and the more general adjustment of marketing strategies
to customer value (Shapiro et al. 1987), to strategies concerning which rela-
tionship to develop and in what direction (Zolkiewski and Turnbull 2002).
Terho and Halinen (2007) have proposed the following theory-based
definition of CPM based on a literature review of academic customer portfo-
lio models: an activity by which a company analyzes the current and future
value of its customers for developing a balanced customer structure through
effective resource allocation to different customers or customer groups
(721). This definition is adopted here as a starting point. However, it is prob-
lematic because it is based on theoretical models representing a relationship-
management philosophy. It is probable that corporate CPM practices are not
perfectly similar to academic models, and indeed that they differ from them.
An empirical field study may give a significantly clearer idea of the domain
of a construct and hence enable a more precise definition. It could also help
in forming an operational definition that is not only theoretically rigorous but
also matches business reality and is relevant to practitioners. It is important
for such a definition to explicate the CPM activities that translate the underly-
ing philosophy into practice (cf. Kohli and Jaworski 1990, 3).
A Field Study of CPM Practices in Business

A qualitative field study of CPM practices was conducted in seven companies
with the goal of developing an operational definition of CPM. The study was
based on a theoretical sample of seven purposefully chosen firms assumed to
represent as much variation as possible in terms of the business and the cus-
tomer base, the aim being to obtain an adequate picture of various management
378 H. Terho
practices (cf. Eisenhardt 1989, 537). A number of factors were taken into account
in the selection of the companies: differences in their strategies (cost vs.
value-added emphasis), main products and services (simple and standard-
ized vs. complex and tailored), customer-base size (large vs. narrow), mar-
ket concentration (many vs. a few potential customers), and in the industry
dynamics (mature and stable vs. developing and dynamic). The companies
involved are given a name based on the industry in which they are acting
and a letter: energy A, insurance B, logistics C, paper D, E (two companies),
and the information and communication technologies (ICT) businesses F, G
(two companies). They were all among the 100 largest companies in
Finland and were known to apply systematic portfolio management.
The study was based on semistructured interviews with carefully
selected senior managers responsible for customer management in each of
the seven companies. This rather limited number of interviews was deemed
sufficient because saturation was reached. The discussions revealed some
clear patterns that contrasted with the theory-based definition of CPM. The
interview themes included the companies CPM aims, the contents of the
analysis, the managerial implications, the various responsibilities, any prob-
lems, and overall CPM-related experiences. The interviews lasted approxi-
mately 1.5 hours and the discussions were kept as broad as possible with a
view to obtaining rich data about CPM practices.
Yin (2003, 106108) proposes two general strategies for analyzing case
study data: case descriptions and theoretical propositions. Even though this
field study was not a genuine case study aiming at a thorough understand-
ing, both of these analytical strategies were applied. First, it was possible to
form a description, or a broad overall picture, of the companies CPM
practices based on the interviews. Second, the interviews were analyzed by
testing the theoretical proposition that the theory-based definition and the
practice should be similar. In other words, the focus of the analysis was on
finding differences between the theory-based definition and the companies
management practices. Because the empirical data were not extensive, anal-
ysis programs such as NUDIST were not used. The findings of the field
study are illustrated in the form of quotations from the interviews.
A Field-Based View of Customer Portfolio Management

A comparison of the interviews and the theory-based definition revealed three
main patterns that are not present in customer portfolio models and, therefore,
in the theory-based definition of CPM: the process nature of portfolio man-
agement, the design of CPM activities, and the role of the various organiza-
tional levels and functions involved. These three themes are discussed here.
First, the theoretical customer portfolio models concentrate on the
mechanical design of the portfolio analysis at one point in time, that is, they
carry out the analysis and develop strategies for managing different kinds of
customers. In practice this is a very limited view, however. According to the

interview data, CPM is likely to be an ongoing, continuous process rather
than a separate act of analysis or strategy development taking place at one
point in time. Portfolio management is clearly a strategic issue, but it takes
place largely in daily business dealings with customers. Several interviewers
stressed the fact that the proper implementation of CPM into practice could
take years, as illustrated here.
Insurance B: Basically, analysis tools or models can be taken into use

quite quickly. The standardization of practices is a bit more time-consuming.
However, the implementation takes time. . . . To get the people in the
field to understand what we are doing and to get them to act correctly
can take years. . . . To make the results visible takes time: we dont act in
a vacuumif we could change our customer-base structure right away
then the results would soon be seen.
It seems that the main aspects of CPM processes concern customer

analysis, in other words, processing customer information and responding to
the new knowledge. These two activities emphasize a process nature and
they are somewhat present in the theory-based definition, although they are
both more generally apparent here. In particular, the idea of responsiveness
is at the core of portfolio management and emphasizes the need to move
from customer-management strategies to their implementation in concrete
daily actions.
Logistics C: We have recently taken a new value-segmentation model

into use. . . . The large [customer] mass is analyzed based on the numeri-
cal data. For the larger customers we have this more qualitative evaluation
as well. . . . I think the implementation represents a major challenge in
management. How to take the created operational models concretely into
our daily practices.
Paper D: There are two levels in our customer management: customer-
base management, which is the responsibility of upper management, and
operative customer management, when the plans are taken into practice. .
. . These two levels interact the whole time through discussions, meetings,
reports, and measurement.
Paper E: It is crucial to move beyond the customer classifications and to
use them as the basis of our operations. What relationships should we
develop, where should we put our efforts? . . . The implementation of
customer-base management involves constant cooperation between cor-
porate management, divisional management, and employees in the field.
This notion of CPM as customer-information processing and responsive-

ness to the knowledge gained is consistent with theories of organizational
380 H. Terho
learning (Huber 1991), information processing (Sinkula 1994), and market

orientation (Kohli and Jaworski 1990). Consequently, CPM in business could
be regarded as an ongoing process involving two main activities: customer
analysis and responsiveness to customer knowledge.
Second, the interviews from the field study indicate that CPM practices
develop over time as companies adjust their portfolio-management practices.
This adaptation may be based on the explicit planning and development of
portfolio-management activities. Even though many companies use consult-
ants in building up their practices, they are not bound to ready solutions.
On the contrary, most of the interviewees stressed the need to build and tailor
the management practices in-house. Interestingly, the adaptation of prac-
tices is not necessarily in accordance with strict managerial planning or for-
mal development, and could also be based on learning from feedback, new
knowledge, insights achieved, and trial and error.
Insurance B: We also quite often do ad hoc analyses when we notice

some interesting issue or want an answer to a specific problem. When
weve done it we wonder if it was just a single project or if we also want
to monitor that issue in the future in our customer-base management.
Logistics C: Our management practices are developing the whole time. . .
There may be changes [to the CPM process] along the way to what we
have planned if we notice that its not exactly what we wanted.
Paper E: The customer-management IT technology and databases play a
central role in management. . . . All our [customer management] software
and the tools that we use have been tailored specifically for us.
The interviews indicate that the adaptations in portfolio-management

practices differed notably from company to company. Some firms had put
lots of effort into formally planning and adapting their analysis and respon-
siveness activities. Others did not place as much emphasis on explicit, for-
mal design and took a more informal approach to portfolio management
through the management of individual customers and daily interaction. In
other words, CPM activities may but do not need to be formally designed, as
Leek, Turnbull, and Naud (2002) also noted.
Energy A: We have standardized customer-treatment models for differ-

ent types of customer relationships in our customer base. There are very
clear-cut instructions for our staff regarding the smaller customers . . . .
For the large ones the customer classification and the implementation of
customer management are basically the responsibility of our very knowl-
edgeable salespeople.
Insurance B: Because of the nature of our business we need to have a
formal management model for analyzing and treating our customers. . . .
In [the] future we need to develop more thorough instructions for the
sales people. . . . A key issue would be getting them to move from a volume
to a profitability orientation in their actions.
Paper E: You dont want to tie up your preferably innovative sales
personnel with too strict instructions. But of course you must have some
common frame or values for them.
ICT F: We do a customer-base-level analysis once a year. Still, the focus
in our customer-base management lies in the continuous monitoring and
management of our customer relationships in our sales organization.
ICT G: The customer base or portfolio level is not relevant for us. . . . In
the end the customer classifications are not important. . . . Our customer-
base analysis and management are realized fully through the management
of individual customer relationships.
The concept of customer-portfolio-management design is a useful starting

point for examining these differences in portfolio-management style. Design
here refers to an explicit focus on the planning and adaptation of CPM activi-
ties. Theoretically, the notion of CPM design is connected to the concept of
mechanistic and organic management styles or arrangements, which is dis-
cussed widely in organization and marketing theory (e.g., Burns and Stalker
1961, 96126; Chakravarthy 1982, 38). The so-called mechanistic organizational
style combines the use of formal rules and procedures with limited participation
in decision making, whereas organic decision making features few procedures,
yet high involvement (Dahlstrm, Dwyer, and Chandrashekaran 1995, 43).
Third, the theoretical models give the impression of CPM as a thoroughly
managerial marketing practice. According to the interviewees, however, it is
strongly cross-functional and multilevel. Instead of being an isolated market-
ing tool it is connected to other managerial decisions in marketing such as key
account management (KAM), need-based segmentation and the development
of offerings, and also to other functional areas of the company such as sales,
accounting, production, supplier management, and R&D. Similarly, CPM deci-
sions in one business unit are often linked to decisions in other related units or
areas.
Energy A: One great challenge for customer analysis is the separated

databases in our different business units.
Logistics C: Value-based and need-based segmentation must be used
together. We cannot just look the value of the customerwe need to con-
sider customer needs as well in managing customers of different value. . . .
We work together with our customers in developing offerings for differ-
ent customer groups.
Paper D: We have started increasingly to take into account customers
who are buying several product categories from different business units.
A good customer in one product area must be serviced well in the other
business areas even though it may be a bad customer for those units.
382 H. Terho
Paper E: There are three main parties who are important [in CPM]. The
sales personnel who are in contact with the customers, the production or
its planning, and thirdly the accounting function, so that you can be cer-
tain of the profitability.
Even though CPM is a managerial activity, it cannot be separated from

other levels of the company. Its proper implementation often requires orga-
nizational changes that need the support of top management. Similarly, the
implementation of portfolio management takes place at lower levels of the
organization, such as the sales level, as illustrated in many of the previous
comments.
Logistics C: It [CPM] is like any other change in the organizationit

requires the support of the top management. Some smaller changes that
only affect a particular area, those you could implement right away, but
as soon as their execution affects the whole organization you need the
support of the management.
Hence, CPM is heavily interconnected with other managerial questions

that should be taken into account in the decision making. For a more thor-
ough discussion on this topic, see Ritter (2000) on the interconnections
between customers in a portfolio, Zolkiewski and Turnbull (2002) on the
interconnections between customer and supplier portfolios, and Tikkanen,
Kujala, and Artto (2007) on the interconnections between customer, project,
network relationship, and offering portfolios.
Synthesis: An Operational Definition of Customer Portfolio

Management
A synthesis of the theory and the field-study findings suggests the following
operational definition of CPM: the companys activities in analyzing its
portfolio of customers pertaining to their role in providing current and
future value for the focal company, and its responsiveness to the analysis
conducted. The core of portfolio management lies in learningcompanies
gain new knowledge about the value and the role of various customers
through the analysis processes, and this enables them to better allocate their
limited resources among their customers.
More specifically, CPM is a continuous process involving four main
dimensions related to analysis and responsiveness activities. Given the goal
of this study to form a measure for studying companies practices, the focus
is naturally on their main CPM activities rather than on the overall longitudi-
nal portfolio-management process. CPM is made up of four dimensions (see
Figure 1) approximating both the efforts (i.e., strength) and the design (i.e.,
style) of the analysis and responsiveness activities.
Analysis efforts
Analysis design Customer

portfolio
management
Responsiveness efforts
Responsiveness design
FIGURE 1 Customer portfolio management construct.
This kind of conceptualization, which takes the design of activities into

account, is rare in marketing, although some similar managerial constructs
exist (e.g., network competence, Ritter 1999; see also Kohli and Jaworski
1990, 16). The different facets of CPM do not necessarily hang together. It is
more likely that the different activities together form the CPM level, indi-
cated by the direction of the arrows in Figure 1. Moreover, it should be
noted that this conceptualization makes sense only when there is a reason-
able amount of efforts present. The presence of design alone would indicate
that a company plans carefully its CPM activities but does not implement
them into practice. Clearly future studies need to take this issue into
account. See the following section, Limitations and Implications for Future
Research, for a discussion on how this issue should be solved. The key
dimensions are discussed in more detail next, based on the theory and the
field study.
ANALYSIS EFFORTS
CPM activities are aimed at obtaining a thorough understanding of the role
of various customers in the customer base in order to ensure value for the
focal company over the long term. The development of analysis activities
may help firms minimize errors in understanding the value of different
kinds of customers. This is essential, because such errors are likely to lead
in certain cases to the under- or overspending of resources (cf. Reinartz,
Krafft, and Hoyer 2004, 296). When the company has an understanding
about the structure of its customer portfolio and the role of various custom-
ers in providing value, it is arguably also better able to develop resource-
allocation strategies to achieve its long-term and effectiveness goals (cf.
Turnbull 1990, 21; Johnson and Selnes 2005).
Analysis efforts here refer to the focal companys efforts to analyze its
whole portfolio of customers pertaining to their different roles in providing
384 H. Terho
current and future value for the focal company. According to the literature
and the qualitative study, it should be stressed here that customer value
must be considered broadly in portfolio analysis, the activities being by no
means restricted to assessing the direct, economic value (see also Appendix 1).
Rather, the main focus is on the roles of different customers in the customer
base in terms of providing current and future value to the focal company
(cf. Johnson and Selnes 2005). The various customer relationships serve a vari-
ety of functions (Mller and Trrnen 2003; Walter, Ritter, and Gemnden
2001; Wilson and Jantrania 1994). Similarly, the value of a relationship may
be realized through the customers broader role in the customer-base struc-
ture, for example, via economies of scale rather than directly (Johnson and
Selnes 2004, 3). In addition, customer-relationship characteristics such as
strength, commitment, trust, and mutuality influence its long-term develop-
ment and success, therefore, affecting its future value. Because portfolio
management is a heavily future-oriented practice, the customers future value
potential (e.g., growth, customer shares) also represents a major aspect of
CPM. It is not enough to understand the value of individual relationships,
and the focus should also be on understanding how each relationship type
fits into the larger portfolio (cf. Cannon and Perreault 1999, 457). Hence,
activities such as comparing, grouping, and prioritizing customers based on
their value are essential in analysis efforts.
ANALYSIS DESIGN
If the analysis activities miss some central aspects of the business of the
focal firm, are of poor quality, or concentrate on the wrong issues they will
produce unsatisfactory and possibly misleading outcomes (cf. Zolkiewski
and Turnbull 2002, 578582). Hence, tailoring portfolio-management activities
is crucial to companies CPM practices (cf. Terho and Halinen 2007; Salle,
Cova, and Pardo 2000). This issue also arose in the field study, in which the
analysis practices were found to vary strongly based on perceived CPM con-
tingencies. The development of analysis activities may take place informally
through learning in everyday business, and also through explicit, systematic
development. Significantly, the activities may but need not be formally
designed.
The concept of analysis design refers to the focal companys continu-
ous efforts to plan and adapt its customer portfolio analysis activities to
company needs. In other words, design refers to how much effort a com-
pany has to put into planning its analysis activities; for example, establish-
ing the criteria, methods, and procedures, as well as further developing its
current activities. Clearly, the adoption of highly designed and sophisticated
analysis practices is close to the use of the formal portfolio models sug-
gested in the literature. This also implies more managerial planning in port-
folio management. Therefore, high levels of design indicate mechanistic
portfolio management with formal rules and procedures and more limited
participation in the decision making (cf. Burns and Stalker 1961).
RESPONSIVENESS EFFORTS
The third main CPM element is responsiveness efforts, referring to the focal
companys efforts to adjust its resource allocation according to the value of
different customers in its current and future customer portfolio. Very little is
accomplished in a thorough analysis of customers unless the firm is able to
respond to the knowledge it gains through such activities. CPM is a future-
oriented practice because it basically helps the company understand its cur-
rent portfolio so that it is equipped to produce better future resource alloca-
tion among customers of different value. The resource-allocation strategies
of customer portfolio models fall into two theoretically meaningful classes:
matching and development (see Figure 2; Appendix 1).
Matching relates to the cost-efficient treatment of customers of differing
value in the current customer relationship portfolio. It involves issues such
as tailored offerings, different operational models (e.g., service, channels),
and the allocation of sales resources to customers of differing value. On the
other hand, the development of a relationship-portfolio structure focuses on
the future-oriented question of which relationships to develop and in which
direction. Zolkiewski and Turnbull (2002, 578) separated the possible rela-
tionship-development implications in the form of four questions: Do new
relationships need to be created? Which relationships should be developed?
Which relationships should be maintained? Are there any relationships that
should be broken or discarded? This division is not exactly clear-cut
because both of these aspects of resource allocation overlap: customer-
treatment decisions always include a relationship-development aspect, and
vice versa.
RESPONSIVENESS DESIGN
Another side to responsiveness concerns its design. The responsiveness
design refers to the focal companys continuous efforts to plan and adapt its
responsiveness activities to company needs with a view to implementing
them in practice. Responsiveness design is a continuous process, and
1. Strategies for adjusting resource allocation to match the value

A B of different customers: How to manage efficiently customer
E groups A, B, C, D, and E?
D C
2. Strategies for developing customer portfolio structure: How to
develop customer groups A, B, C, D, and E?
FIGURE 2 Two Main Aspects of Resource Allocation for Hypothetical Customer Portfolio (A,
B, C, D, E).
386 H. Terho
includes the evaluation of current practices and their adaptation based on

feedback. Unlike analysis design, responsiveness design directly incorpo-
rates implementation issues. Implementation is not self-evident: many of the
interviewees in the pilot study indicated that they had difficulties putting the
differentiated resource allocation into practice. This was the result, in many
cases, of a sales-volume-oriented culture in the sales department, for exam-
ple, emphasizing volume rather than profitability. To be able to successfully
implement differentiated resource allocation a firm must be able to realize
its strategies in the actions of its personnel at the customer interface in vari-
ous functions (cf. Campbell 2003, 380381). For example, instructions about
customer-management principles may be crucial. In sum, responsiveness
design concerns the careful planning of resource allocation and the adapta-
tion of current practices. High levels of design in responsiveness indicate
more formal, mechanistic customer management.
MEASURES OF CPM
Formative Measurement
Ever since Churchill (1979) presented his article about measure develop-
ment, researchers in marketing have devoted considerable attention to the
development of multiple-item measures with sound psychometric proper-
ties. Measurement in marketing has been largely based on the ideas behind
classical test theory and its assumptions about the relationship between a
construct and its indicators. The basic assumption here is that the latent
variable results in the indicators (Bollen and Lennox 1991). Because the
direction of the causality is from the construct to the indicators, and change
in the construct causes changes in the indicators, the classical measures are
referred to as reflective. In more formal terms, it is assumed in classical test
theory that the variation in the scores on measures of a construct is a func-
tion of the true score, plus the error (Jarvis, Mackezie, and Podsakoff 2003,
199). The reflective indicators should, therefore, be internally consistent, as
they all reflect the same underlying construct. For the same reason, the indi-
cators in reflective measurement should be interchangeable and the con-
struct validity should be unchanged when a single indicator is removed
(Bollen and Lennox 1991).
However, the suggested CPM conceptualization does not fit easily into
the dominant reflective-measurement perspective (cf. Jarvis, Mackezie, and
Podsakoff 2003). First, all four CPM dimensions are internally very broad,
and each of them includes a wide variety of indicators that are not necessar-
ily intercorrelated. For example, a company may analyze its current cus-
tomer value but it does not have to analyze the future value potential.
Similarly, it may manage customers of different value very efficiently but it
does not have to try to develop its customer structure by driving customer
relationships in a certain direction. Second, the same applies to the four

CPM dimensions, which are not necessarily intercorrelated. This is obvious,
because the existence of analysis activities does not mean that the company
will respond to this knowledge. Neither do the analysis nor responsiveness
efforts need to be carefully designed.
CPM is better operationalized through the use of formative (cause)
indicators (see Figure 1). Formative measurement is based on the idea that
the indicators cause the concept measured. This has several effects on the
properties of such measures. First, the internal-consistency criterion is not
valid for the cause indicators (Bollen 1984, 381). On the contrary, a census
of indicators, not a sample, is required for indicator specification in forma-
tive measures (cf. Bollen and Lennox 1991, 308). Second, as the formative
constructs are caused by their indicators, dropping an indicator may alter
the meaning of the construct. Third, for the same reason, the measurement
error cannot be measured on the item level but must rather be estimated on
the construct level (Bollen and Lenox 1991). A natural consequence of these
characteristics is that the formation and validation of formative measures dif-
fer from traditional reflective measurement.
Diamantopoulos and Winklhofer (2001) have developed guidelines for
developing and validating formative measures. They separate four critical
issues for successful index construction: content specification, indicator
specification, indicator collinearity, and external validity. Next, the CPM
measure is developed in accordance with these guidelines. The content
specification and the indicator specification are discussed in the context of
developing the survey instrument, while the indicator collinearity and exter-
nal validity are based on the empirical survey data.
Survey Instrument
The above presentation of the CPM construct was based on theory and a
field study. The first step in the construction of formative measures, content
specification, is firmly rooted in the extensive definitions of CPM and its
dimensions. The careful literature review and the empirical field study sup-
port the content validity of the construct.
The second step, indicator specification, is based on definitions of the
CPM dimensions. In order to ensure that the indicators will cover the entire
scope of the construct, conceptual matrices based on these definitions are
used as a guide. They provide a structured means of ensuring that the ques-
tions evenly cover all the main aspects. The list of items was tested in inter-
views with experts. The aim of this qualitative process is to ensure that the
questions are understandable, relevant, and do not overlap too much. It
consisted of an additional seven personal interviews with the senior manag-
ers responsible for customer management (with an emphasis on the clarity
and scope of the questions), 10 personal interviews with academic experts
388 H. Terho
(with an emphasis on the theoretical rigidity and scope of the questions),

and a critical review with nine academics examining how the indicators fit
the definitions. This process resulted in modifications to several questions
until the indicators were found suitable. The result was a list of 10+6+9+6
indicators covering all the main aspects of CPM without excessive overlap,
presented in the questionnaire in Appendix 2. The theory-based matrices
used in the formation of the indicators are presented below. The numbers
in the matrices refer to the indicators in the questionnaire. The original
questions were in Finnish.
Analysis efforts refer to the focal companys efforts to analyze its whole
portfolio of customers pertaining to their different roles in providing it with
current and future value. According to the definition, the two main aspects
of analysis efforts comprise the temporal aspect of customer value analysis
(current vs. future) and the degree to which individual customers and the
whole portfolio are analyzed. The codes in the matrix correspond to the
questions in the questionnaire (see Figure 3; Appendix 2).
Analysis design refers to the focal companys continuous efforts to plan
and to adapt its CPM activities to company needs. According to the defini-
tion, two main aspects are distinguished: time (what has been done/future-
oriented development orientation) and the type of design (planning/adapta-
tion of practices). The codes in the matrix correspond to the questions in
the questionnaire (see Figure 4; Appendix 2).
Responsiveness efforts refer to the focal companys efforts to adjust its
resource allocation according to the value of different customers in its cur-
rent and future customer portfolio. The main aspects are, once again, the
temporal aspect (current/future moment) and the focus of the resource allo-
cation (matching/development). The codes in the matrix correspond to the
questions in the questionnaire (see Figure 5; Appendix 2).
Responsiveness design refers to the focal companys continuous efforts
to plan and to adapt its responsiveness activities to company needs with a
Relationship level Portfolio level

Current (backward-
looking) value AE1-AE2 AE5-AE7
Future value AE3-AE4 AE8-AE10
FIGURE 3 A conceptual matrix for forming items for analysis effort.
Planning of Adaptation
practices of practices
Current focus
AD1-AD2 AD4-AD5
Future focus AD3 AD6
FIGURE 4 A conceptual matrix for forming items for analysis design.

Matching focus Development focus

Current focus
RE1-RE3 RE5-RE7
Future focus RE4 RE8-RE9
FIGURE 5 A conceptual matrix for forming items for responsiveness efforts.
view to implementing them in practice. Again, two central aspects can be

drawn from the definition: time (what has been done/future-oriented devel-
opment) and the type of design (planning/adaptation of practices). The
codes in the matrix correspond to the questions in the questionnaire (see
Figure 6; Appendix 2)
The next stage was to test the suggested CPM measure empirically. The
data collection is discussed first. The focus then shifts to multicollinearity and
the testing of external validity based on partial least squares (PLS) modeling.
Data Collection
Large companies are more likely to systematically apply portfolio manage-
ment given their more extensive resources. Therefore, a purposive sample
was drawn from the Finnish Fonecta ProFinder B2B database for the largest
B2B companies acting in all industries in Finland. There were no statistical
considerations in the company selection. In practice, selecting all firms with
a turnover of more than 55 million gave a list of 630 companies. Those act-
ing mainly in business-to-consumer businesses, nonprofit companies, and
those mainly supplying to their owners were dropped from the survey. CPM
is frequently practiced in independent business areas in large companies,
rather than as a centralized process. The researcher, therefore, contacted the
senior management in every company in the sample in order to (1) identify
whether there were one or more independent organizational units responsi-
ble for CPM, (2) find the key persons responsible for CPM activities, and (3)
motivate the respondents to participate in the study (cf. Huber and Power
1985, 174175). The final sample consisted of 493 independent units respon-
sible for customer-base management. Given the difficult respondent group of
senior marketing managers, a single-respondent approach was adopted to
get a better response rate. Of the personally contacted independent unit
managers, 446 promised to participate. They were all sent an electronic
Planning of Adaptation
practices of practices
Current focus
RD1-RD2 RD4-RD5
Future focus RD3 RD6
FIGURE 6 A conceptual matrix for forming items for responsiveness design.

390 H. Terho
questionnaire and two reminders in order to obtain as good a response rate

as possible. After three months of data collection a total of 225 question-
naires had been returned. In 18 cases two or more responses were received
from a single company.
Removing responses with low respondent competency, measured by
means of a separate question, and those with a substantial quantity of miss-
ing values led to a total of 212 usable responses, which represented a high
response rate of 43 percent. Even though the single-respondent strategy is a
limitation, it helped in increasing the response rate, which in turn may
improve the overall validity of this study. Armstrong and Overtons (1977,
396) guidelines for estimating nonresponse bias were used. First, the per-
sonnel class, turnover, and industry of the respondent companies were
compared to all B2B companies in the focus area of the study for possible
bias. There were no statistically significant differences in turnover or indus-
try, although the personnel size of the respondent companies was slightly
larger than that of the nonrespondent companies. Second, the early and late
respondents were compared, and no systematic differences were found. In
sum, the responses could be considered to represent large Finnish B2B
companies well, and the results suggest that nonresponse-bias is not a prob-
lem in this study.
Estimation and Results

The third step in the CPM measure formation process is the examination of
multicollinearity. Excessive collinearity is a problem in formative measure-
ment because it affects the stability of the indicator coefficients. Moreover,
multicollinear indicators would include redundant information, making the
index problematic. In other words, index-construction procedures tend to
eliminate highly intercorrelated items for minimizing multicolleniarity,
whereas traditional scale-development procedures tend to retain highly
intercorrelated items for maximizing internal consistency (Diamantopoulos
and Siguaw 2006, 271). Diamantopoulos and Winklhofers (2001, 272)
guidelines include the use of the variance inflation factor (VIF), for which
they suggest a cut-off threshold value of 10. According to the VIF values,
none of the indicators were problematic. Diamantopoulos and Siguaw
(2006, 271) suggest studying multicollinearity in terms of a related tolerance
value with a more conservative a cut-off value of .30, and, as a result of this
procedure, two items were deleted (questions AD1 and AD6). Furthermore,
multicollinearity was studied by examining pairwise correlations where cor-
relations greater than .8 indicate multicollinearity (Gujarati 2003, 359). In
this case, most of the correlations remained less than .6 and all of them
were less than .7 (five variables greater than .6). Finally, Hair, Anderson,
and Tathams (1995) two-part process for assessing multicolinearity did not
reveal any such problems.
The fourth and final phase in formative measurement development is

ensuring the external validity of the construct. The formative indicators may
have a positive, a negative, or no correlation between one another (Bollen
and Lennox 1991, 307), which implies that the traditional assessment of
individual item reliability and convergent validity is not meaningful for for-
mative constructs (Hulland 1999). The error of an index may be approached
on the construct level rather than on the item level. According to Diamanto-
poulos and Winklhofer (2001, 272), the external validity of an index should
be examined by means of a multiple indicators and multiple causes
(MIMIC) model in which the formative indicators act as direct causes of the
latent variable, which, in turn, is indicated by one or more reflective indica-
tors. If the overall model fit proves acceptable, it can be taken as supporting
evidence for the set of indicators forming the index.
The CPM construct consists of the four dimensions of analysis efforts, anal-
ysis design, responsiveness efforts, and responsiveness design, which together
form the CPM measure. In the following, the MIMIC model is tested on the
aggregate level, that is, all CPM dimensions are used as causes in an overall
CPM measure using four reflective indicators. This is an established procedure
for validating formative constructs with multiple dimensions (e.g., Reinartz,
Krafft, and Hoyer 2004; Ulaga and Eggert 2006). The indicators of the reflective
CPM measure can be found in the questionnaire in Appendix 2.
Partial least squares, a component-based structural equation modeling
technique, is used to test the MIMIC model. There are several reasons for
choosing this approach over maximum-likelihood-based methods such as
LISREL. First, PLS can model latent constructs under conditions of non-nor-
mality, which is the case in this research (e.g., Chin, Marcolin, and Newsted
2003, 197). Second, it avoids two serious problems associated with maxi-
mum-likelihood-based methods, namely, improper solutions and factor
indeterminacy (Fornell and Bookstein 1982, 440). Attempts to explicitly
model formative indicators in traditional structural equation modeling have
been shown to lead to identification problems. One way of avoiding this
problem is to apply components-based PLS, which can better model forma-
tive indicators (Chin 1998a, 910). Partial least squares estimates the latent
variables as the exact linear combination of the observed measures, thereby
avoiding the indeterminacy problem and providing an exact definition of
the component scores. Finally, PLS is appropriate when the theory is
untested in an application domain (Gopal, Bostrom, and Chin 1992, 57).
The results of the MIMIC model are discussed. The measurement model
results are discussed first, followed by the results of the structural model.
The SmartPLS 2.0 program was used to carry out the analysis (cf. Ringle,
Wende, and Will 2005).
The four-item reflective CPM measure had a Cronbachs alpha of .66 (.65
acceptable), composite reliability of .80 (over .7), and an average variance
extracted (AVE) of .50 (should be larger than .5), see Table 1. The item
392 H. Terho
TABLE 1 Summary Statistics for Measures
Number Std.
Construct name of items Mean Deviation Range (17) Reliability AVE
Analysis efforts 6 4.75 1.00 1.407.00 -/- -

Analysis design 4 4.25 1.34 1.007.00 -/- -
Responsivness design 5 4.44 1.18 1.337.00 -/- -
Responsivness efforts 7 5.07 0.92 1.446.78 -/- -
Reflective CPM measure 4 4.89 1.04 1.007.00 .66/.80 .50
loadings were .67, .69, .72, and .73 (ideally over .7, but over .5 acceptable).
Even though these figures are not ideal, they could be considered accept-
able given the purpose of this research to develop measures, and the fact
that the CPM measure is a very complex, widely varying multidimensional
construct. Its broadness makes it difficult to capture in its entirety with a sin-
gle reflective measure (cf. Churchill 1979, 68).
Reliability and AVE are not applicable in formative measurement.
Instead, item weights could be seen as validity coefficients. For this reason
Diamantopoulos and Winklhofer (2001) recommend removing nonsignifi-
cant items in the MIMIC model. However, several authors stress that indicator
elimination, by whatever means, should not be separated from conceptual
considerations when a formative measurement model is involved (Bollen
and Lennox 1991, 308; Diamantopoulos and Winklhofer 2001, 273). Further-
more, earlier studies have validated formative measures with several dimen-
sions, based purely on structural relationships (e.g., Reinartz, Krafft, and
Hoyer 2004).
When the MIMIC model was tested several indicators turned out to have
negative or near-zero indicator weights, suggesting the need to remove indi-
cators. The decision was made to drop those with weights of under 0.100, with
two exceptions (RE1, RE4). This was possible because the suggested list of
indicators was very fine-grained, and there was slight overlap in the items.
Therefore, removing the indicators did not alter the overall measure, as the
final items still effectively covered the essential aspects of the CPM phenom-
enon. More specifically, items AE3 and AE4 could be considered to be cov-
ered by AE1 and AE2; AE6 by AE5 and AE7; AE8 by AE10; RE3 and RE7 by
RE1, RE2, RE4; and RD4 by RD5 and RD6: AD1 and AD6 were removed ear-
lier because of multicollinearity (see the questionnaire in Appendix 2) The
measurement model results for the final purified CPM measure are shown in
Table 2. Table 2 gives the item weights for the formative measures, the item
loadings for the reflective measures, and the t values for all measures.
Significantly, 19 of the 22 indicators were significant at least at the
10 percent level, and all of the indicators had positive indicator weights
(retained nonsignificant indicators: AE2, RE1, RE4). Because PLS is based on
standard ordinary least squares regression, misspecification due to the inclu-
sion of irrelevant items will not bias the estimates of significant items
TABLE 2 Measurement Model Results for the MIMIC Model
Formative Indicators Indicator Weights t statistics
AD2 -> Analysis_Design .241 2.473

AE1 -> Analysis_Effort .165 1.718
RD1 -> Responsiveness_Design .161 1.814
RE1 -> Responsiveness_Effort .087 0.831
Reflective Indicators Indicator Loadings t statistics
RF1 <- Reflective_CPM .689 10.307
Note: t value 1.64 = 10%; 1.96 = 5%; 2.54 = 1% significance.
(Mathieson, Peacock, and Chin 2001, 107). The 10 percent significance level
for the indicators was acceptable because of their strong conceptual sup-
port. The difficulty of forming a good reflective CPM measure also supports
this choice because the nomological context is important in assessing the
relative importance of formative measures (Mathieson, Peacock, and Chin
2001, 107).
Furthermore, the structural model depicted in Figure 7 supports the con-
struct validity of the CPM measure. The figure shows the path coefficients,
with the t values in parenthesis, and the R2 value for the structural model.
The interpretation of the R2 values is identical to that of traditional regres-
sion (Chin 1998b, 316). The corresponding path estimates could also be
interpreted in the same manner. Following the bootstrap procedure
included in the SmartPLS (500 resamples, as recommended by Chin 1998b,
323), all of the model path coefficients were found to be significant. The R2
of the CPM construct was substantial (.777), indicating that the reflective
and formative measurement approaches shared 78 percent of their variance,
supporting the construct validity of the formative CPM measure.
394 H. Terho
.366**
Analysis design (4.931)
R2 = .777
.135*
Analysis efforts (2.403)
Reflective
.325** CPM
(5.916) Measure
Responsiveness efforts
.226**
(3.989)
Responsiveness design
FIGURE 7 Structural model results for the MIMIC model*t values 1.96 = 5% significance
level. **t values 2.54 = 1% significance level.
TABLE 3 Latent Variable Correlations and Squared AVE for CPM Dimensions and Reflective
CPM Measure
Ana_Des Ana_Eff Resp_des Resp_Eff Refl_CPM
Ana_Des (.823)
Ana_Eff .569 (.683)
Resp_des .669 .564 (.775)
Resp_Eff .481 .647 .571 (.656)
Refl_CPM .769 .673 .775 .675 .705
Note: The bolded figures are squared AVE. AVE is not well suited for formative measurement and is
therefore in sparenthesis for formative measures.
Interestingly, analysis and responsiveness efforts evinced weaker path

coefficients than design in the structural model. This was clearly caused by
the narrow scope of the reflective CPM measure, and can also be seen if the
correlations and squared AVE figures for the CPM constructs are examined
(see Table 3). The correlation table shows that all the CPM dimensions are
highly correlated. However, design correlates more highly with the reflec-
tive CPM measure than with efforts. Furthermore, the correlations between
the CPM dimensions are smaller than the squared AVE figures, the reflective
CPM measure being an exception. This was expected, as the reflective CPM
measure should overlap all formative measures.
The GoF figure (geometric mean of the average communality and the
average R2) can be used to estimate the overall goodness-of-fit of the PLS
model. Even though the AVE figure is not well suited to formative mea-
surement, the GoF figure was examined, indicating a good fit of .644
(cf. Tenenhaus et al. 2005, 173). Therefore, according to the path coeffi-
cients, the R2 value and the GoF value, the MIMIC model has a good fit
with the empirical data.
Finally, an alternative way of conceptualizing customer portfolio man-
agement is as a second-order construct. In the building of new measures,
choosing between first-order and second-order conceptualizations should

always be based on both theoretical and empirical reasoning. Hierarchical
component analysis, as recommended by Wold (cf. Lohmller 1989, 130133),
was used to test this alternative second-order conceptualization. In this case,
it comprised the two second-order activities of analysis and responsiveness,
both of which comprised CPM effort and design. Technically speaking, a
second-order factor is directly measured by observed variables for all the
first-order factors. While this approach repeats the number of manifest vari-
ables used, the standard PLS algorithm can be used to estimate the model
(Chin, Marcolin, and Newsted 2003, 197). In other words, the second-order
constructs repeat the indicators of the lower-order constructs (for analysis
4+10 indicators and for responsiveness 6+9 indicators).
Significantly, the outer model results (indicator weights) are similar in
this model to the previously tested first-order conceptualization of CPM.
Therefore, both of these MIMIC models suggest keeping and dropping the
same indicators, thereby providing further support for the validity of the
construct. The R2 value of the tested second-order model was .775 and the
GoF figure was .642, indicating that choosing a second-order conceptualiza-
tion of CPM does not lead to a better model fit. Therefore, the simpler first-
order model is a reasonable choice.
LIMITATIONS AND IMPLICATIONS FOR FUTURE RESEARCH
This study developed a conceptualization of customer portfolio manage-

ment based on theory and a qualitative field study. The suggested construct
is formative and consists of four dimensions: analysis efforts, analysis
design, responsiveness efforts, and responsiveness design. Hence, it takes
into account both the strength and style of companies management prac-
tices. Together with the content validity established in the conceptual phase
of this research, the empirical results based on survey data (N = 212) lend
support to the construct validity of the suggested CPM measure.
However, there are also limitations related to the novelty of the mea-
sure. The new measure should be cross-validated with a fresh set of data.
Moreover, its nomological validity should be examined by linking it to other
constructs (antecedents or consequences) to which it could feasibly be
linked (cf. Diamantopoulos and Winklhofer 2001, 273). Avenues for future
research are suggested based on both the theory and the field-study results.
A crucial question for future research is whether companies CPM prac-
tices are related to company performance (cf. Turnbull and Zolkiewski
1997), or whether they could even be counterproductive (cf. Dubois and
Pedersen 2002). CPM involves the processing of customer information and
responding to the new knowledge and insights gained in this process.
Therefore, it could be seen as organizational learning, which, at its most
396 H. Terho
basic level, is the development of new knowledge or insights that have the
potential to influence the behavior of the organization (cf. Huber 1991).
Organizational learning is widely recognized as an important aspect of the
strategic performance of companies (e.g., Fiol and Lyles 1985, 803; Slater
and Narver 1995, 6667). Thus it could be hypothesized that CPM activities
are linked to performance.
Future research should consider three areas of performance. First, CPM
activities may produce new and more precise knowledge about the portfolio of
customers and their value to the focal firm. The learning that takes place in
such activities enables firms to allocate their resources more efficiently
among customers, thereby avoiding underspending or overspending. There-
fore, it could be hypothesized that the activities of analysis and responsive-
ness are connected to financial customer performance, in other words to
customer profitability. Second, CPM focuses on managing customers based
on their value to the selling company. This strong supplier focus raises the
interesting question of how its activities affect the customer perceived value
in the exchange. Based on earlier studies, both negative and positive effects
can be argued for (cf. Armstrong and Brodie 1994; Dubois and Pedersen
2002; Johnson and Selnes 2004, 15). Too strict a focus on customer profit-
ability and customer costs in management could potentially decrease per-
ceived value creation, customer satisfaction, and customer retention, all of
which are reflected in overall customer performance. Then again, insight
into the selling companys value creation could also result in openness and
the understanding of customer value. Consequently, a positive relationship
could be hypothesized. Third, the two areas of customer performance dis-
cussed are both key operational performance measures that form a meaning-
ful link from CPM efforts to firm performance (cf. Venkatraman and Ramanujan
1986). If these links are strong enough the former may also have a direct
relationship with the latter.
Any testing of the link between companies CPM practices and perfor-
mance should take into account the different roles of effort and design.
First, behavior change is the necessary link between organizational learn-
ing and performance improvement (Slater and Narver 1995, 66). It is,
therefore, rational to consider that only analysis and responsiveness
efforts, that is, behavior, can provide a direct link to performance. Second,
analysis and responsiveness design approximates CPM style and cannot
therefore affect performance in isolation. Given that CPM efforts may but
do not need to be highly designed, it would be very interesting to study
whether the careful design of CPM practices would amplify the relation-
ship between efforts and performance. In other words, does analysis and
responsiveness design mediate the relationship between respective CPM
efforts and performance? It would be rational to study mediation instead
of moderation because the four CPM dimensions are all highly correlated
(cf. Baron and Kenny 1986, 1176).
Finally, future research should pay careful attention to the possible

firm-external and firm-internal contingencies (moderators) in testing the
relationship between CPM activities and performance with a view to creat-
ing more managerially and theoretically relevant knowledge. For example, a
highly relevant proposition put forward by Mller and Halinen (1999, 2000)
and Terho and Halinen (2007) is that the relational complexity and the con-
text of exchange strongly affect what kind of customer management is rea-
sonable in practice. On this basis, it could be hypothesized that market-like
exchange contexts are likely to favor highly designed, more mechanistic
CPM practices whereas network-like exchange contexts are likely to favor
less designed, more organic CPM practices. Several company-internal vari-
ables could also be hypothesized to moderate the relationship between
CPM activities and performance. The main issues identified concern the
acquisition, quality, and adequacy of customer information; the use of infor-
mation technology, organizational alignment, interdepartmental relation-
ships; and the role of the accounting function.
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APPENDIX 1. CUSTOMER PORTFOLIO MODELS ANALYZED
Author Steps Dimensions and operationalization Managerial implications
Hartley (1976) 1) Sales analysis Sales volume, customers industry, sales Strategies for market penetration:
2) Market penetration strategies trend (present geographical, other SIC
market)
Smackey (1977) 1) Account analysis Sales volume: history, current, targeted Allocate sales force resources to
2) Sales forecast and planning of Compare sales volumes, product lines, and estimated customer potential
sales resource allocation sales efforts
3) Monitoring results
Cunningham 1) Create a portfolio for Sales volume Help understanding different
and Homse (1982) analyzing customers Technical interaction and assistance customers roles for developing
(Customers importance as a reference customer structure
point)
(Customers ability to provide important
commercial information)
Canning (1982) 1) Creating a profit profile Profit profile: Do dedicated sales programs for
402
2) Determining the source of Direct operating costs, sales order processing, customers with similar value and
profits field service costs requirements
3) Assessing the value elements Source of profits:
beyond profits: Product mix, industry served, volume sold,
4) Establish a value ranking order frequency/ size, share of customers
5) Set up a marketing program business, length of time served,
competitiveness of purchase
Value elements beyond profits:
Growth, technological issues, customer as a
referential source, share of customer volume
LaForge and Cravens 1) Classify PCU for selling effort PCU (planning and control unit) Adjust sales resources to customers
(1982) deployment opportunity: with different potential
Size of account, sales growth rate of account,
the intensity of competition/account
Sales organization strength:
Product distribution/the items stocked, shelf
space and trade relations
Fiocca (1982) 1) Analyze all customers in The importance of the customer: General level: understand customer
general level Volume of purchases, potential sales, prestige of structure
the account, market leadership, overall
account desirability Detailed implications for the key
Difficulty of managing each account: customers:
Product characteristics (novelty and complexity), Improve/ hold/ withdraw position
accounts characteristics, (customers needs, with a customer
buying behavior, competencies, power, and
competitiveness) competition for the account
(number, strengths and weaknesses of
competitors and competitors position vis--vis
the customer)
2) Analyze the key accounts Customers business attractiveness:
separately Competition, market, technological, financial
and economic, socio-political factors
The relative stage of the present buyer/
seller relationship:
Length of the relationship, volume of purchases,
403
importance of the customer, power,
friendship, co-operation in development,
managerial & geographical distance
The monetary value of purchases for every
product
The accounts market share for selling
firms each product
Dickson (1983) 1) Distributor portfolio analysis The growth rate of the distributors sales Trading tactics for different customers
the manufacturers share of distributors
sales of the product or product group
Manufacturers sales of the product per Explicit plans for developing long-term
each distributor Channel distribution mix (offensive
Gross profit and direct manufacturing costs investment, defensive entrenchment,
2) Channel dependence matrix Manufacturers market share strategic retreat, abandonment)
Distributors market share
(Continued)
APPENDIX 1 (Continued)
Campbell and 1) Life cycle classification of Sales volume Short term: general help for allocating
Cunningham customers Use of strategic resources resources among customers
(1983) A general analysis of Age of the relationship
customers Share of customers purchases
Profitability
2) Customer competitor analysis Customers share in his market Long term: general help for
by market segments Growth rate of customers demand for the understanding and Developing
Introduces competition product customer portfolio structure
Volume of suppliers product purchased
Competitors shares of the product
3a) Portfolio analysis of key Competitive position of the seller
customers Growth rate of customers market
Sales volume of each customer
3b) Portfolio analysis of a single Growth rate of customers purchases
customer Life cycle classification of customers
404
different businesses:
Tomorrows, todays special, todays normal,
yesterdays business
Customers volume
Dubinsky and 1) Customer profitability The customers potential profit Adjust sales resources to customer
Ingram (1984) portfolio contribution: value and future potential
Dubinsky (1986) 2) Make a customer composition Net sales - (costs of goods sold + direct selling Develop needed customer relationship
expences of salesperson) now categories
The present profit contribution of a
customer:
Net sales - (costs of goods sold + direct selling
expenses of salesperson) in future
Shapiro, Rangan, 1) Customer profitability Cost to serve: Adjust marketing strategies for value of
Moriarty and Ross portfolio Presale costs, production costs, distribution different customer groups
(1987) 2) Management: five-step action costs, presale service costs General help for understanding and
plan Net price developing customer profitability
structure
Krapfel, Salmond 1a) Relationship type matrix Relationship value: Adjust, match, and signal interaction/
and Spekman (typing) Function of criticality, quantity, replaceability, management style to different
(1991) 1b) Relationship management slack (RV=f(C, Q, R, S)) relationship type
mode matrix (typing) Interest commonality:
2) Combine the relationship type Actors economic goals and their perception of
and the management mode partners economic goals
(mapping) Perceived power position Help understanding and developing
3) Management mode matching Interest commonality customer structure
across the dyad
4) Signaling about relationship
Rangan, Moriarty 1) Segment industrial customers Price Adjust pricing and level of service to
and Swartz (1992) Cost to serve customer value
(Power) Help understanding and developing
customer profitability structure
Pels (1992) 1) Analyze customers to divide The possibility of increasing sales volume Tailor marketing teams for key clients
the main and key customers The customers capacity to develop the
sellers image
405
The know-how which the client can transfer
or help to create is the network effect
Yorke and 1) Developing a customer The strategic importance of the account: Adjust resource allocation to customer
Droussiotis (1994) portfolio Account potential, future capacity expansions, value
links to export markets, account prestige
2a) Analyze important customers The difficulty in managing the customer: Plans which relationships should be
in depth - profitability Competitor entrenchment, payment problems, developed stronger for long-term
claims put forward, buying behavior portfolio balance
2b) Analyze important customers Customer profitability:
in depth - perceived Direct costs, pseudo-direct costs, indirect costs
relationship strength
3) Compare an important Perceived strength of relationship:
customers relationship Technical ability, experience, pricing, speed of
strength and market share response, frequency of contact, cooperation,
trust + length of relationship, friendship,
management distance
Customers market share
Strength of the relationship
(Continued)
APPENDIX 1 (Continued)

Storbacka (1997) 1) Three views to create an Relationship revenue Adjust customer strategies to customer
understanding of customer Relationship cost costs/profitability
base and its profitability Volume Help understanding and developing
Relationship volume customer profitability structure
Relationship profitability
Turnbull and 1) Analyze customers with a Net price Adjust customer strategies to customer
Zolkiewski (1997) three dimensional portfolio Cost to serve: costs (monitor migration patterns)
Presale costs, production costs, distribution
costs, presale service costs (Shapiro)
2) Monitor the migration of Relationship value: Help understanding customer portfolio
customer positions Function of criticality, quantity, replaceability, structure
slack (RV=f(C, Q, R, S)) (Krapfel)
Freytag and Mols 1) Ask five questions from main Why the customer is important to the firm? Prioritization in resource allocation;
(2001) customers and divide Economy (turnover, earnings, costs, demand), how to act toward customers
customers to groups with know-how and learning (processes,
406
regards of their importance technologies, employees know-how),
now and in the future. competition (limits and advantages), other Which relationships to develop,
points (reputation, ethics) maintain, terminate
Major strengths and weaknesses of the
customer?
How does customer see selling firm and
how it behaviors?
In what direction are the customers
developing? co-operation/competition?
Is the direction in which the customer is
heading compatible with seller?
2) Combine questions with the Net price
Turnbull and Zolkiewskis Cost to serve
(1997) model (note: Relationship value:
relationship value understood e.g., earnings, access to knowledge, access to
differently) certain markets, high turnover
Zolkiewski and 1) Identify the individual Customer profitability Adjust relationship management
Turnbull (2002) portfolio constituents Relationship value strategies to customer value (such as
Strategic importance of the account KAM, attention, sales, contracts,
time, etc.)
2) Identify the interactions Explicit plans for developing customer
between portfolio constituents portfolio structure: which
relationships to develop, maintain,
broke, create new.
3) Identify the interactions Customer, supplier and indirect portfolios
between different portfolios
Ryals (2003) 1) Analysis for risk adjusted Returns from customer portfolio: Understand and develop customer
value of the firms customer Sum of individual customer lifetime values portfolio profitability structure:
portfolio (revenue-costs) try to reduce customer risk, acquire
Risk from customer portfolio. less risky customers
(How well managed, knowledge about
customer, risk of being taken over,
relationship strength)
407
408 H. Terho
APPENDIX 2. QUESTIONNAIRE
The following statements deal with the strategic management of the customer
base and customer relationships. Please indicate to what extent you agree or
disagree with the statements in terms of the practices of your business unit
(company): 1 = strongly disagree, 7 = strongly agree. (* = removed item)
Analysis Efforts (AE)
AE1 We analyze the value of all customer relationships in our customer base
AE2 We analyze the costs of all customer relationships in our customer base
AE3 We evaluate the expected value of our customer relationships*
AE4 We look for customers in our customer base that have high future
value potential*
AE5 We look for diverse customer groups in our customer base that repre-
sent different sorts of value for our company
AE6 We make comparisons of our customers based on their value*
AE7 We segment our customers based on their value
AE8 We analyze the roles various customers have for our company over the
long term*
AE9 We analyze the development of various customer groups in our cus-
tomer base
AE10 We analyze the health of our customer base over the long term
Analysis Design (AD)
AD1 We have carefully thought out the essential criteria for analyzing our
customer relationships*
AD2 We evaluate the quality of our customer-base analysis practices
AD3 We tend to discuss how to develop our customer-base analysis practices
AD4 We have tailored the criteria of our customer-base analysis to match
the special characteristics of our business
AD5 We have invested in developing our customer-base analysis methods
AD6 We adapt our customer-base analysis practices according to the experi-
ences gained from current practices*
Responsiveness Efforts (RE)
RE1 We tailor various product and service entities to customers based on

their value
RE2 We have created different operational models for treating customers
with different kinds of value (e.g., service channels, level of service)
RE3 We allocate our sales resources to customers in relation to their value

to our company*
RE4 We systematically direct resources to customers that have high future
value potential
RE5 In our actions we aim at converting low-value relationships to more
valuable ones
RE6 We systematically develop our most valuable customer relationships
RE7 We try to retain customer relationships that do not have development
potential, but are careful about overly investing in them*
RE8 We ignore or aim at terminating certain unprofitable customer relationships
RE9 We put effort into finding new customers that have potential value to
our company
Responsiveness Design (RD)
RD1 We have carefully considered the main aspects of our customer-base

management practices
RD2 We evaluate the quality of our customer-base management practices
RD3 We try to find ways of improving our customer-base management practices
RD4 We put a lot of effort into applying the principles of our customer-base
management in our everyday business*
RD5 We have created concrete instructions related to our customer-management
principles for our personnel who work at the customer interface
RD6 We adapt our customer-base management practices based on the
experiences received from our practices
Reflective CPM Measure
RF1 We seek to develop our customer-base analysis practices

RF2 We analyze the current and future value of our customer relationships
extensively
RF3 We seek to develop our customer-base management practices
RF4 Customer value is an essential factor in our customer-base management
practices
IMPLICATIONS FOR BUSINESS MARKETING PRACTICE
During the last two decades an increasing number of studies have under-
lined the need for companies to manage their customer base as founded on
customer value. Customer portfolio management (CPM) focuses on the entire
portfolio of customer relationships, from transactions to strategic partnerships,
410 H. Terho
and their management based on the value of the customers to the selling
company. This article has conceptualized CPM and has created a measure
for studying this pivotal area of customer-relationship management based
on theoretical review, interviews, and survey data (N = 212). Several impli-
cations can be drawn from a theoretical review and the results of the empir-
ical study for developing customer portfolio management practices.
First, this article identifies key aspects of CPM activities, namely analy-
sis and responsiveness. These two issues should be in focus when develop-
ing analysis activities. On the one hand, a company should understand the
value of individual customer relationships and on the other hand the roles
of different customers in the customer base in providing value for the focal
company in the long term. In practice, the value of a customer to the selling
company can be approached by analyzing the positive value and costs
related to the customer relationship, the realized historical value and the
future value potential, or the various functions the relationship serves. The
state and characteristics of the relationship should also be taken into
account in analysis because they may affect the future outcomes of cus-
tomer relationships. It is important to note that the mere maximization of
the lifetime value or revenues of single customers is a restricted view of
CPM. Instead, the analysis activities should concentrate on the comparing,
grouping, and prioritizing of customers in the entire customer base as based
on their value.
Further, the companies should respond to knowledge about different
customers value in the customer base. Two general responsiveness strategies
can be distinguished. First, a company should match its resource allocation
according to the value of different customers. This implies the cost-efficient
treatment of customers such as through tailored offerings, various operational
models (e.g., level of service, service channels), and the allocation of sales
resources to customers of different value. Second, companies should pay
attention to developing their future customer-portfolio structure in the long term.
Do new relationships need to be created? Which ones should be developed,
which should be maintained, and are there any that should be broken or
discarded? Both of these strategies greatly overlap because customer-treatment
decisions always include a relationship-development aspect, and vice versa.
Second, this study has identified several issues that are likely to foster
or discourage the successful implementation of CPM. The results underline
that customer portfolio management is a strategic multilevel and cross-func-
tional practice, and the cooperation between various company levels and
functions plays a critical role in its implementation. The support of top man-
agement is crucial in terms of securing the necessary organizational
resources and changes. Further, the timeframe varies for the different
aspects of its implementation, which should be taken into account. For
example, analysis procedures can be developed and taken into use quite
quickly. However, the main challenge in customer portfolio management
lies in its proper implementation to everyday practices, which can be very

time consuming. The personnel at the customer interface play a key role in
putting the portfolio-management strategies into practice. Hence, the results
highlight the need to pay special attention to motivating, giving instructions,
and also listening to the staff.
The results further indicate that CPM is highly interconnected to other
management decisions and activities. Hence, CPM decisions should not be
considered in isolation, in terms of the marketing department, but as inter-
connected to other functions such as supply, production, R&D, and
accounting. Furthermore, attention should also be given to the connection
with other marketing decisions. For example, managing customers based
only on their value to the selling company would probably be very danger-
ous in the long term. CPM activities should, therefore, be well integrated
into need-based segmentation. Similarly, the connections within customer
relationships, between customer and supplier relationships, and among
other network relationships should also be considered in CPM decisions.
For example, managers should pay attention to the issue of how to treat
customers who are buying several product categories from different busi-
ness units in a consistent way. Overall, interdepartmental communication
and cooperation should receive special attention.
Third, the results of this study further highlight the need for companies
to tailor CPM activities to their needs. For example, the appropriate analysis
criteria for estimating customer value are likely to differ from company to
company depending, for example, on the strategy, nature of the business,
and characteristics of exchange with the customers. Hence, the companies
should carefully consider the central criteria in their business for estimating
customer value.
A further pivotal question managers should ask themselves relates to
the design of customer portfolio management. Do the companys customer
relationships and customer-base characteristics imply the need for carefully
designed, formal customer-base analysis practices, or do more informal,
flexible customer-relationship-specific analysis procedures better suit its
needs? Does it need carefully planned, top-down, formal procedures for
responding to the value of customers, or would more flexible responsive-
ness procedures pursued in close interaction with customers be better?
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Journal of Business-to-Business Marketing, 16:374411, 2009

Copyright Taylor & Francis Group, LLC

A Measure for Companies Customer

Turku School of Economics, Department of Marketing, Turku, Finland

Purpose/Contribution: Customer portfolio management (CPM) is one

that should be addressed in future CPM studies. The resulting

KEYWORDS Customer portfolio management (CPM), customer

largely on the treatment of individual relationships in management. Some

THE CUSTOMER PORTFOLIO MANAGEMENT CONSTRUCT

in order to help managers allocate scarce organizational resources and

A Field Study of CPM Practices in Business

A Field-Based View of Customer Portfolio Management

customers. In practice this is a very limited view, however. According to the

Insurance B: Basically, analysis tools or models can be taken into use

It seems that the main aspects of CPM processes concern customer

Logistics C: We have recently taken a new value-segmentation model

This notion of CPM as customer-information processing and responsive-

learning (Huber 1991), information processing (Sinkula 1994), and market

Insurance B: We also quite often do ad hoc analyses when we notice

The interviews indicate that the adaptations in portfolio-management

Energy A: We have standardized customer-treatment models for differ-

The concept of customer-portfolio-management design is a useful starting

Energy A: One great challenge for customer analysis is the separated

Even though CPM is a managerial activity, it cannot be separated from

Logistics C: It [CPM] is like any other change in the organizationit

Hence, CPM is heavily interconnected with other managerial questions

Synthesis: An Operational Definition of Customer Portfolio

Analysis design Customer

FIGURE 1 Customer portfolio management construct.

This kind of conceptualization, which takes the design of activities into

1. Strategies for adjusting resource allocation to match the value

includes the evaluation of current practices and their adaptation based on

relationships in a certain direction. Second, the same applies to the four

(with an emphasis on the theoretical rigidity and scope of the questions),

Relationship level Portfolio level

Future value AE3-AE4 AE8-AE10

FIGURE 3 A conceptual matrix for forming items for analysis effort.

Future focus AD3 AD6

FIGURE 4 A conceptual matrix for forming items for analysis design.

Matching focus Development focus

Future focus RE4 RE8-RE9

FIGURE 5 A conceptual matrix for forming items for responsiveness efforts.

view to implementing them in practice. Again, two central aspects can be

Future focus RD3 RD6

FIGURE 6 A conceptual matrix for forming items for responsiveness design.

questionnaire and two reminders in order to obtain as good a response rate

Estimation and Results

The fourth and final phase in formative measurement development is

TABLE 1 Summary Statistics for Measures

Analysis efforts 6 4.75 1.00 1.407.00 -/- -

TABLE 2 Measurement Model Results for the MIMIC Model

Formative Indicators Indicator Weights t statistics

AD2 -> Analysis_Design .241 2.473

Ana_Des Ana_Eff Resp_des Resp_Eff Refl_CPM

Interestingly, analysis and responsiveness efforts evinced weaker path

choosing between first-order and second-order conceptualizations should

LIMITATIONS AND IMPLICATIONS FOR FUTURE RESEARCH

This study developed a conceptualization of customer portfolio manage-

Finally, future research should pay careful attention to the possible

Armstrong, S. and R. Brodie (1994). Effects of portfolio planning methods on

Chakravarthy (1982). Adaptation: A promising metaphor for strategic management.

Fornell, C. and F. Bookstein (1982). Two structural equation modeling models:

Author Steps Dimensions and operationalization Managerial implications