A professional services firm's competence development

nt 36 (2007) 1068–1081
Industrial Marketing Manageme
A professional services firm's competence development

Gabriel Baffour Awuah ⁎,1

School of Business and Engineering Halmstad University P O Box 823 SE - 301 18 Halmstad, Sweden

Received 8 February 2006; received in revised form 14 August 2006; accepted 26 August 2006Available online 30 October 2006

Abstract

The conceptualization of a firm's competence development has undergone some developments, as seen from the extant literature. However,studies or explanations of a firm's competence development over time seem to concentrate on firms that manufacture physical goods. The literature isdevoid of studies on the competence development of professional services firms (PSFs). With two in-depth case studies, this paper seeks to shed lighton factors that impinge on PSFs' competence development over time. An important finding of this study is that all the two PSFs' competencedevelopment over time has been influenced, in large measure, by their close and regular interaction with their respective immediate customers as wellas with some significant third parties in their network of exchange relationships, where the actors mutually adapt to each other and also learn fromeach other. Evidences in all the two cases show that each of the firms has won and kept important customers that give them the most and frequentassignments per year, thanks to the factors that have affected their competence to meet customers' demand over time.© 2006 Elsevier Inc. All rights reserved.

Keywords: Competence and competence development; PSFs; Network of exchange relationships

1. Introduction

The competence of an individual person or of an organizationis not a new phenomenon (Bandura, 1986; Dunphy, Turner, &Crawford, 1997; Kloftsen, 1992; Ulvund, 1985). However, ourunderstanding of the concept of competence and, for that matter,how that is developed over time, at the individual level or at theorganizational level, can differ from one researcher to another. Inthe marketing literature and the strategy literature, for example,researchers have over the years used all sorts of measures, suchas competitive position, competitive advantage, market shares,profitability, core competences, competitive position, andcustomer loyalty to describe and/or explain a business firm'sperformance in the marketplace (Aaker, 2005; Bradley, 1995;Doyle, 1994, 2002; Kotler, 1997, 2001; Porter, 1985). For some,the firm's performance, the results of which can be any of theabove measures, are mostly internal strategies, which a firm

⁎ Tel.: +46 35 16 7704.E-mail address: [email protected].

1 He is a Senior Lecturer, School of Business and Engineering, HamlstadUniversity. He researches on internationalization processes of firms, competencedevelopment of organizations, and strategic alliances. His work has beenpublished in International Business Review, Industrial Marketing Management,and Journal of Business and Industrial Marketing.

0019-8501/$ - see front matter © 2006 Elsevier Inc. All rights reserved.doi:10.1016/j.indmarman.2006.08.006

needs to develop and defend over time so as to be able tooutperform its competitors (Hamel & Prahalad, 1990; Hollen-sen, 2001; Porter, 1985). To be able to effectively compete withrivals and outperform them, a firm will need to develop its corecompetence, for instance, by undertaking internal strategies thatwill facilitate that effort (Hamel & Prahalad, 1990).

For some researchers, however, a firm's performance, nomatter what measures are used, will depend, in largemeasure, onhow well it handles its exchange relationships with othersignificant actors in the marketplace (Gummesson, 2002;Håkansson & Snehota, 1995). This position is a clear indicationthat a firm's internal efforts to develop its competence, forexample, that will enable it meet demands put on it, might not beadequate. Taking a firm's customer, for example, the firm'sstrong relationship with the customer has been found to be veryimportant in services companies (Berry & Parasuraman, 1991).This is because of their inherently interpersonal focus and therelative lack of objective measures for evaluating service quality.Forging important exchange relationships cannot be limited to afirm's customers alone. As maintained elsewhere (Doyle, 2002;Gummesson, 2002; Tzokas & Saren, 2004), a firm's closeexchange relationships with some important actors in thefocused firm's value chain, do help to provide the end product(i.e. the service solution) that will be as good as possible (Doyle,

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http://dx.doi.org/10.1016/j.indmarman.2006.08.006

1069G.B. Awuah / Industrial Marketing Management 36 (2007) 1068–1081

2002) for the end customer. Looking at a firm's competence andhow that is developed over time, studies or explanations to thateffect seem to concentrate on firms that manufacture physicalgoods (Awuah, 2001; Hamel & Prahalad, 1990; Johnston,Wilkinson, & Ritter, 2002; Prahalad & Ramaswamy, 2000).

In view of the above, the purpose of this study is tosystematically describe and analyze the factors that impact on aservices firm's competence development over time, thereby alsocontributing to theory development in the subject area. The mainresearch question is as follows: How does a services firm'snetwork of exchange relationships affect the development of itscompetence over time?

The rest of the paper will proceed as follows. In the nextsection we discuss the concepts of competence and learning at theorganizational level, followed by a literature review and ourtheoretical framework(s). The method employed for the datacollection follows the theoretical framework(s). This section isthen followed by a presentation and analysis of the case studies.Finally, the last section will consist of conclusion and theimplication(s) of the study.

2. The concepts of competence and learning

2.1. Competence

Studying a concept such as competence is very complex, sincethe meaning of the concept can be used differently by manypeople. “The ability of a firm to develop and manage relationswith key suppliers, customers and other organizations and to dealeffectively with the interactions among these relations is a corecompetence of a firm” (Johnston et al., 2002, p.119). “In thispaper, the term competence is used to mean not only havingknowledge or possessing skills and qualifications, but also usingthose qualifications” (Ritter & Gemünde, 2004, p. 549). “Corecompetencies are the collective learning in the organization,especially how to coordinate diverse skills and integrate multiplestreams of technologies” (Hamel & Prahalad, 1990, p.82). ForHamel and Prahalad, competence is the glue that binds existingbusinesses. Others refer to a firm's competence as its ability to actwith effectiveness and efficiency when it comes to the call tosatisfy customer needs and wishes (Bjerkens, Dahlbohm, &Mathiassen, 1990; Kloftsen, 1992). Kloftsen (1992, p. 30), forexample, contends that a firm's competence lies in its ability toidentify and satisfy the needs and wishes of customers and toconduct gainful transactions with them. For Webster (1991),emphasis should be put on a firm's distinctive competence. Thisallows a firm to focus attention on the customers served, the natureof the needs that are satisfied and the role of the firm's products orservices that are offered in satisfying that sets of needs. As Doyle(2002) posits, a firm's competence lies in its use of suppliers andsubcontractors to facilitate customer needs' satisfaction.

In this study, we adopt Awuah's (1997, 2001) definition of afirm's competence. According to Awuah, a firm's competence isits ability to meet demands put on it by the actors with whom itinteracts, where that competence is developed as the result oflinking together its internal skills, activities, and resources to thoseof external actors (Snehota, 1990, p. 203; Sadler-Smith, Chaston,

&Badger, 2000). This competence development is often enhancedby the mutual learning and experiences the firm engages inthrough its interaction with other actors in a network context(Awuah, 2001; Fruin, 2001; Snehota, 1990). In the final analysis, amarketer's ultimate goal will be to seek an answer to the questionof how its customers' needs and wants can be satisfied (Doyle,2002). For some researchers (Armstrong, Saunders, & Wong,2002; Armstrong, Saunders, & Wong, 2005; Doyle, 2002), theanswer to this question is the same for both services and products.

While the definition of competence adopted for the presentstudy has much in common with some of the definitions above(Bjerkens et al., 1990; Johnston et al., 2002; Kloftsen, 1992;Webster, 1991), because it is the customer need satisfaction that isin focus, we cast a wider net to see the extent to which a firm'snetwork of exchange relationships impinges on the firm'scompetence development (see also Johnston et al., 2002,p. 119). For Prahalad and Ramaswamy (2000, p. 80; Awuah,2001), a firm's competence is a function of the collective knowl-edge available to a whole system, an enhanced network of tradi-tional suppliers,manufacturers, partners, investors and customers.

2.2. Learning

The concept of learning and its importance for competencedevelopment is emphasized in the literature (Dunphy et al., 1997;Hamel & Prahalad, 1990; Prahalad & Ramswamy, 2000, p. 81).Organizations learn (Andersson, Forsgren, & Holm, 2002;Dodgson, 1993; Dunphy et al., 1997), alone or in interactionwith other actors, in order to improve upon its performance.Dunphy et al. (1997), for example, maintain that organizations areconcernedwith learning if it helps them to perform better. And, forDunphy et al., learning which is valuable to organizations isembodied in competencies to do things better or do differentthings. In this study, a firm's internal capability to learn so as toperform better (using whatever measure to describe thatperformance, for e.g., competence, competitiveness or innova-tiveness) is complemented by its capability to engage in mutuallearningwith some actors, with whom the firm interacts. As statedelsewhere (Andersson et al., 2002, p. 981; Ford et al., 1986;Havila, Håkansson, & Pederson, 1999; Tzokas & Saren, 2004),the interdependent relationships between most firms suggest thata firm and its interacting partners engage in mutual learning.Interacting parties mutually take measures to improve the uses oftheir interrelated activities and, hence, their respective perfor-mances. With this, we now review the existing literature.

3. Literature review

Studies of a firm's competence and how that is developed overtime, after the influential contribution of Hamel and Prahalad(1990), have all concentrated on some internal strategies, whichthe firm is supposed to undertake to develop its competence.Since most studies consider a firm's competence to lie in itspersonnel's collective knowledge, skills, qualification and alsotheir knowledge in the existing technologies and processes toperform activities that will enable the firm to outperform itscompetitors (Abell &Hammond, 1979; Hamel & Prahalad, 1990,

1070 G.B. Awuah / Industrial Marketing Management 36 (2007) 1068–1081

1996; Kotler, 1997), constantly educating the staff and upgradingother existing resources are a major means to developcompetence. The sources (e.g. collective knowledge and skillsin the firm) of a firm's core competence (Hamel&Prahalad, 1990,1996), leading to diversifying a firm's activities into variousmarkets and provide value that customers would appreciate andneed, must be protected; it should be difficult for competitors tocopy. The personnel as well as business units are supposed tolearn from each other, collective learning. These efforts seem to beundertaken only within the firm.

The above view, as many researchers see it, lacks the completepicture of sources of a firm's competence and how that is deve-loped over time. Hence, it is suggested that we complement theexisting knowledge by emphasizing that a firm's network ofexchange relationships can be an important source of itscompetence, which can also affect the development of thatcompetence (Andersson et al., 2002; Davies & Brush, 1997;Johnston et al., 2002; Prahalad & Ramaswamy, 2000; Ritter &Gemünde, 2003). In the network literature Andersson et al. (2002)shed light on the extent to which a subsidiary, a manufacturingfirm, within a multinational corporation develops and sharescompetence in product and production development with othersister companies. The study provided by Johnston et al. (2002), ona more aggregated level, sheds light on the fact that a firm'snetwork competence impinges on its degree of technologicalinterweavement and its innovation success. The focus of this studytoo was not on the extent to which a firm in a network meetsdemands put on it by some other actors, especially customers.Awuah's studies (1997, 2001) have made a contribution here, buthis studies concentrated on manufacturing firms. In this study, weaim to describe factors that impact on a professional servicesfirm's (PSF, see Appendix B) competence development over time,somethingwhich is lacking in the existing literature. LikeAwuah'sstudies, we also focus on the industrial marketing sector, but withprofessional services firms as our focus of study and analysis.

A PSF's relationship to its customers, suppliers and otherparties are ‘connected’ in the sense that what is happening inone relationship affects the interaction in others (Håkansson &Snehota, 1995, p. 12). In this study, therefore, how a supplyingservices firm's competence in meeting customers' demand isdeveloped cannot be decoupled from its network context.Restricting the study to professional firms and how they meetdemands customers put on them has to do with the abovereasons. Also the delimitation by focusing on focal actors,services supplying firms and their respective customers, isarbitrary; it is just for analytical purposes (see also Johanson,1989; Axelsson, 1996a,b, p.224). The impact of the focalactors' exchange relationships with third parties are channeledthrough the focal actors (Andersson, Håkansson, & Johanson1994; Anderson & Narus, 2004; Håkansson & Snehota, 1995).

The performance of a firm, manifested, for example, in itsmarket share, profitability, sales growth and customer needsatisfaction, will depend upon a number of factors (Doyle &Wong, 1998; Edvardsson&Larsson, 2004;Håkansson&Snehota,1995; Hamel & Prahalad, 1990; Prahalad & Ramaswamy, 2000).Some of the factors are the marketing orientation philosophy usedby a firm (Doyle &Wong, 1998; Jaworski & Kohli, 1990; Narver

& Slater, 1993), the competence a firm develops (Hamel &Prahalad, 1990; Johnston et al., 2002), and the services concept(Berry& Parasuraman, 1991; Edvardsson&Larsson, 2004) a firmadopts. These are, for example, areas of interests that havegenerated a lot of research. Many studies in the area of marketorientation build on Jaworski andKohli's (1990) viewof the extentto whichmarket orientation affects a firm's performance. Essentialfor market orientation will be the organization-wide collection anddissemination of information about current and future customerneeds and how the entire organization responds to the information.It is beyond the scope of the present study to discuss therelationship between market orientation and business performanceas studied elsewhere (Doyle & Wong, 1998; Dadzie & Winston,2002; Jaworski & Kohli, 1990) and the extent to which a firm'sservices concept affects its performance. The on-going research ona firm's competence and how that is developed over time, asreviewed above, is of special interest for our purpose. The nextsection deals with our theoretical framework(s).

4. Theoretical framework(s)

4.1. The industrial network approach

The conceptual model in this study builds heavily on theindustrial network approach (for details see Axelsson, 1996a,b;Håkansson, 1982, 1987, 1989; Håkansson & Snehota, 1995;Hammarkvist, Håkansson, &Mattsson, 1982; Hägg & Johanson,1982). The network approach suggests that specific actors such asfirms, organizations and individuals, possess specific resourcesand perform specific activities which create exchange relation-ships among them (Hägg & Johanson, 1982; Håkansson, 1982;Håkansson & Snehota, 1995). This implies that the activities ofone actor are, for themost part, dependent on the outcome of thoseof certain others. Hence a firm's competence and its developmentover timewill affect and be affected by specific actors with whomit interacts in a network context (Fruin, 2001; Johnston et al.,2002; Ritter & Gemünde, 2004). As the actors in interactioncomplement each other, through the uses of their respectiveresources and activities, they become interdependent, especiallywhen the interaction becomes much more frequent and ismutually meaningful to the parties (Gummesson, 2002; Håkans-son, 1982). An important effect of the actors' interdependence isthat they engage in mutual learning (Ford, Håkansson, &Johanson, 1986; Havila et al., 1999) and mutual adaptations(Ford, 1997; Hägg & Johanson, 1982; Håkansson, 1987).

As actors adapt their products/services, attitudes, and routines inorder to meet some demands put on them by their counterparts,commitments and trust in their relationship increase (Hunt &Morgan, 1994; Håkansson, 1982); the adaptations will alsostrengthen the bonds, knowledge, technical, commercial, socialand administrative, between themselves. Interconnectedness ofexchange relationships (Cook & Emersson, 1978) betweeninterdependent actors in our industrial system has been found.Thus, an actor's relationships with its focal partners, for instance,are contingent, positively or negatively, upon exchange in otherrelations. However, actors tend to develop their specific positionsrelative to others in a network (Johanson & Mattsson, 1985). A


firm's position in a network gives it direct control over its ownresources and activities and indirect control over those of others.Allthis will facilitate an actor's access to activities and resources thatwill help it meet demands, its competence, put on it by other actors.

In this study a modified model (see below) of the industrialnetwork approach, a general one, developed by Awuah (1994,1997, pp.78–79) has proved to be very useful. The modifiedmodel has been developed inductively by eliciting insights fromthe interplay between, for example, the industrial network modeland various empirical data (Awuah, 1997, 2001). Awuah'smodel,our analytical tool, was developed for the purposes of studying theextent to which an organization (including manufacturing andservices firms) utilizes its network of exchange relationships inaccomplishing (Ford, 1997; Håkansson, 1987) any task in theindustrial field. Hence, the special characteristics of services areincorporated in the model discussion.

In Fig. 1, a firm's competence development is seen to beaffected by three interrelated variables, as the firm interacts withother actors. The three basic factors are (a) the transfer ofelements of exchange, namely product/service, information,financial and social exchange, between interacting parties, (b)the mutual learning undertaken by the parties and (c) the mutualadaptations the parties undertake. As a relational process, theinterplay between the above factors evolves over time.

As one actor's product/service becomes an input for anotheractor, for instance, the activation and integration (Anderson &Narus, 2004; Håkansson, 1987) of their interdependent resourcesor activities cannot be done without engaging in effectivefinancial, information and social exchange (i.e. the elements ofexchange). The relationship between the elements of exchangeresults in a number of benefits for the interacting parties. Throughthe regular and effective transfer of such elements of exchange toand from a counterpart, an actor's knowledge about thecharacteristics and expectations of its counterpart(s) will beenhanced. Moreover, the interacting parties will learn about howto utilize each other's capabilities. With services' characteristics(Berry & Parasuraman, 1991; Normann, 1991) such as intangi-bility (e.g. can't be seen, felt, tasted and smelled), variability (e.g.quality of service depends on who provides it at a certain time),

Fig. 1. Competence development through a network of exchange relationshipsSource: Awuah, 1997, p. 78.

perishability (can't be stored) and inseparability (production andconsumption at the same time), the simultaneous presence of aseller and a buyer of a certain service, for example, will not onlybe crucial, a relationship will also have to emerge (Gummesson,1987; 2002; Ford, 1990; Grönroos, 1990; Mercer, 1993). ForNormann (1991), a direct contact between the seller and the buyermight then be necessary, since production and consumptionmight take place at the same time. All this will facilitate thetransfer of the elements of exchange between actors in interaction.

The importance of social relationship is recognized in thenetwork literature (Ford, 1997; Gummesson, 2002; Håkansson,1982). On the one hand, it helps to increase the interacting actors'knowledge of each other. On the other hand, it also contributesgreatly to the cooperation, understanding and trust (Hunt &Morgan, 1994), which strengthen the various bonds (cf. Ham-markvist et al., 1982; Hägg & Johanson, 1982; Pfeffer & Salancik,1978) between the firms for which they work. Actors in interactionmay have their respective interests; they engage in exchange topromote these interests (Burt, 1982). It is not uncommon to have asimultaneous presence of common and conflicting interests (Hå-kansson, 1987) in any exchange relationships; hence the exercise ofpower by an actor in a relationship is not uncommon. But, inexchange relationships where the interacting parties feel that theyare mutually dependent and are also willing to invest much inrelationship-specific transactions, when need be, any abuse ofpower will endanger stability and long-term relationships.

The process of interaction denotes learning (Ford et al., 1986;Havila et al., 1999). Principally, interacting parties strive afterknowledge (Tzokas & Saren, 2004) that helps them to takeadvantage of opportunities or overcome constraints that mightinhibit their mutual exchange. Since the activities of actors ininteraction are interconnected (Cook & Emersson, 1978;Holmlund, 2004), any actor's inability to meet its end customers'demands will have a profound effect on the others with whom itinteracts, especially, its immediate trade partners. As the results ofthe interdependent relationships between most firms, interactingparties do engage in mutual learning; for the ability to meetdemands of others is often beyond the knowledge, skills and/orresources of a single firm (Awuah, 2001; Fruin, 2001; Tzokas &Saren, 2004). For Dunphy et al. (1997), the market-basedorganizational learning and the internally focused learning rein-force each other. Evidently, characteristics of interacting actors,actors' expectations, the combination and uses of heterogeneousresources, actions of the actors and so onmay not be constant overtime. They change, and so do the knowledge of the actors.

Changes in the network, in whatever form they occur, maydemand that the interacting actorsmakemutual adaptations tomeeteach other's needs. Adaptation, in turn, will influence the actors'learning rate. One adapts to a counterpart or a situation which willdemand mutual action from interacting parties. Changes oradaptations to meet the demands of a counterpart and the resultsthereof will be a basis for future references in decision making. Asan actor adapts tomatch the needs or capabilities of other actors, theformer and the latter may become increasingly dependent on eachother (Hägg & Johanson, 1982; Håkansson & Snehota, 1995;Turnbull & Brennan, 1999). All this suggests that exchangerelationships between certain actors have a history (Snehota, 1990).


The interplay between the three basic factors discussed aboveshows that as a firm's competence to meet its obligationsincreases through time, its exchange relationships, characterizedby the transfer of elements of exchange, learning and adaptations,with some significant actors will be positively affected (seeFig. 1). This model therefore serves as our analytical tool for thepresent study. Now, we dwell on the method used in this study.

5. Methodology

Since no effort is striven after to generalize the findings of thisstudy and/or to present an objective view of a services firm'scompetence and how that is affected by its position within anetwork of exchange relationships, a positivistic approach,mostly prescribing quantitative methods (Hyde, 2000; Bryman,1989; Ghauri & Gronhaug, 2002) was not chosen. Instead, anon-positivistic approach, which will enable us to deeplyunderstand the complex nature of exchange relationships, howthese evolve over time and their effects, when studying an under-researched area, such as the present study, case study methodwas found to be appropriate (Yin, 1989, 1994; Bryman, 1989;Ghauri & Gronhaug, 2002; Gummesson, 2003) and used as theresult. Once the decision to use the case study method for thedata collection was made, the firms included in this study wereidentified and drawn from their respective Web pages.

We were looking for services firms that deliver no tangibleproducts but intangible ones. This criterion and the followingdefinition of a services firm helped us to select the firmswe have inour sample. “A service is any activity or benefit that one party canoffer to another which is essentially intangible and does not resultin the ownership of anything” (Armstrong et al., 2002, p. 535). Asthe study focuses on professional services firms, we were alsolooking for services firms that rely on highly professional staff,people-based services (Armsrtong et al., 2002; see also AppendixB for some characteristics of PSFs), and information intensiveones (McCole & Ramsey, 2005, p. 38). All firms in this studyfitted well into our criteria. Also some assertions made in theliterature that (1) a firm's network of exchange relationships canbe an important source of its competence, which can affect thedevelopment of that competence (Johnston et al., 2002; Prahalad& Ramaswamy, 2000; Ritter & Gemünde, 2003) and (2) that afirm's competence is a function of the collective knowledgeavailable to a whole system— an enhanced network of traditionalsuppliers, manufacturers, partners, investors and customers(Prahalad & Ramaswamy, 2000, p. 80) motivated us to undertakethe present study. This is because there is virtually no study thathas addressed the extent to which a PSF's competence is affectedby its network of exchange relationships.

After identifying the firms, the two in this study and severalothers, we wrote to solicit for their participation in our research,asking for their acceptance and whom to approach for personalinterviews at some appointed date. By this approach, we weredirected to arrange and hold interview (s) with some keyinformant or respondent, who was judged to be knowledgeablein his/her firm's exchange relationships with some significantactors in their network of exchange relationships. The two firmsin this study are (1) HSTD, Halmstad, an advertising firm and (2)

Albihns AB, a legal firm. Table A1 presents the samplecharacteristics of firms in this study (see Appendix A; Table A1).

The interviews were held with the various respondents attheir respective offices in September, 2005. Tape-recordedinterviews and some written notes taken, during the interviews,have been kept, an attempt that speaks for the reliability andvalidity of the report (Turnbull & Brennan, 1999). The averagetime for an interview was 2 h. This contributed immensely to thecongenial atmosphere that prevailed, while the interviewer andthe interviewee ran through the loosely structured interviewguide; there was ample time to explain or correct misunder-standings. In December 2005, all respondents were sent draftcopies of the interviews held with them for comments, askingthem to subtract and/or add additional information, as theydeemed appropriate. The aim was to secure the validity andgenuineness of the study (Bryman, 1989; Kidder & Judd, 1986).One of the respondents did send in her feedback, with thenecessary adjustments made. The other respondent did not sendin any feedback. However, we assumed that the respondent thatdid not send in any feedback might have been content with thereport, for respondents normally react to information that doesnot reflect what they gave at an interview (Awuah, 1994). In thenext section we present the two cases.

6. The case of Halmstad Reklambyrå (HSTD)

Most of HSTD's services (see Appendix A, Table A1 for itsbasic characteristics) are sold to non-business and businessorganizations. HSTD principally provides advertising services,which in turn are broken into three main areas: (1) Printing (e.g.materials, brochures and graphical designs — packagingdesigns, graphic profiles and logotypes), (2) Internet Services(e.g. production of Web sites, portals and advertising) and (3)Sending messages and pictures via film or radio. HSTD, in theprovision of the above services, is basically selling ideas, adviceand design of pictures and messages.

7. Interactionprocesses.The transfer of elements of exchangesbetween the interacting parties

7.1. Product/service exchange

HSTD is a pure service provider, with a very high customercontact. This high customer contact enables HSTD to providecustomized solutions to the various customers (e.g. Erostop,Hallandsposten, Etac, Energieverken in Halmstad, Kraft, Land-stinget Halland and Riskbyggen, all big firms). Any assignmentfrom a customer will bring about a close and continuousinteraction between the parties. Experts from HSTD, mostly themanaging director/project leader, and the two other co-owners, artdirectors, will meet customers very regularly to discuss the latter'sneeds and their market situation. With this knowledge about thecustomer, HSTD then will provide reliable services to the variouscustomers, each depending upon the unique situation confrontingit. Mostly, customers will buy a whole package of services for anadvertising campaign. Thus, HSTD will be responsible for theideas, text, pictures and the entire production. Thus, on behalf of


the customer, HSTD contacts the media in order to publish invarious newspapers, professional newspapers, radio or directmails, andmaterials for trade fares. A customer that does not wanta whole package of services can just buy HSTD's advice, ideas,design or suggestion of pictures and can get their own media orprinting press (with HSTD's advice also) to help them.

The most important customers, for HSTD, are those that buyservices amounting to about 500,000 Swedish kronor per year.They buy continuously, co-operate very well and are trustful; andmany of them have been with HSTD since 1995/6 (the two firmsbrought their customers with them after the merger). The averageage of the relationships between HSTD's and its customers is6 years. For HSTD, an important customer is a security for thefirm's revenue. Most of them even have written and long-termcontracts with HSTD, mostly three years in a stretch, but HSTDgets orders on the year's basis.However, other important customershave verbal contracts, no written ones, with HSTD. For mostcustomers, delivery of services can be daily, even hourly, and so on.

7.2. Information exchange

According to HSTD, the production and consumption ofmost of the services are inseparable so close and continuouscontacts (i.e. both non-personal and personal means of contacts)are very crucial for the parties to meet each other's needs.Through the close meetings, experts from HSTD and those fromthe customer organizations (esp. the big ones have own expertisein-house), work together, propose and suggest ideas, do somesketches of designs, for example, and get immediate feedbackfrom the counterpart. Here, the process allows HSTD to knowthe customer (s) best, their problems and interests. The same canbe said about customer's knowledge of HSTD's capabilities, andabove all their willingness to co-operate and to learn from eachother. To exemplify the joint discussion, the parties can discussand agree on the intended budget, sketching of the project byHSTD (the seller) and the customer has to accept or reject ormodify those things. That done, the art directors (at HSTD) willoversee the photographing work, the copywriter will conductinterviews with people, for which the project is made, and theproject leader will oversee that the schedule time and the budgetfor the entire project are followed. These preparations will haveto be accepted and signed by the customer, before HSTD canproduce the services for the customer.

7.3. Financial exchange

Customers' payment of services on time, just like the deliveryof services to them on time, is very important for HSTD. Allcustomers enjoy 30 days credit period, after the purchase of aservice. For most customers, price-value combination, whenbuying services, is very crucial. Small firms or organizations, withno expertise in-house, tend to be price-sensitive. Theywill alwayscompare HSTD prices to those of its competitors. The usualquestion HSTD gets from some customers is as follows. “Whatcan I get from HSTD, but not from the competitors?” Buyers thatare not used to buyHSTD's services will be a little doubtful, at thebeginning, as to what they are buying. HSTD will invite such

customers to their premises and show them how HSTD'sproduction and other activities are carried on. Through this,most become convinced and accept the prices charged by HSTDfor some services. Very important customers that buy about500,000 Swedish kronor services yearly are not price-sensitive.These, especially those having contracts with HSTD, which is aguarantee for assignments, can even enjoy discounts between 3–10%. The longer the relationship between a customer and HSTD,the more the parties stress value-added solution instead of price.Hence, financial exchange between the parties is very crucial.

7.4. Social exchange

Many of HSTD personnel have forged personal friendshipswith some representatives of their customer firms because theyhave been doing business with each other for a long time. Somedo socialize, after work, with friends at customer firms; goingfor lunch together is a common socializing aspect. For therespondent at HSTD, such socialization helps them to buildmore personal knowledge of each other, something they hopemight strengthen the confidence and the trust they have in doingbusiness with each other also.

8. The learning and adaptation inherent in interaction

8.1. The Learning process

HSTD has some customers that have difficulty in knowingwhat they really want; lack of knowledge is very high amongsome customers, small firms or organizations. As the partiesengage in dialogue and discussions about customers’ needs,market situations, and trends in the environment, they mutuallylearn and jointly agree on measures to be taken in order tosatisfy the needs of the customer. According to the respondent,big customer firms do have competences in almost all areas, butthey may lack one essential thing, “creativity”. For example,creating pictures and messages that are appealing to some targetgroups make the big firms prefer to do business with HSTD. ForHSTD, the interaction with the big firms has been very useful inthat knowledge acquired during the process is often modifiedand transferred to help many small firms, which lack expertisein many areas. Some customer assignments have demanded thatHSTD will have to acquire special knowledge, where theyengage the services of independent experts to help them up-grade their knowledge in some functional areas, example,power point presentations and the use of some computer softwares to design and produce graphics.

8.2. The adaptation process

The close and regular interaction between HSTD and itscustomers has one advantage that mistakes in projects do nottake long time to be detected by the parties. Any mistakedetected too late can have severe financial consequences. This isbecause HSTD might have already bought and used someservices from its numerous suppliers; so pointing out a mistakeso late would demand that the project would have to, more or


less, be started all over again. Hence, HSTD and its customerstry to voice any mistake out, as the customers help produce andconsume the services at the same time. However, somecustomers may not have the time to read through somemessages and/or graphic designs and give the feedback on time.This can lead to some accumulated mistakes. It becomesexpensive to rectify such mistakes, but HSTDwill always adjustto the customers and help solve the problem.

Sometimes two customers will want some services to bedelivered at the same time. Thus, HSTD cannot tell one cus-tomer to wait, while it does the assignment for the other. Bothmight be in dire need of some services, which will demand thatHSTD will have to cater to both customers' need at the sametime. HSTD adapts to the situation by letting its personnel workovertime so that they can help both customers. For customers,some adaptations can be in their routines and attitude. HSTD,through discussions and demonstrations, can get some custo-mers, with some specified needs and wants, to think aboutalternative solutions because that is what HSTD thinks isefficient and cost effective. A case in point is a small firm thatwanted to introduce customer cards. HSTD did help the firm todo a third alternative. The firm did as advised by HSTD and theformer was very satisfied. As HSTD acquires new knowledge(e.g. computer software use in graphics/design), their customersdo adapt to the new solutions offered by HSTD.

9. Interacting with third parties

For HSTD to be able to understand and appreciate thedemands its customers' customers make, HSTD has the practiceof evaluating or following up the effect of some assignmentsdone for a customer. To do this, HSTD will go to somecustomers' customers to hold interviews with them. Forexample, they can evaluate the effect of some advertisementdone for a customer by talking to customers' customers. Most ofthe time, an independent research firm will be hired by HSTD todo the market research, contacting customers' customers. Tobetter understand the demands of its customers, HSTD some-times invites some focused groups comprising its customers'customers to find out from them what their needs andpreferences are. This enables HSTD understand why theircustomers make some demands and how HSTD can help them.Concretely, Etac (customer to HSTD)'s customers, which aremostly handicapped people, are visited by HSTD. The knowl-edge acquired here enables HSTD to offer Etac messages andpictures that are tailor-made for the handicapped people.

Satisfying the needs and wants of its customers, HSTD alsointeracts with a number of suppliers, which complement theformer's resources and activities. Running advertising cam-paign for a customer, HSTD contracts the services of supplierssuch as printing press firms, photographing firms, Translationfirms, Mass Media (professional and non-professional news-papers, radio and television firms), Movie firms, and copy-writers. These independent firms are contracted by HSTD toassist in providing a total solution that helps meet HSTD'scustomers' needs. For HSTD, it is important that each and everyone of their suppliers maintains consistency and reliability in

providing good quality job; the coordination and integration ofthe heterogeneous services will demand HSTD's close andregular interaction with all the suppliers. All this have enabledHSTD to win and retain its present customers.

As a knowledge-intensive company, HSTD keeps abreast withnew knowledge. Taking part in relevant seminars, lectures atuniversities and other conferences, participating in trade fares,reading relevant literature and studying various Web sites bringthem into contacts, directly or indirectly, with many other actors.Some experts are, periodically, invited to HSTD to have seminarsand run courses for the personnel. HSTD is an active member inthe “Sveriges Reklamförbund”, (Advertisers Union in Sweden)and also a member in the 4th October Movement, an influencergroup, which undertakes lobby activities on behalf of its members.It is important for HSTD to be a member of such unions because asingle firm, andmost especially a small firm likeHSTD,would notbe able to influence laws and regulations that might beunfavourable for the conduct of business in their common industry.

10. The case of Albhin

Albihns (see Appendix A; Table A1 for its basic character-istics) operates mostly in the business-to-business market,offering customized solutions to most customers. A customizedsolution for a customer will consist of a legal protection for acustomer's patent, trademark, design, copyrights, domainnames and giving advice on competition regulations andcommercial law to a customer in a particular market. Hence,regular interaction with each customer assumes importance.

11. Interaction processes: the transfer of elements ofexchange between interacting parties

11.1. Product/service exchange

Albhins is a pure and people-base service provider, with avery high-customer contact. “We live on our knowledge, whichis inside our brains”. Large customers do have patentdepartments (protection of patent is a core service offered byAlbhins) in-house, yet they turn to Albhins for help in filingapplications and protecting applications that have beenapproved. This is because customers may not have the timeand the timely knowledge that will enable them to addresscertain problems. For small customer firms, with no in-housepatent department, helping them takes much time and otherresources. Mostly, Albhins' customers tend to buy a wholepackage of services, namely applying for and the protection ofpatent, the protection of a company's design, trademark, brandand domain name. As part of the package, a customer, operatingin a foreign market, needs Albhins' help regarding how to, forexample, legally understand and/interpret laws and regulationsthat affect the conduct of business in a particular market. Buyinga whole package of services from a local branch (e.g. atGothenburg), the branch may not have all the specialists in-house to help the customer. But, they can draw on otherspecialists at Albhins in other branches (see Appendix A) tocome down to help serve the customer. To be able to provide the


right services to a customer, Albhins and the customer will needto collaborate closely with each other.

For the protection of a customer's patent, for example, thecustomer will be offered a personal professional assistance froman expert in Albhins. The expert, a generalist, will be sent to thecustomer to study and assess the latter's need. Albhins will thenset up a team comprising different specialists (the firm has about100 of them) that are judged to be competent and appropriate forthe assignment at hand. These experts from Albhins will haveregular and close discussions with their counterparts at thecustomer firm in order to be able to, among other things, jointlyanalyze and think out solutions to the customer's needs. Due tothe intense competition in the seller's market certain customersopt for standardized solutions, some common procedure to applyfor a patent right. In this case, they ask several selling firms toprovide samples for study, evaluation and selection. Eventually,they choose the service provider that can best satisfy their needs.But, for customers buying a whole package of services andunique solutions, long term-solutions are the essential issue forthem. Big or important customers such as Volvo, SCA, andEricsson, which have had more than 30 years businessrelationships with Albhins, opt for customized solutions, fortheir specific needs might differ from others as they operate inSweden, South Korea, Britain, Poland, U.S.A and the MiddleEase, for example. Important customers give large assignmentsper year and have also frequent exchanges with Albhins.

Still with the example of patent applications, on behalf of acustomer, to be sent to some authorities (e.g. Swedish PatentRegistration Office) certain requirements must be met. Thus,the attorney (s) helping the customer must not only haveknowledge in areas that are patentable, he/she must also be aqualified lawyer and an engineer in some field. All in all, anapplication for a patent will require the following: (1) acomprehensive description of the idea, concept or product, forwhich patent is being sought, it should be new, unique anduseful for industrial application, (2) indicate precisely therequirements for patent, (3) correct translation of the applica-tion into English, and (4) proper editing to eliminate typingerrors. This brings about extensive information exchangebetween the parties. Together, the customer and Albhinsmutually do the customer need analysis thoroughly before theycan jointly agree on what each party has to do for the ful-fillment of the application requirements.

11.2. Information exchange

As the procedure to file an application for a patent right andto protect that over time, for example, indicate, comprehensiveand extensive information input from the parties will beneeded. After the parties have discussed an idea or a productthat is deemed patentable, meeting the above requirements,Albhins will, in turn, check with some Patent RegistrationOffice to find out whether there are changes in therequirements or not and will get back to the customer withthat information too. When all the necessary information hasbeen gathered, Albhins will then write the application for apatent protection, with all the necessary requirements met. The

customer reads the application, gives some feedback, beforethe entire application is submitted to some Patent RegistrationAuthorities for approval. For Albhins, customers are also co-producers. This helps to avoid the accumulation of wrongdoing on the part of the seller and vice versa.

11.3. Financial exchange

For Albhins, knowledge and information acquisition, fromwithin and from external sources, their process and transfor-mation into problem solving solution for a customer, make thefinancial exchange between Albhins and its customers veryimportant. Much of Albhins' business is done with theimportant or big customers; almost all of them need Albhins'services in Sweden and in foreign markets. These big firmsgive regular and large assignments to Albhins, for whichpayments are made regularly. For the last 10 years, Albhinshas been having long-term contracts with some of them. Thecontract is seen as a guarantee of assignments per year; thecontract is renewed every third year. While the big firms buy awhole package of services and place emphasis on value-addedsolutions, not price, most small firms may opt for simplesolutions (not a whole package) where price of the servicesthey buy play a major role. Albhins has to cater for thesedifferent needs. Firms that buy many services, regularly and inlarge volumes, do get some discounts (3–10%). All customersenjoy a 30 day credit period, after a purchase of services, topay for Albhins' services. But, the customers, in whomAlbhins has not much trust, advanced payment will have to bemade before some services are delivered to them.

11.4. Social exchange

According to the informant, Albhins encourages its personnelto have social interaction with their customers. Social relation-ship is seen as part of the need to take care of customers. Duringsuch interaction, according to the informant, it may not even benecessary to discuss business at all, but just to get to know eachother better. At times some personnel at Albhins go to watchhockey matches or go to some pubs with some personnel fromsome customer firms (e.g. Volvo and Ericsson). Some effect ofthe social exchange, as maintained by the informant, will be toeasily have contact with each other later on.

12. The learning and adaptation inherent in interaction

12.1. Learning

When Albhins and customers engage in need analysis, forexample, they learn about each other's capabilities. Buyingtailor-made services that are intangible, customers may want tohave some evidences that will bring to the fore what thecustomer really need and what the seller can or cannot do for thebuyer, all judging from the circumstances facing the parties.Usually Albhins organizes internal courses for its personnel,where external experts from universities and consulting firms(from Sweden and foreign markets) come to Albhins to give


lectures on a number of issues, such as American laws and doingbusiness in that country. Personnel from Alhbins and somepersonnel from customer firms do participate in such educationalactivities. Interaction with most small firms demands much timeand explanations, since such firms may lack expertise in patentissues, for example. Engaging such firms in regular and closeinteraction, where the parties inform and be informed aboutmarket developments, changes in regulations and whatever,most small firms get to know, in the course of time, what theirneeds are and how the seller can help meet that.

12.2. Adaptation

The exchange relationships between Albhins and some of theimportant customers have lasted more than over 30 years. It wasonly 10 years ago that most of them started to have writtencontracts with Albhins. In the course of time, the parties havemutually agreed and adapted to this new routine (having a writtencontract) because it is a guarantee for the constant and regularexchanges of services, information, and finances between theparties. One area where Albhins has adapted to some customershas to do with the translation of patent applications into English.Some price-sensitive customers will want the cheapest means oftranslation, which the computer translation mechanism allows.Here, Albhins has invested in educating its personnel to musterthe software that allows the computer-aided translation. Hence,those looking for some computer-aided translation, not soadvanced as the personal and thorough translation, do get helpfrom Albhins. With tangible reasons from Albhins, customersaccept late deliveries of services. When a buyer complaints abouta poor performance of an expert at Albhins and insists that he/sheshould be replaced, Albhins does that.

However, a few customers that have not had long-termrelationship with Albhins will neither complain about a poorperformance experienced nor do a repeat purchase. It does nottake much time for Albhins to discover this defection, so theycall such customers to ask about their attitude and purchasebehaviour. The answer Albhins will get from such customers isas follows: “We have changed the supplier”. With this negativedevelopment, Albhins is seriously stressing the importance ofcustomer care. Customers that may have the difficulty to pay forthe services, at some agreed upon time period, will discuss theirproblem with Albhins. Together, the parties will make paymentplans, after which the customer will pay accordingly. Admin-istratively, Albhins and almost all its customers have adapted toeach other in the collection of some information via the Internet.Through Albhins' Albnet, a portal in the net, customers canobtain data on the supplier. Mutually, the supplier can also log ininto most of the customers' website and go into their portals forinformation that concerns them. With time most small firms buya whole package of services, a change of attitude.

13. Interacting with third parties

Representing customers in different foreign markets (e.g. USand Japan) Albhins, which cannot be in all places at the sametime, uses the services of local attorneys that know, for instance,

their countries' laws and regulations, and business cultures.With its intensive interaction with independent attorneys indifferent markets, Albhins is in regular touch with timely andup-to-date information that help the parties to mutually learningabout the needs of Albhins and that of Albhins' customers. Inmost cases Albhins will travel to a foreign market such as theUS to first study the country, with its customer's need in mind,the competitive situation, the segment (s) targeted by thecustomer, and conduct interviews with several actors (e.g. sub-attorneys and market research firms in the US). With the inputsfrom the external actors, Albhins will be in the position to comeback to help customers that will want to have something to do inthe US market. The same can be said about representingcustomers in some other countries.

Interacting with institutions such as the Swedish PatentRegistration Office and the European Patent Convention helpsAlbhins gain knowledge pertaining to laws and regulations onpatent, for example, and how they change over time. As aknowledge-intensive firm, interactionwith universities such as theStockholm School of Economics and the Chalmers TechnicalUniversity is going on constantly. Through such interaction withthese places of learning, Albhins gains up-to-date knowledge intheir areas of specialization, knowledge that it transfers to helpcustomers meet their needs. Albhins publishes and sendsinformation, to which customers have access, through the firm'smonthly magazine and brochures. Albhins' interaction with anumber of suppliers that supply some physical products such ascommunication equipment (for seminars and lectures), papers,and firms supplying information technology services andadvertising services (advertising in various media) is veryimportant. Albhin's active membership in some industry associa-tions is very important because, together, themembers can directlyor indirectly influence government policies and/or regulationsaffecting their industry. The analysis of the cases comes next.

14. Analysis

This supplier – customer interface works effectively(Awuah, 1997, 2001) when the parties regularly transferelements of exchange (i.e. services, information, finance andsocial exchange) between themselves and also learn and adaptto each other mutually. In Table 1a and b, we show some of thesimilarities and differences between the two cases.

With the services characteristics depicted in Table 1a, thesimultaneous presence of the seller and the buyer (Berry &Parasuraman, 1991; Edvardsson & Larsson, 2004; Normann,1991) has been very crucial. This has, among other things,enabled the service provider and the customer (in both cases) tolearn how to utilize each other's capabilities. HSTD, for ex-ample, have important customers that also have advertisingexpertise in-house, yet they engage the services of HSTDbecause the latter's ‘creativity' in suggesting ideas or producingsolutions are valued by most customers. Analogously, Albhins'customers, especially those with expertise in-house, buyservices because that enables them to exploit the uniquecustomized solutions (solutions that demand much time andtimely knowledge), which Albhins provides them. Besides the

Table 1

HSTD AlbhinsProfessional services firm Professional services firm

a: A summary of the similarities between the two casesCore services (selling ideas, advice

and design of pictures andmessages) demand high customercontacts, mostly offering tailor-made services

Core services (selling ideas, advice,and offering legal protection for, e.g.,patent, intellectual property rights anddomain name) demand high customercontacts, mostly offering tailor-madeservices

Core services are intangible, can varyaccording to who provides it andwho receives it at a particular time,production and consumption are atthe same time, and are perishable(can't be stored) in most cases.These have necessitated thesimultaneous presence of the sellerand the buyer in most instances

Core services are intangible, can varyaccording to who provides it and whoreceives it at a particular time,production and consumption are at thesame time, and are perishable (can'tbe stored) in most cases. These havenecessitated the simultaneouspresence of the seller and the buyerin most instances

High customer involvement: jointneed analysis and solution forthe customer

High customer involvement: jointneed analysis and solution for thecustomer

Regular and frequent transfer ofelements of exchange, highrate of mutual learning andadaptation between sellerand customer

Regular and frequent transfer ofelements of exchange, high rate ofmutual learning and adaptationbetween seller and customer

High and regular use of externalactors that provide supportingservices (intangibles likeeducation, information, consultingand marketing research) andproducts (printing materialsand so on) to complement theseller's core services

High and regular use of externalactors that provide supporting services(intangibles like education,information, consulting andmarketing research) andproducts (printing materials andso on) to complement the seller'score services

Outcome: Has won and retainedmany important customers thatgive regular assignments, largepurchases. Long-term contractswith important customers as aguarantee or security for stableexchange relationships; averageage or relationship is 6 years

Outcome: Has won and retainedmany important customers thatgive regular assignments,large purchases. Long-termcontracts with important customersas a guarantee or security for stableexchange relationships; average ageof relationship is 30 years

b: A summary of the differences between the two casesHSTD is an advertising firm, with 8

employees and an annual turnoverof 8 million Swedish kronor

Albhins is a legal firm, with 200employees and an annul turnover of400 million Swedish kronor

It is a relatively new company,founded in 2003, as a mergerbetween two companies that hadbeen in existence since 1995 and1996 respectively

It is an old company that wasfounded in 1891

Operates mostly in Sweden, withHalmstad as headquarters

Operates in many countries, withheadquarters in Stockholm andbranches in some European countries

No extended international network ofexchange relationships

Has extended international networkof exchange relationships

Close and regular interaction with,e.g., suppliers in order to coordinateand integrate the heterogeneousservices to assure consistency andreliability of services to end-customers are restricted to actors inSweden only. Has not experiencedcustomer defection

Close and regular interaction with,e.g., suppliers in order to coordinateand integrate the heterogeneousservices to assure consistency andreliability of services to end-customers are carried onworldwide. Has experienced somecustomer defection


immediate customer, regular interaction with several other actorsin a firm's networks of exchange relationship (Awuah, 2001;Anderson & Narus, 2004; Håkansson & Snehota, 1995) enablesit to gain access to others' resources and activities, whichbecome complementary to the firm's own and thereby making itpossible to meet its immediate customers' needs. In both cases,the services suppliers have close and continuous exchangerelationships with other actors, this playing a tremendous role inthe focal companies' performance.

The ‘give and take exchange' relationships between the PSFsand all the other actors, including immediate customers, in theirnetwork (see Figs. 1 and A1) have enabled the studied firms tomeet demands made on them by their customers and all theother actors they interact with in their network. This isconsistent with the observation made by other researchers.“The performance and effectiveness of organizations operatingin a network, by whatever criteria these are assessed, becomedependent not only on how well the organization itself performsin interaction with its direct counterparts, but also on how thesecounterparts in turn manage their relationships with thirdparties” (Håkansson & Snehota, 1995, p. 191).

As the customers are involved in the production and con-sumption (Berry & Parasuraman, 1991; Normann, 1991) ofHSTD's services, their immediate feedback, and adaptation dohave impact on HSTD's own learning and adaptation rate.HSTD's solutions learned from the interaction with someimportant customers can, with some modifications, be used tohelp small customer firms that do lack expertise in advertisingwork. HSTD's regular interaction with third parties (e.g. its ownsuppliers, places of learning such as universities, public seminarsand trade fares) has shown that what is happening in thoserelationships (e.g. knowledge sharing at the universities, internalcourses provided by third parties and the suppliers providingreliable and dependable services) does affect HSTD's ability tosatisfy its customers, for major relationships of a company arefound to be ‘inter-connected' (Håkansson & Snehota, 1995,p.12). Similarly, in Albhins' case, all customers are extensivelyand closely engaged in dialogue and discussions, where Albhinsand the customers learn from and adapt to each other. Albhins'case also demonstrates that gaining access to Albhins' activitiesand resources (including those from its wider network inter-connected relationships) a customer's needs' satisfaction wouldbe facilitated (Fig. A1, Appendix C shows how embedded any ofthe studied firms is in a network of exchange relationships).Albhins' access to knowledge and other resources of its partners(marketing research firms and sub-attorneys in foreign markets)and interaction with universities and independent consultingfirms have all contributed to Albhins' need and acquisition ofbetter and timely knowledge or information that have helpedAlbhins to advice and/or to meet the needs of its customers.

One important difference between the two cases, as theevidences show, is that Albhins has experienced some customerdefection without some prior warnings or complaints. Often-times, customer defection would be about the performance ofsome representatives of Albhins. The characteristics of those thatdefect are that they have not had long-term relationships withAlbhins, do not normally buy customized solutions, and are


price-sensitive. The intense competition in the marketplaceseems to influence such buyers' expectations, changing to newsuppliers without any warning. But, all two cases havedemonstrated that having strong customer relationships, as aservices firm, is of particular importance (Berry & Parasuraman,1991; Gummesson, 2002) because of their interpersonal focusand the relative lack of objective measures for evaluating servicequality. Both HSTD and Albhins have succeeded to get many oftheir small firm customers, with high expectations and lack ofexpertise to judge quality of services obtained at the beginning oftheir relationships, to through mutual learning and makingadaptations (e.g. in attitudes), to strive after regular, stable andlong-term relationships. Irrespective of the differences in size,location, turnover and customer base, the two firms seem to actquite similarly; the use of their own capacity (own coreexpertise, knowledge and services) plus their use of externalcapacity, due to exchange relationships with third parties, havebeen very crucial for all of them to achieve their goals.

Social interaction facilitates the rate at which the interactingparties increase their knowledge of and trust in each other (Ford,1997; Gummesson, 2002; Huemer, 1988; Håkansson, 1982). Inall two cases, some personnel in the services firms socialize withsome personnel of their customers firms. For the services firms,socializing with the customer firms has produced a number ofbenefits, namely, it has been a way of taking care of thecustomers and it has also been a medium to get to know one'scounterpart better, a knowledge upon which current and futurebusinesses can be facilitated between the parties and the firms forwhich they work.

15. Conclusion

The purpose of this study has been to systematically shedlight on factors that impinge on a professional services firm'scompetence development over time. This study has clearlyprovided evidence that a services firm's ability to meet demand,its competence (Awuah, 1997, 2001), put on it by its customers(in this study), is very much affected by the firm's regularinteraction with its customers and other significant actors. Thisis because the services firm's internal skills, activities andresources, for example, are founded to be strongly linked(Snehota, 1990) to those of all the other actors, with whom thefirms interact in this study. Consistent with Dunphy et al.'s(1997) view, the firms' market-based learning and theirinternally focused learning reinforce each other. By the regularand effective interaction with actors in their respective networkof exchange relationships, the two firms are able to draw ontheir complementary activities and resources so as to be able toprovide reliable and consistent services to their customers. Eachof the two services firms' total competence (Johnston et al.,2002; Tzokas & Saren, 2004; Fruin, 2001) is to be seen in theirown internal skills, knowledge and activities plus their access toexternal skills, knowledge and activities of their customers,suppliers, and universities for example. Having been able to winand retained, for example, important customers that give regularand large assignments, the two firms have demonstrated theirabilities to meet their respective customers' demands over time.

One important way to measure a firm's success, according toDoyle (2002;Armstong et al., 2005; Edvardsson&Larsson, 2004),is the measuring of its results in customer satisfaction. Satisfiedcustomers, for example, are a valuable asset for a firm (Awuah,2001; Anderson & Narus, 2004; Doyle, 2002). The importantcustomers in this study do not only give regular assignments to theirrespective service providers, they engage in dialogue and mutuallearning (Prahalad & Ramaswamy, 2000), undertaking mutualadaptations aswell; they also recommend their respective suppliers,through positive word of mouth, to other potential customers. Eachof the firms has wonmost customers through recommendations. Inspite of some differences between the two firms (see Table 1b) theyhave shown that ability to meet customers' needs, a measure oftheir competence, produces satisfied customers that opt for long-term business relationships with the respective service providers.HSTD have customers, important ones, with whom it has hadregular business relationships since 1996. Similarly, Albhins'business relationships with satisfied customers, also the importantones, have been going on for more than 30 years.

In both cases, many of the important customers and theirrespective service providers have chosen to strength the bondsbetween themselves by agreeing to have written contracts, forexample. As they have had regular interaction over the years,learning how to mutually use their resources and activities andundertaking mutual adaptations (Ford et al., 1986; Havila et al.,1999), the trust the parties have in each other has not onlyincreased, they have all become increasingly committed (Hunt &Morgan, 1994; Håkansson, 1982) to the relationship that seemsto pay off for each of them (Anderson & Narus, 2004). ForAnderson and Narus (2004), when interacting parties mutuallycreate value sharable among them, they are apt to continue tohave relationships, as this study has shown. A number ofempirical and theoretical implications can be drawn from thisstudy; below are examples.

16. Implications of the study

Since there is no coherent definition of the concept of com-petence and hence no standard pattern of competence develop-ment over time, various researchers have concentrated ondifferent characteristics of the concept of competence that are inline with their view of reality (Andersson et al., 2002; Hamel &Prahalad, 1990, 1996; Johnston et al., 2002; Webster, 1991).Some have looked at, for example, a firm's core competence(Hamel & Prahalad, 1990, 1996) that will enable it to diversify itsactivities into two or more markets to exploit that competence.The products/services that are generated from the use of the corecompetences should be valued by the target customers and thecore competences should be difficult to imitate by competitors.These are internal activities that need be developed or upgradedbecause consumers' needs change and competitors get betterover time; so for the attainment of a sustainable competitiveadvantage, the firm needs to develop its core competences all thetime. Proponents of the network view of the world (Snehota,1990; Awuah, 2001; Johnston et al., 2002; Andersson et al.,2002) on the other hand, shift emphasis to the complementaryrelationships, which in turn, are the result of the interdependent


exchange relationships between most of our firms and/ororganizations, when explaining one of the main sources of afirm's competence. The present study sheds light on that too.

As this study has shown, each of the firms' competence,ability to meet customer demands, is developed over time bylinking together its internal skills, knowledge, and activities tothose of the significant actors identified and analyzed in thisstudy. The two firms have mostly intangible core services, theproduction of which demands the simultaneous presence of thebuyer and the seller (Normann, 1991). The core services andmost of the support services are difficult to value before purchaseand can also be difficult to store. Unlike, physical products,selling professional services, with the above characteristics, willbe difficult for the buyer to know what it is buying in advance; itis also difficult for the seller to demonstrate which attributes ofthe services and service quality will drive customer value(Edvardsson & Larsson, 2004). The two firms have shown thatto be able to satisfy customers' need better than competitors cando, much time and resources should be invested in the regularinteraction (regularity and frequency in relationships areemphasized by Gummesson, 2002; Håkansson & Snehota,1995) with own customers and with others whose resources andactivities complement theirs. For Anderson and Narus (2004),goods and services are created, designed and delivered bysharing knowledge and experience with others. All the cases inthis study show how well the sellers of services have involvedtheir immediate customers in the creation, design and delivery ofservices to them. As observed elsewhere, (Mercer, 1993, Ford,1990) providing business services will require greater specia-lization and customization, where customer–supplier interactionis intense, in order for the seller to be able to meet the buyers'needs. The sellers of services in this study draw heavily, for

example, on joint learning that occurs in interaction with thirdparties (Ford et al., 1986). Relationship with third parties, in anyattempt to meet customers' demand, is worth the investment, forthe market-based organizational learning and the internallyfocused learning reinforce (Dunphy et al., 1997) each other.

Since customers can defect, in spite of their active involve-ment in production and consumption of services, as one of thecases shows, the relative lack of objectivity in measuring servicequality (Berry & Parasuraman, 1991), for example, is animportant issue to be addressed by a services firm. A majorthought which has been followed throughout the present studyrelates to the extent to which a company's competence develop-ment over time can be influenced, in large, by its interaction withsome significant actors in its network of exchange relationships.It has not been possible to examine all the exchange relationshipsin which the focal actors, Albhins andHSTD and their respectivecustomers, might engage. Our model, with its roots in the net-work perspective, has served its purpose by aiding our under-standing of how the PSFs through actions and interactions withsome significant actors in their network describe and/or interpretthe extent to which their exchange relationships with somesignificant others enable them to satisfy demands made on them.Some suggestions (see above) have been provided regardinghow firms or researchers can address the distinctive character-istics of professional services firms when using the appliedmodel in this study to investigate factors that impinge on a firm'scompetence development over time. By the study of a firm'scompetence development over time, future research shouldinvestigate whether other factors, other than those in our model,are possible to describe the effects of a network (s) of exchangerelationships when services firms, owing to their distinctivecharacteristics, are involved than manufacturing firms.

Appendix A

Table A1Sample characteristics of the firms studied

Company
Industry Turnover andnumber of employees
Services provided

Halmstad Reklam (HSTD),operates mostly in Sweden, withHalmsatd as headquarters

AdvertisingUsual approach to win customersand assignments:

8 million Swedish kronor8 employees

Advertising services: Printing, Internet servicesand sending messages and pictures via filmsand radio. The provision of the aboveservices is about basically offering ideas, adviceand design of pictures or images

Was established in 2003, a mergerbetween “The One” (established in 1995and “Kerg Kirtley”(established in 1996)

(a) Reactive: customers seekHSTD on their own because ofrecommendations, word-of-mouth.This seems to be the mostimportant for HSTD

Provides services to mostly business andnon-business organizations as customers.Customers are mostly in Sweden
The respondent at HSTD was
the Managing Director; interviewon 5-10-2005

(b) Proactive: customers andassignments are won through ownactive promotion

Albhins AB, one of the leading firms ofpatent and trademark attorneys in Europe.

Legal servicesUsual approach to wincustomers and assignments:

400 million Swedish kronor210 employees

Services: Providing legal protection for acustomer's patent, trademark, design, copyright, domain names and providing adviceon competition regulation and commercial lawin a particular market.

Was founded in 1891, with its mainheadquarters in Stockholm. Has alsobranches in Gothenburg, Malmö, all inSweden, Copenhagen, (Denmark)and (Munich) Germany

(c) Reactive: customers come toAlbhins on their own because ofrecommendations, word-of-mouth.This seems to be the mostimportant for Albhins

Customers: mostly business companies, smalland large. Most customers operate in Swedenand in foreign markets

The respondent at Albhins in Gothenburgwas the patent manager; interview on12-09-2005

(d) Proactive: customers andassignments are won throughown active promotion


Appendix B

In an attempt to develop an interactive approach to themarketing of professional services (PS), the following isprovided in Ford (1997).

Professional services can be distinguished from otherservices due to the following characteristics of PS

A) Advisory and focus on problem solvingB) Provided by a qualified person known for a special skillC) Centred on assignment required by the clientD) Provided by a professional who is independentE) Supervised by an association which attempts to lay down

requirements of competence and to enforce a code of ethics.

Types of professional services

a) Financial accounting, auditing, book-keepingb) Advertising and other agencies and brokersc) Business and management consultingd) Engineering, architectural and interior designinge) Legald) Medical health care

Appendix C

Fig. A1. An illustration of any of the services firm's network of exchangerelationships (In reality the network will extend beyond this; this is just adelimited one). Explanation:

Focal relationship (e.g. HSTD-Customer or Albhins-CustomerInteraction)Focal actor's direct relationships with other actorsFocal actor's indirect relationships with other organi-zations (e.g. Universities, Research Institutes, trade association, governmentagencies).

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A professional services firm's competence development