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Effect of Customer-Centric Structure on Long-TermFinancial PerformanceJu-Yeon Lee, Shrihari Sridhar, Conor M. Henderson, Robert W. Palmatier

To cite this article:Ju-Yeon Lee, Shrihari Sridhar, Conor M. Henderson, Robert W. Palmatier (2014) Effect of Customer-Centric Structure on Long-Term Financial Performance. Marketing Science

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Articles in Advance, pp. 1–19ISSN 0732-2399 (print) � ISSN 1526-548X (online) http://dx.doi.org/10.1287/mksc.2014.0878

© 2014 INFORMS

Effect of Customer-Centric Structure on Long-TermFinancial Performance

Ju-Yeon LeeCollege of Business and Economics, Lehigh University, Bethlehem, Pennsylvania 18015,

[email protected]

Shrihari SridharSmeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802,

[email protected]

Conor M. HendersonLundquist College of Business, University of Oregon, Eugene, Oregon 97405,

[email protected]

Robert W. PalmatierMichael G. Foster School of Business, University of Washington, Seattle, Washington 98195,

[email protected]

Firms with a customer-centric structure—an organizational design that aligns each business unit with a dis-tinct customer group—are expected to exhibit superior performance compared to firms that are internally

structured. Top executives invoke these customer-centric beliefs when initiating corporate reorganizations. How-ever, a lack of empirical evidence linking these customer-centric structures to better long-term financial per-formance raises doubts if corporate structure can truly foster customer centricity and better position a firm tosatisfy customers and hence exhibit superior performance. The current research addresses this question by usinglongitudinal data (1998–2010) that links Fortune 500 firms’ corporate-level structure to performance. Utilizing adueling mediator model with allowance for endogeneity in a firm’s organizational structure choice, the studyreveals that a corporate-level customer-centric structure translates to greater customer satisfaction, but simul-taneously adds coordinating costs. Further explaining customer-centric structure’s record of mixed success, thebenefits of increased customer satisfaction diminish (1) as competitors have already adopted customer-centricstructures, (2) in fragmented markets where competitors leave few unique customer needs unaddressed, and(3) in less profitable industries. Ultimately, we show that aligning corporate structure around customers paysoff only in specific competitive environments.

Keywords : customer-centric structure; customer satisfaction; coordinating cost; competitive environment;financial performance

History : Received: January 1, 2014; accepted: July 24, 2014; Russell Winer served as the senior editor andRoland Rust served as associate editor for this article. Published online in Articles in Advance.

1. IntroductionA widespread belief among academics and man-agers is that customer-centric firms outperform theirpeers that are internally structured, because they nur-ture closer customer relationships, enhance customervalue, and improve customer satisfaction (Kumaret al. 2008, Shah et al. 2006). For example, Dellrealigned its corporate business units around distinctcustomer groups (e.g., large enterprise, public, smalland medium business, and consumer division), stat-ing that “this alignment creates a clear customer-centric focus 0 0 0 , and enables us to better understandand address their challenges” (2010, p. 2). A sur-vey of managers indicate that the proportion of U.S.firms with structures organized around customers

will grow from 32% to 52% as firms race to buildmore customer-centric organizations (Day 2006). Datacollected for the current research shows that the pro-portion of Fortune 500 firms with a customer-centricstructure has increased by 46% in the past decade.Yet extant research offers no actual evidence of a“significant correlation between organizing by cus-tomer groups and relative performance” (Day 2006,p. 42). Managerial interest in, combined with the lackof empirical support for, the link between customer-centric structure and performance has led the Mar-keting Science Institute (2012, p. 8) to announce“Research is needed to better understand how orga-nizational structure and marketing capabilities influ-ence business performance” as one of the top research

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Lee et al.: Effect of Customer-Centric Structure on Long-Term Financial Performance2 Marketing Science, Articles in Advance, pp. 1–19, © 2014 INFORMS

priorities. Accordingly, we investigate the effect ofcustomer-centric structure on financial performance.

Extant marketing research studying other orga-nizational design elements shows that adopting acustomer-centric culture (Shah et al. 2006), metrics(Rust et al. 2010), and processes (Kumar et al. 2008)improves relational and financial outcomes. Apply-ing the same logic to organizational structure, manyFortune 500 firms, such as WellPoint and AmericanExpress, have shifted their corporate structure to aligndivisions with each of their key customer groups. Still,nearly 70% of the Fortune 500 firms organize theirtop divisions around internal criteria (i.e., productgroups, functional areas); operational functions arestreamlined internally but cover multiple customergroups externally. Drawing a contrast with internallyaligned structures, we evaluate the financial perfor-mance effect of a firm’s organizational structure (i.e.,business units, divisions) that is externally aligned todistinct customer groups.

Such a customer-centric structure represents adeliberate managerial attempt to foster a shared com-mitment, in each division of the firm, to fulfill theneeds of a unique customer segment, which pur-portedly improves customer satisfaction and perfor-mance (Lee et al. 2014, Yim et al. 2004). Althoughthis structural alignment is customer-centric in nameand purpose, the lack of evidence linking it to per-formance raises the concern that perhaps corporate-level structure is too far removed from the customerto foster meaningful differences in firm performance.To better understand this linkage we include cus-tomer satisfaction as a positive mediating mecha-nism and coordinating costs, expenses incurred frommanaging interdependent functional activities acrossinternal units, suppliers, and customers, as a nega-tive mediating mechanism. This allows us to exam-ine researchers’ warning that organizing a firm’sstructure around customer groups instead of inter-nal criteria will create more difficulties in managingrelationships between front-end and back-end offices(Homburg et al. 2000), and duplicate resources andfunctional efforts across divisions (Gulati 2007). Whenorganizing by an internal production basis, commu-nication will be optimized for operational efficiency.Under this structure, management will easily see andreact to any suboptimal coordination of functionalactivities that slows production, duplicates resources,or requires too much administrative overhead. Thus,the total impact of a customer-centric structure onperformance likely depends on whether the customer-centric benefits surpass the higher coordinating costs.We posit that the trade-off between these positive andnegative mediating pathways also depends on theexternal environments where the firm chooses to com-pete. The failure to account for the positive and neg-ative mediating paths, and the contingent effects of

the external environment could explain prior incon-clusive empirical results (Day 2006).

Using a unique, multisource data set that com-bines measures of organizational structure, customersatisfaction, and coordinating costs of Fortune 500firms from 1998 to 2010, we examine the perfor-mance effects of a customer-centric structure. We ana-lyze 13 years of annual data, comparing the perfor-mance of firms with a customer-centric structure toother internally aligned structures, as mediated bycustomer satisfaction and coordinating costs. We con-sider how the positive link through customer sat-isfaction may be moderated by a firm’s competi-tive environment (Figure 1), using a Bayesian latentinstrumental variable (LIV) approach to explicitlyaccount for endogeneity in firms’ structure choices(Zhang et al. 2009). Our study addresses the “clearneed for large-scale empirical research 0 0 0 [using] sec-ondary data 0 0 0 [to] assess performance outcomes ofvarious organizational structures” (Homburg et al.2000, p. 474) whereas previous research on customer-centric structures has remained theoretical (Rust et al.2010, Shah et al. 2006), or drawn mainly on sur-veys (Becker et al. 2009), qualitative field research(Homburg et al. 2000), and case studies (Galbraithet al. 2002).1

This paper contributes to existing literature in threeways. First, to the best of our knowledge, we arethe first to conceptually and empirically disaggre-gate the positive and negative mediating mechanismsto understand how aligning a firm’s highest-level busi-ness units around distinct customer groups affects long-term financial performance. The results show that acustomer-centric structure improves performance byincreasing customer satisfaction but also degradesperformance by adding coordinating costs. Whentop executives realign divisions with distinct cus-tomer groups, they can credibly invoke the externalbenefits of greater customer centricity (e.g., greaterresponsiveness, customization), but must weigh themagainst the internal costs (e.g., duplication, com-plex communication across functions) to determinethe overall effect. Because “efforts to increase cus-tomer satisfaction produce costs that reduce efficiencyimprovements in the short term” (Swaminathan et al.2014, p. 184, Mittal et al. 2005), we evaluate the ulti-mate consequences of a customer-centric structurewith the use of long-term versus short-term perfor-mance metrics (e.g., immediate market metrics).

Second, with this trade-off between benefits andcosts, it becomes necessary to determine when a

1 Only recently has it become possible to amass a longitudinal sec-ondary data set because of changes in the Financial AccountingStandards Board’s reporting guidelines, possibly contributing to thelack of response to Homburg et al. (2000) call for large-scale empir-ical research from secondary data.

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Lee et al.: Effect of Customer-Centric Structure on Long-Term Financial PerformanceMarketing Science, Articles in Advance, pp. 1–19, © 2014 INFORMS 3

Figure 1 Effect of Customer-Centric Structure on Long-Term Financial Performance, Mediated By Customer Satisfaction and Coordinating Costs

Long-termfinancial

performance

Firm outcomeMediating mechanisms

Externalcustomer

satisfaction

Internalcoordinating

costsH3 (+)

H4 (+)

H5 ( )

Control variables

Competitive environment

Competitors’customer-centric

structure

Industryprofitability

Competitiveintensity

Firmscope

Firm’sorganizational structure

Customer-centricorganizational

structure(highest-level

business units arealigned to distinctcustomer groups)

H2A (–) H2B (–) H2C (+) H2D (+) H1 (+)

–

customer-centric structure pays off. Customer satisfac-tion benefits are often determined by competitiveforces external to the firm (Mittal and Frennea 2010).We consider four key characteristics of where firmscompete to better determine when customer satisfac-tion benefits promised by a customer-centric struc-ture actually materialize. Our results suggest that afirm is less likely to capitalize on the potential bene-fits of a customer-centric structure when more com-petitors already have customer-centric structures. Wealso find that the customer satisfaction effect of acustomer-centric structure weakens when competitionintensifies and industry profitability decreases. Wetested if a customer-centric structure is more benefi-cial when the firm competes in many end markets;however, firm scope was not confirmed as a signif-icant moderator. Thus, contrary to popular notionsthat customer-centric structures are generally benefi-cial (Becker et al. 2009), we find that their costs oftenoutweigh their benefits, at least in competitive envi-ronments where unmet customer needs are scarce orrelatively unimportant.

Third, we offer managerial insight into the impactof customer-centric structure on financial perfor-mance by conducting post hoc analysis on the entireFortune 500 firms, removing date limitation of cus-tomer satisfaction measure in a non-mediated model.The average performance level for firms with acustomer-centric structure relative to firms with inter-nally aligned structures varies from +10% to −23%,depending on the competitive environments. There-fore, our study provides theoretical and empiri-cal insights that clarify the mixed picture that hasemerged from high-profile stories of firms that enjoythe fruits of restructuring around customer groups(e.g., IBM, Fidelity Investments), even as others seetheir business sour after making similar changes (e.g.,Cisco, Xerox).

2. Customer-Centric OrganizationalStructures

Researchers often investigate ways to make firmsmore “customer centric,” in the belief that doing sowill enhance firm performance (Shah et al. 2006). Thewidely researched “market orientation” construct,which typically refers to specific firm behaviors or cul-ture (e.g., gather, disseminate, and react to customerand competitor information), is distinct and can bestbe described as an outcome of customer-centric struc-ture (Homburg et al. 2000, Kohli and Jaworski 1990).In line with organizational design theory (Galbraithet al. 2002), marketing scholars compare customer-centric culture, incentives, and processes with tra-ditional production-oriented approaches to under-stand how these organizational design dimensionsaffect performance (Kumar et al. 2008). Despite thewidespread belief that organizational structure is animportant design element for making a firm more cus-tomer centric, “there has been relatively little discus-sion” of how and when customer-centric structuresimprove firm performance (Homburg et al. 2000,p. 469).

We examine customer-centric structure at the cor-porate level where it manifests as an organizationaldesign with top-level business units aligned to dis-tinct customer groups. Although it is not unusual tofind various structures at lower layers of the organiza-tion, we focus on the top hierarchical level because thegeneral consensus that adopting a top-level customeralignment will yield customer-centricity benefits hasyet to be empirically verified (Day 2006). Executivesview corporate structure as the firm’s architecturalfoundation for communication (Horowitz 2014). Fur-thermore, corporate-level structure receives intensescrutiny because (1) decisions made at the top leveldictate the management of organizational entities at

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lower levels, (2) the top-level structure determinesthe assignment of responsibilities to the senior exec-utives who determine the firm’s strategy, and (3)each corporate-level business unit is responsible forits profit-and-loss statement, which the firm disclosesin legal filings. Of central importance to the cur-rent research purpose, corporate-level structure ismost relevant to marketing if it can truly influence afirm’s ability to satisfy customers. If not, shareholdersshould demand executives offer a different rationaleto justify a costly corporate structural realignment.

To date, empirical support linking customer-centricstructures to performance improvement is limited.Perhaps a customer-centric structure is not intrinsi-cally superior, because placing any criteria as thefocus of a structural unit necessitates a trade-off inloss of focus on other criteria. Prominent executiveand investor Ben Horowitz recognized this issue, stat-ing that “the first rule of organizational design is thatall organizational designs are bad 0 0 0you will opti-mize communications among some parts of the orga-nization at the expense of other parts” (Horowitz2014, p. 188). For example, Intel found internallyaligned divisions (i.e., organizing top-level divisionsaround product groups or functional areas) a superiorstructure in terms of its internal simplicity, which min-imized communication complexities and functionalduplication. Customer-centric structure (i.e., orga-nizing top-level divisions around customer groups)instead offered greater knowledge of and commitment tocustomers, which better positioned the firm to increasecustomer satisfaction (Shah et al. 2006). That is, it isimperative to recognize both the benefits and costs ofemploying customer-centric structures to understandtheir performance impacts.

3. Conceptual Framework andHypotheses

We seek to examine (1) the mediation processes deter-mining how a customer-centric structure affects long-term financial performance and (2) the contingent cir-cumstances that determine when a customer-centricstructure pays off. We begin by highlighting positiveand negative mechanisms through which structureaffects firm performance. Our review of literature(Table 1) identified customer satisfaction and coordi-nating costs as key mediators. In essence, organiz-ing divisions (internal to the firm) around customergroups (external to the firm) should better positionthe firm to improve customers’ experience and thusincreases satisfaction, though at the expense of inter-nal simplicity (Gulati 2007, Homburg et al. 2000).Coordinating costs, defined as the expenses incurredfrom managing interdependent functional activitiesacross internal units, suppliers, and customers (Ray

et al. 2009, Bendoly et al. 2012, Im et al. 2013), arehigher when external, front-end, customer considera-tions are prioritized in organizing back-end functionalactivities.

To fulfill our second research goal, we incorpo-rate characteristics of where firms choose to com-pete as contingent factors. Organizational design the-orists have long held that a firm’s ideal internalstructure impact depends on its fit with the externalcontext (Drazin and Ven 1985). To understand howthe external environment makes a customer-centricstructure more or less efficacious, we focus on itslinkage to customer satisfaction. Because the struc-ture’s domain of control ends at the firm’s bound-ary, customer satisfaction—residing externally to thefirm, in customers’ evaluations of experiences relativeto expectations—is particularly vulnerable to exter-nal contingencies (Mittal and Frennea 2010). We con-sider four dimensions of where a focal firm com-petes that influence the number and quality of suchopportunities.

3.1. Linking Customer-Centric Structure toPerformance Through Customer Satisfaction

Customer satisfaction, which reflects customers’ over-all evaluations of their experiences with the firm’sproducts or services (Mittal et al. 2005), captures theexternal, beneficial effects of a customer-centric struc-ture. A two-step process leads to high customer sat-isfaction: (1) The firm uncovers customers’ unmetneeds, and then (2) responds quickly to address thisneed, even beyond customers’ expectations (Mittaland Frennea 2010). A customer-centric structure isdesigned to allow each division to focus on a uniquecustomer segment, which should increase knowledgeof and commitment to each customer group through-out the firm’s hierarchy (Gulati 2007, Jayachandranet al. 2005). Subunits cooperate to focus on customers,and competition across product lines does not comeat any one customer’s expense. Functional specialistsalso become customer specialists, and managers whoset priorities are just (Galbraith et al. 2002). Sharedcustomer-specific knowledge positions the firm favor-ably to uncover any unmet needs, and greater sharedcustomer-specific commitment enables it to respondquickly and effectively to unmet needs (Reinartzet al. 2004). Structural solutions that enable a firmto concentrate on specific customers support “Cus-tomer satisfaction information usage,” which capturesboth monitoring satisfaction and reacting accord-ingly (Morgan et al. 2005, p. 114). Furthermore, acustomer-centric structure generates a shared within-unit focus on customers, increases customer insight,provides a single customer contact point, and createsmore “Accountability for managing customer rela-tionships” (Shah et al. 2006, p. 117).

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Table 1 Literature Review: Mediating Mechanisms for the Effect of Customer-Centric Structure on Performance

Reference Context Customer-centric structure Measure of customer-centric structure Key findings/propositions

Customer satisfaction: Positive mediating mechanismsBecker et al.

(2009)Survey of 90 CRM

project managersIncluded as part of a

multidimensionalconstruct: “Organizationalimplementation”

We have an organizational structure thatis based on customer segments (e.g.,customer segments as profit center).Our distribution is organized accordingto customer groups (segment-based).

Organizational implementation improvesthe acquisition and regaining of lostcustomers when supported bymanagement.

Jayachandranet al. (2005)

Survey of 151marketingmanagers

Included as part of amultidimensional construct:“Customer-centricmanagement system”

We organize our company aroundcustomer-based groups rather thanproduct or function-based groups. Inour organization, various functionalareas coordinate their activities toenhance the quality of customerexperience.

Customer-centric management systemsupports relational informationprocesses (the specific routines that afirm uses to manage customerinformation), which in turn relatespositively to customer satisfaction andretention.

Reinartz et al.(2004)

Survey of 211 seniormanagers ofbusiness units

Included as part of amultidimensional construct:“Organizational structurearound customer groups”

Our business unit is organized tooptimally respond to customer groupswith different profitability. Organizingpeople (i.e., changing organizationalstructure) to deliver differentiatedtreatment and products to differentcustomer segments presents astrength for our business unit.

Organizing a firm’s structure aroundcustomer groups moderates therelationship between a formalized CRMprocess and performance (for theinitiation and termination stages).

Shah et al.(2006)

Conceptual paperabout acustomer-centricorganization

Discussed as part of anorganization designelement: “Customer-centricorganization structure”

Organizing all functional activities aroundcustomer segments.

Transitioning to a customer-centricstructure increases accountability formanaging the customer relationship,which in turn leads to superiorbusiness performance.

Yim et al.(2004)

Survey of 215 seniormanagers

Included as part of amultidimensional construct:“Organizing around CRM”

Our organizational structure ismeticulously designed around ourcustomers.

Organizing around CRM relates positivelyto customer satisfaction, whichincreases retention and sales growth.

Coordinating costs: Negative mediating mechanismsDay (2006) Survey of 347 midsize

to large U.S.companies

A binary concept of divisionsorganized aroundcustomers:“Customer-focusedstructure”

How are you organized now? (e.g.,functions, product/service lines,customer groups).

Organizing by customer-focused unitsincreases accountability, employeefreedom, and ease and ability to dealwith customer problems, but notrelative customer retention or profitsdue to bureaucracy and coordinatingcosts.

Gulati (2007) Survey of seniorexecutives at Cisco,GE Healthcare, andJones Lang LaSalle

Firm’s formal structureorganized by customersegment:“Customer-focusedstructure”

Semi-autonomous lines of businessfocusing on a distinctcustomer-customer type (vs. function,technology/product).

Under a customer-centric structure, firmsneed to invest significant time andresources in developing the ability tomaintain both product and customerexpertise and the ability to resolvedissonance across internal boundaries.

Homburg et al.(2000)

Field interviews with50 managers;quantitative studyof 385 firms

Structuring the organizationaround customers:“Customer-focusedorganizational structure”

Organizational structure that uses groupsof customers as the basis on whichbusiness units are established.

Given the greater reporting complexityassociated with a customer-focusedstructure, many companies have notmade the shift to a customer-focusedstructure, and some have reverted toother structures.

In contrast, other structures with divisions respon-sible for serving multiple customer groups cannotcontinually focus on any particular customer’s needs;multiple divisions internally organized by productlines or functions create confusion for customers andundermine relationship-building efforts (Day 2006,Rust et al. 2010). The lack of external alignment makesit difficult to sense changes affecting a particular cus-tomer group, which can reduce the speed of response

to emerging trends. Managers in charge of productdivisions serving multiple customer groups primar-ily focus on the customer group that is most impor-tant for their division’s current sales, which couldlead to missed opportunities to satisfy other cus-tomer groups. In summary, firms with a customer-centric structure develop richer depositories of cus-tomer knowledge and ensure greater commitment toeach customer group throughout the firm’s hierarchy.

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These outcomes lead to improved customer satisfac-tion (Lee et al. 2012, Yim et al. 2004).

Hypothesis 1 (H1). A customer-centric structure in-creases customer satisfaction more than internally alignedstructures.

3.2. Moderating Effects of the CompetitiveEnvironment

The environments in which firms choose to competemay have significant implications for the extent towhich expected customer satisfaction benefits actu-ally materialize. Shah et al. (2006, p. 122) argue that“the relevance, importance, and associated benefits ofcustomer centricity may vary across different indus-tries.” A customer-centric structure organizes inter-nal units to foster greater knowledge of and commit-ment to customer groups; translating these strengthsinto superior customer satisfaction is subject to pro-cesses external to the firm. For customer-centric firms,a rich depository of customer knowledge and abilityto uncover unmet needs is of little value in environ-ments in which unmet customer needs are scarce or ofrelatively little importance. Therefore, we consider themoderating effects of (1) the adoption of customer-centric structures by competitors, which underminesthe focal customer-centric firm’s unique advantage,(2) competitive intensity that increases the number offocused, competitive firms, leaving fewer unmet cus-tomer needs for discovery, (3) industry profitability,which indicates customers’ desire and willingness topay for centricity benefits in the industry, and (4) firmscope because a firm in a broad set of end marketshas more potential customer issues worth addressing.

3.2.1. Competitors’ Customer-Centric Structure.In industries in which a customer-centric structurehas become popular, the customer-specific knowledgeand commitment that help firms uncover and quicklyaddress unmet customer needs becomes more com-mon. As more competitors take strong positions foruncovering and responding to customer needs, eachfirm’s relative advantage diminishes, and they facefewer unique opportunities to improve customer sat-isfaction. Stated simply, “a firm can be customer cen-tered and still not gain an advantage if the competi-tors are equally customer centered” (Shah et al. 2006,p. 122).

Instead, if competitors generally employ internallyaligned structures, the industry as a whole has fewdivisions specifically attuned to particular groups’unique needs, leaving an untapped environment richwith potential opportunities to improve customers’experience. A firm thus can increase its customer-specific knowledge and responsiveness by adopting acustomer-centric structure and gain a relative advan-tage, but competitors “blunt any advantage” if they

“also reorganiz[e] around customer groups” (Day2006, p. 42). Thus, we expect the increased satisfactiongenerated by a customer-centric structure to diminishas the number of competitors with the same structureincreases.

3.2.2. Competitive Intensity. Competitive inten-sity refers to the degree of rivalry among competi-tors in an industry, as determined by less concen-trated market shares, a greater number of productor service alternatives, and increased customer power(Anderson et al. 2004, Porter 1985). In highly com-petitive, fragmented markets, many small firms carveout narrow niches; the jockeying for a relative posi-tion helps make the overall industry more suited tosense and accommodate specific customer needs. Insuch industries, the large number of highly focusedfirms likely have addressed customers’ needs already,so firms with a customer-centric structure have feweropportunities to exploit their greater internal focus onany particular customer group.

Further reducing the advantages gained from acustomer-centric structure, even the competitors with-out customer-centric divisions should become moreaggressive as markets become more competitive,which increase their focus on core customers, cus-tomer accountability, and responsiveness (Robertset al. 2005). Consequently, the firms with a customer-centric structure are left with fewer unmet cus-tomer needs available to uncover or fulfill. In sum-mary, when competitive intensity is low, firms witha customer-centric structure should benefit frommore opportunities to improve customers’ expe-rience, through their knowledge of and commit-ment to specific customer groups. Thus, we expectthe increased customer satisfaction generated bycustomer-centric structures to diminish as competitiveintensity increases.

3.2.3. Industry Profitability. In an industry expe-riencing considerable financial strain, firms tend tocompete with lower price (Porter 1985). At oneextreme, there exist struggling low-profit industriessuch as true commodity markets where customersprefer buying a standardized offering from anyprovider at the lowest possible price. In such cases,an internally aligned structure focused on economiesof scale and controlling costs should suffice, becausecustomers do not have unmet needs they wantaddressed. If they prefer an efficient exchange, con-stant communications from customer-centric firmsactually could bother customers (Palmatier et al.2008). Alternatively, highly profitable industriesemerge because of customers’ willingness to pay forcustomization and responsiveness, two features wellsupported by externally focused, customer-centricdivisions. Thus, we expect higher satisfaction levels

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to result from customer-centric structures as industryprofitability increases.

3.2.4. Firm’s Scope. Firms that operate in a largerset of independent market segments have greateropportunities to uncover unmet customer needs, butsimultaneously face the risk of spreading manage-rial attention too thin (Rao et al. 2004, Morgan et al.2005). In such a case, a customer-centric structureshould better enable the firm to stay on top of evolv-ing customer needs and take advantage of the manyopportunities available with operations in many endmarkets. Alternatively, the number of unmet needscovered are limited when firms operate in fewer endmarkets; yet, paradoxically, these firms should be bet-ter able to uncover and respond to an unmet needbecause their less heterogeneous customer portfolioprovides inherent external alignment (Lee et al. 2012).For example, when Intel eliminated its Web host-ing business to focus on microprocessor markets, itreduced the diversity of customer problems that itneeded to address, thereby reducing customer hetero-geneity, concentrating information gathering to fewermarket segments, and increasing institutional knowl-edge (Vance and Weiss 2002). A narrow scope of busi-ness helps a firm gather more detailed informationabout customers and respond to their needs inde-pendent of structure (Varadarajan et al. 2001), andthus makes a customer-centric structural solution lessbeneficial.

In summary, the increased customer-specific knowl-edge and commitment attained with a customer-centric structure positions a firm to uncover and thenquickly address unmet customer needs. This abilitybecomes less valuable when many competitors alsoadopt customer-centric structures, when many highlyfocused competitors leave few unmet customer’sneeds to address, when few customers strongly desirecustomization and responsiveness, and when a firm’sscope provides few opportunities to uncover unmetneeds. Therefore, we offer the following:

Hypothesis 2 (H2A). The positive effect of a customer-centric structure on customer satisfaction relative to inter-nally aligned structures diminishes as the number of com-petitors with a customer-centric structure increases (negativeinteraction).

Hypothesis 2 (H2B). The positive effect of a customer-centric structure on customer satisfaction relative to inter-nally aligned structures diminishes as competitive intensityincreases (negative interaction).

Hypothesis 2 (H2C). The positive effect of a customer-centric structure on customer satisfaction relative to inter-nally aligned structures diminishes as industry profitabilitydecreases (positive interaction).

Hypothesis 2 (H2D). The positive effect of a customer-centric structure on customer satisfaction relative to inter-nally aligned structures diminishes as a firm’s scopedecreases (positive interaction).

3.3. Linking Customer-Centric Structure toPerformance Through Coordinating Cost

Despite its benefits, a customer-centric structure alsoincurs more costs than an internally aligned struc-ture. A customer-centric structural design prioritizescommunication about and knowledge of specific cus-tomer groups over clarity in internal and back-endfunctional operations (Day 2006, Gulati 2007, Leeet al. 2014). We argue that a customer-centric struc-ture will increase a firm’s coordinating costs, orthe expenses incurred from managing interdepen-dent functional activities across internal units, sup-pliers, and customers (Ray et al. 2009, Im et al.2013). First, a customer-centric structure employsmore resources in communication and decision-making processes, because complex reporting rela-tionships arise between front-end (customer-facing)and back-end (product-producing) operation centers.In each customer-centric division, managers must fos-ter boundary-spanning skills to ensure that sales callsfrom the front-end transcend multiple back-end prod-uct groups, which often involves additional time andcosts to resolve dissonance in complex structures(Day 2006, Galbraith et al. 2002). For example, Intel’schange to a customer-centric structure made man-agers concerned that internal communication couldbe inefficient as “the rank and file won’t know whoto report to” (BusinessWeek 2005a). In contrast, aninternally aligned structure has simple, unambiguouslines of communication for each function and prod-uct group—the front-end is never confused with dif-ferent back-ends—so internal reporting structures arestreamlined. This logic is in line with Gulati’s (2009)point that firms should recognize “the potential lossof economies of scale that comes from duplicatingfunctions in each customer-unit instead of locatingthem all under one umbrella” (p. 65).

Second, a customer-centric structure needs to investmore in selling and delivering products to cus-tomers, because front-end employees are responsiblefor understanding diverse, expansive product bun-dles and performing more complex selling tasks fortheir own customer groups. Such integration effortsoften require additional front-end staff and costs totrain them as the firm attempts to maintain both prod-uct and customer expertise in each customer-focuseddivision, which in turn increases the costs associ-ated with coordinating sales (Gulati 2007, Homburget al. 2000). For example, Hewlett-Packard disman-tled a major part of its customer-centric structureto “lower [its] selling costs 0 0 0 [and] commissions for

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each deal,” after finding that selling the entire port-folio of products required 15,000 more employees(BusinessWeek 2005b). This additional investmentin resources is required throughout customer-centricdivisions as customer-specific customization necessi-tates duplication of resources across each customer-focused division. Conversely, in an internally alignedstructure, employees specialize in their function, pro-ducing and selling their “own products” to any mar-ket. Our argument mirrors (Gulati’s 2009, p. 103) viewthat organizing the firm’s structure around customergroups can mean “time-consuming and costly adjust-ments in the interest of customers.” The detrimen-tal effects of increased duplication and complexity ininternal reporting structures lead to higher coordinat-ing costs.

Hypothesis 3 (H3). A customer-centric structure in-creases coordinating costs more than internally alignedstructures.

3.4. Effects of Customer Satisfaction andCoordinating Costs on Financial Performance

Firms with satisfied customers enjoy higher levelsof positive word of mouth, customer loyalty, futurerevenues, and long-term growth (Evanschitzky et al.2011, Mittal et al. 2005), as well as lower customerdefection, expenses related to customer complaints,and price elasticities (Anderson et al. 2004, Ittneret al. 2009), all of which enhance a firm’s long-termperformance. Thus, we propose that customer sat-isfaction, which captures the beneficial effects of acustomer-centric structure, enhances long-term finan-cial performance (positive mediating mechanism). Incontrast, coordinating costs lower financial perfor-mance directly, by reducing firm profits, and indi-rectly, by adding complexity and slowing decisionmaking, which undermines future growth opportu-nities (Galbraith et al. 2002). Overall, higher coordi-nating costs, a key negative mediating mechanism,undermine long-term financial performance.

Hypothesis 4 (H4). Customer satisfaction positivelyaffects long-term financial performance.

Hypothesis 5 (H5). Coordinating costs negatively af-fect long-term financial performance.

4. Methodology4.1. DataTo test our hypotheses (Figure 1), we assem-bled a data set from multiple archival sources,including the American Customer Satisfaction Index(ACSI), COMPUSTAT Industrial Annual database,COMPUSTAT Business Segments database, and theannual/quarterly financial reports (Form 10-K, 10-Q).We began with a sample of all Fortune 500 firms, tobe broad in our scope and diverse in our selectionof industries. Beginning in 1998, all U.S. public firms

were required to disclose disaggregated informationin Forms 10-K and 10-Q about all operating units,in accordance with their internal structure (FinancialAccounting Standards Board 1997). We exploit thisinformation to develop an objective customer-centricstructure measure. In congruence with the availabilityof 10-K and 10-Q information, our data spans the 13-year period from 1998 to 2010.

We concatenated the database with data on finan-cial performance and other control variables from theCOMPUSTAT Industrial Annual database. Finally, weturned to the ACSI database to collect overall cus-tomer satisfaction with a firm’s products and services.To link the name of each ACSI entity (e.g., brands,firms) to company identifiers in financial databases,we followed the “cleaning the ACSI data” approachoutlined by Ittner et al. (2009, p. 834).

After merging all three databases, the final samplecomprised a panel of 1,241 observations, represent-ing 137 firms over a 13-year period. Annual customersatisfaction scores are only available for about 200 ofthe Fortune 500 firms (Anderson et al. 2004). Becauseof these data restrictions and incomplete companyrecords in COMPUSTAT, we were not able to includethe entire Fortune 500 in the estimation. However, weconduct several post hoc analyses of all Fortune 500firms to see if our findings are supported in a moregeneralized setting. In Table 2, we describe the con-structs, definitions, measures, and data sources.

4.2. Measures

4.2.1. Long-Term Financial Performance. Consis-tent with the extant marketing literature (Mittal et al.2005), we used Tobin’s q to measure long-term finan-cial performance for the following reasons. First, thisforward-looking, risk-adjusted measure enabled us toevaluate the effect of structure on firm performance.Tobin’s q captures both the beneficial effects due toimprovements in customer satisfaction and the detri-mental effects of increases in coordinating cost. Sec-ond, Tobin’s q is not vulnerable to the distortionfrom tax laws or latitude in interpreting regulations(Anderson et al. 2004, Fang et al. 2008). Using theCOMPUSTAT Industrial Annual database, we opera-tionalized Tobin’s q with Chung and Pruitt’s (1994)method: Tobin’s q = (MVE + PS + DEBT)/TA, whereMVE is the closing prices of shares at the end of thefinancial year × number of common shares outstand-ing; PS refers to the liquidation value of outstandingpreferred stock; DEBT indicates (current liabilities −

current assets) + (book value of inventories) + (long-term debt); and TA is the book value of total assets.

4.2.2. Customer Satisfaction and CoordinatingCosts. We measured customer satisfaction, the over-all evaluation of a customer’s experience with the

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Table 2 Constructs, Definitions, Measurements, and Data Sources

Constructs Definitions Measures (references) Data sources

Long-term financialperformance

Overall level of a firm’s long-termfinancial performance

Tobin’s q (Chung and Pruitt 1994). COMPUSTAT Annual IndustrialFiles

Customer satisfaction Overall evaluation of a customer’sexperience with firms’ products orservices

American Customer Satisfaction Index score (Ittneret al. 2009, Mittal et al. 2005).

National Quality Research Centerat the University of Michigan

Coordinating costs Expenses incurred from managinginterdependent functional activitiesacross internal units, suppliers, andcustomers

Subtracting expenses for advertising, R&D, software,bad debt, and pension and retirement from selling,general, and administrative expenses (billions ofdollars) (Im et al. 2013, Shin 2003, Ray et al.2009).

COMPUSTAT Annual IndustrialFiles

Customer-centricorganizationalstructure

An organizational design where a firm’shighest-level business units arealigned to distinct customer groups

Dummy variable measured as 1 if a firm has acustomer-centric structure and 0 if a firm has aninternally-aligned structure (Day 2006, Homburget al. 2000, Shah et al. 2006).

Form 10-Ks and 10-Qs underStatement of FinancialAccounting Standards (SFAS)No. 131

Competitors’customer-centricstructure

The extent to which competitors withinthe same industry have adopted acustomer-centric structure

The percentage of Fortune 500 firms with acustomer-centric structure for each industry,identified by four-digit Standard IndustrialClassification (SIC) codes.

Form 10-Ks and 10-Qs underSFAS No. 131, andCOMPUSTAT Annual IndustrialFiles

Competitive intensity The degree of rivalry among competitorsin an industry

Herfindahl’s concentration index, or the sum ofsquared shares of firms in the industry at thefour-digit SIC level. We subtracted theconcentration ratio from 1 to measurecompetitiveness because we are interested incompetition rather than concentration (McAlisteret al. 2007).


Industry profitability The extent to which the industry isprofitable

The average return on assets of publicly traded firmsoperating in the same four-digit SIC industry(Bowen and Wiersema 2005).


Firm scope The extent to which the firm operates in alarger set of independent marketsegments

The number of distinct four-digit Business SegmentSIC in which the firm operates (Rao et al. 2004).

COMPUSTAT Business Segments

Firm size Size of the firm Natural log of the total assets in the firm. COMPUSTAT Annual IndustrialFiles

Service ratio Firm’s share of sales revenue generatedby services versus products

The percentage of sales revenues in all servicebusiness segments compared with the total salesrevenue of each firm in a given year (Fang et al.2008).

COMPUSTAT Annual IndustrialFiles, and COMPUSTATBusiness Segments

Restructuring charges One-time costs attributed to restructuringevents

The aggregate restructuring charges in years t andt−1 scaled by the firm’s year t marketcapitalization (Doyle et al. 2007).


Industry growth Rate of sales growth within an industry We regress industry sales (four-digit SIC) over time,using a three-year window. Then, we normalizethe industry’s growth coefficient by the averageindustry sales for those years (Fang et al. 2008).


Regulated industry Industry which is significantly regulatedby the state or federal government

Dummy variable measured as 1 if a firm’s primarySIC begins with 4 (transportation, communication,and utilities), 6 (financial), and 9 (publicadministration); otherwise 0 (Servaes 1994).


firm’s products or services, using the ACSI score(Ittner et al. 2009, Mittal et al. 2005). Consistent withprior studies employing coordinating costs to capturethe expenses incurred from managing interdependentfunctional activities across internal units, suppliers,and customers, we operationalized coordinating costswith reported selling, general, and administrative(SG&A) expenses, which capture nonproduction over-head expenses due to customer-supporting activities,business inefficiencies, or other administrative laborcosts (Im et al. 2013, Shin 2003, Ray et al. 2009).

The coordinating cost measure is not as preva-lent in the marketing literature as customer satisfac-tion. Thus we adopt the measure from managementand operations research, which also endorses that“SG&A is an appropriate surrogate for coordinationcosts” (Im et al. 2013, p. 7). SG&A has been the basisfor secondary research on coordinating costs sinceStrassmann (1999) experimented with several metricsavailable from public sources and found it to be thebest metric of information and process managementof functional activities. The main advantages of SG&A

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as a measure of coordinating costs are its objectivityand availability for all the publically traded firms inthe United States across various industries and timeperiods. This availability allow researchers to studythe relationship of coordinating costs to other keyconstructs while parsing out variance due to industrypractices, firm-specific factors, and temporal shocks.Yet, a disadvantage of using SG&A as a proxy forcoordinating costs is that reported values of SG&Ainclude expense items that do not fit with the defini-tion of coordinating costs. To overcome this weakness,we subtracted the irrelevant items (i.e., R&D, adver-tising, software, bad debt, and pension and retire-ment expenses) from SG&A. To better explain thisdecision, we show the itemized expenses of SG&Aprovided by the User’s Guide for COMPUSTATand their relation with coordination costs in WebAppendix A (available as supplemental material athttp://dx.doi.org/10.1287/mksc.2014.0878). We alsoconduct robustness checks with alternate measures.

4.2.3. Customer-Centric Structure. At the corpo-rate level, customer-centric structure manifests asan organizational design where a firm’s highest-level business units are aligned to distinct customergroups. Accordingly, we adopted a dummy variableoperationalization, coded as 1 if a firm exhibited acustomer-centric structure and 0 if it has an internallyaligned structure (Day 2006, Homburg et al. 2000,Shah et al. 2006). We used unit operating segmentinformation from Forms 10-K and 10-Q, which offeredtwo advantages. First, according to the Statementof Financial Accounting Standards (SFAS) No. 131,these forms provide information about a firm’s struc-ture: “the segments are evident from the structureof the enterprise’s internal organization” (FinancialAccounting Standards Board 1997, p. 6), and the seg-ment information is “regularly reviewed by the enter-prise’s chief operating decision maker, so it reflectsthe internal structure in place at that time” (p. 7). Sec-ond, legally required reports of structure are trans-parent and less subject to “management’s latitude”(Ettredge et al. 2005, p. 776).

Two researchers who are experts in organiza-tional design independently reviewed each firm’s10-K and 10-Q information. They classified the struc-ture as either customer centric or other (i.e., inter-nally aligned structure). An example of a state-ment indicating a customer-centric structure is “During2007, we realigned our reportable operating segmentsto reflect the reorganization of our businesses intotwo customer-focused groups—the Global ConsumerGroup and the Global Business-to-Business Group”(American Express Company 2007, p. 1). An exampleof a statement indicating an internally aligned struc-ture is “Our segments are strategic business units

that offer different products and services over vari-ous technology platforms and are managed accord-ingly. We have four reportable segments: (1) wire-less, (2) wireline, (3) advertising & publishing and(4) other.” (AT&T Inc. 2008, p. 10). As discussed inour background discussion of customer-centric orga-nizational structures, it is not unusual to find var-ious structures at lower layers of the organization,but we focus on top-level structure because it isobservable and assumed to be impactful. Our levelof analysis empirically tests the assumption that acustomer-centric structure at the firm’s highest leveltranslates to higher customer satisfaction and perfor-mance despite structural design at lower levels of theorganization.

Single business unit companies were classified asinternally aligned as per established practice in orga-nizational design, to reflect the tendency for respon-sibilities organized by functional specialty within agiven unit (Hoskisson et al. 1993). To limit discrep-ancies in cases where descriptions of divisions werenot obviously customer centric, conservative codingcriteria were adopted. The coding criteria requiredeach division in a customer-centric structure to servea distinct part of the market; firms were coded asnot having a customer-centric structure if descrip-tions of divisions indicated that multiple divisionsmight serve the same customer. Overall, disagreementbetween the two researchers occurred less than 7%of the time, which was resolved with discussion. Weprovide a description of the coding procedure in WebAppendix B.

We excluded firms from the analysis if they hada pure geographical structure because what “mat-ters” in a geographical structure is the structuralform within the geography. Specifically, (Egelhoff1988, p. 3) characterizes a geographical structure as:“Each [geographic] headquarter is responsible for allof the company’s products and business within itsgeographical area 0 0 0 [so] this structure tends to coor-dinate around, and optimize, performance within ageographical area.” That is, a geographical structureis determined under the top level and can be eitherinternally or externally focused. Less than 10% (e.g.,6.4% in 1998, 9.3% in 2010) of the Fortune 500 con-sisted of firms with a pure geographic structure; wedropped them from the analysis.

In some cases, firms have a geographic hybridstructure, creating for example, product-geographyor customer-geography hybrid structures. With ourfocus on customer-centric versus internally alignedstructures, we classified product-geography hybridsas internally aligned structures and customer-geography hybrids as customer-centric structures ifsales from geographical units accounted for less

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than 50% of the firm’s total sales. Sensitively anal-ysis revealed that the results were similar when weexcluded all hybrid structures from the sample.

4.2.4. Competitive Environment. We define com-petitors’ customer-centric structure as the extent towhich competitors within the same industry haveadopted a customer-centric structure. For each indus-try, identified by four-digit standard industrial classi-fication (SIC) codes, we calculated the percentage ofFortune 500 firms with a customer-centric structure.Over our study period, competitors’ customer-centricstructure increased by 41.3% among the Fortune 500.Competitive intensity was measured with Herfindahl’sconcentration index, or the sum of squared sharesof firms in the industry at the four-digit SIC level(McAlister et al. 2007). Key attributes of competi-tive industries are (1) the presence of many smalland medium-sized firms and (2) the absence of mar-ket leaders with the power to shape industry events(i.e., low concentration ratio), so we subtracted thefirm concentration ratio from 1 to measure com-petitiveness. The average competitive intensity scoredecreased by 5.1% for the Fortune 500 over the sam-ple period. Industry profitability was measured as theaverage return on assets in the four-digit SIC primaryindustry of the firm (Bowen and Wiersema 2005).Average industry profitability increased by 9.1% forthe Fortune 500 over the sample period. Firm scope wasoperationalized as the number of distinct four-digitbusiness segment SIC in which the firm operates (Raoet al. 2004). The average competitive intensity scoredecreased by 1.4% for the Fortune 500 over the sampleperiod.

4.2.5. Control Variables. We considered nine con-trol variables capturing a comprehensive set of time-varying firm and industry characteristics that couldpotentially affect all three outcomes (i.e., customersatisfaction, coordinating cost, and financial perfor-mance).2 We include the main effects of the four mod-erators on all outcomes. More specifically, we con-trolled for firm size, measured as the natural log ofthe total assets in the firm, because larger firms tendto have higher coordinating costs but also tend tobe more profitable. We also used service ratio, mea-sured as the percentage of a firm’s sales from ser-vice segments (Fang et al. 2008), because firms sellingservices may gain more value from being customercentric because of the added complexity of sellingservices. To isolate any one-time, immediate changesin all outcomes because of a firm’s restructuring, wecontrolled for restructuring charges, using the aggre-gate restructuring charges in years during and before

2 We thank the review team for recommending a comprehensive setof control variables.

switching, scaled by the firm’s year t market capital-ization (Doyle et al. 2007). To identify restructuringcharges, we used nonzero values of the COMPUS-TAT data items: restructuring costs pretax, restructur-ing costs after-tax, restructuring costs basic EPS effect,or restructuring costs diluted EPS effect. To accountfor industry trends, we controlled for industry growth.To measure it, we regressed industry sales (four-digit SIC) over time (three-year window) to obtainthe industry’s growth coefficient, and we normalizedthis coefficient by industry size (Fang et al. 2008). Asindustry regulation may affect a firm’s policy choices,we controlled for regulated industry using a dummyvariable: 1 if a firm’s primary SIC begins with 4 (trans-portation, communication, and utilities), 6 (financial),and 9 (public administration), otherwise 0 (Servaes1994). We provide descriptive statistics and correla-tions in Web Appendix C.

4.3. Model SpecificationTo test H1–H5, we employed a specification that dis-entangles the positive and negative mediating mecha-nisms driving the effects of customer-centric structureon financial performance. We estimated the followingequations for firm i in time period t:

CSATit = �10i +�11CCSit +�12CCSit × CMPCCSit

+�13CCSit × CMPINTit +�14CCSit

× INDPRFit +�15CCSit × SCOPEit

+Á16Zit + �1it1 (1)

COSTit = �20i +�21CCSit +Á22Zit + �2it1 (2)

PERFit = �0i +�1CSATit +�2COST it +�3CCSit

+Â4Zit + �3it1 (3)

where CSAT is customer satisfaction; COST denotescoordinating costs; PERF is long-term financial per-formance; CCS is customer-centric structure dummy;CMPCCS is competitors’ customer-centric structure;CMPINT is competitive intensity; INDPRF is indus-try profitability; and SCOPE is a firm’s scope. Avector Z comprises nine control variables: competi-tors’ customer-centric structure, competitive intensity,industry profitability, firm scope, firm size, serviceratio, restructuring charges, industry growth, and reg-ulated industry.

In Equation (1) (i.e., the positive mediating path),customer satisfaction is the dependent variable, �11captures the main effect of customer-centric structureon customer satisfaction, �12, �131�14, and �15 repre-sent the moderating effects of competitors’ customer-centric structure, competitive intensity, industry prof-itability, and the scope of a firm, respectively, onthe effect of customer-centric structure on customer

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satisfaction. Also, Á16 is the parameter vector cor-responding to the nine control variables in Z. Wespecify a random intercept term denoted by �10i, tocapture unobserved heterogeneity in customer satis-faction due to firm-specific idiosyncratic reasons overand beyond the hypothesized variables and nine con-trol variables. We mean centered moderators to aid ininterpretation (Spiller et al. 2013).

In Equation (2) (i.e., the negative mediating path),coordinating costs is the dependent variable, and �21captures the main effects of customer-centric struc-ture on coordinating costs. Similar to Equation (1), weinclude the nine control variables in Z, whose effectsare captured by the parameter vector Á22, and spec-ify a random intercept term denoted by �20i, to cap-ture unobserved heterogeneity in coordinating cost.In Equation (3), the parameters are the performanceeffects of customer satisfaction (�15, coordinating costs(�25, and customer-centric structure (�35. We includeda direct effect of customer-centric structure on perfor-mance, for model completeness (i.e., to capture theeffect of customer-centric structure on performance,beyond the variation explained by mediation paths).Also, the parameter vector Â4 captures the effects ofthe nine control variables in Z and the random inter-cept term �0i captures unobserved heterogeneity infirm performance over and beyond the hypothesizedvariables and nine control variables.

The error terms in Equations (1), (2), and (3) (�1it1�

2it ,

and �3it5 are normally distributed with zero means

and constant variances (�21 , �2

2 , and �23 , respectively),

but possibly correlated since myriad industry andeconomic conditions could potentially affect all out-comes. Hence, we specify and estimate a full variance-covariance matrix (nine terms), thereby allowing forcorrelation across the three equations. Further, man-agers could set their structure strategically, in antic-ipation of actual performance or other unobservedfactors, the covariate �3 may be correlated withthe error term in Equation (3) (i.e., endogenous toperformance). We used a latent instrumental vari-able approach to correct for possible endogeneity(Ebbes et al. 2005, Zhang et al. 2009). That is, weused a binary, unobserved instrument to separate anobserved endogenous predictor into correlated versusuncorrelated components, with the error term in theEquation (3) estimation. Accordingly, we augment themodel specification for Equation (3) as follows:

PERFit = �0 +�1CSATit +�2COSTit +�3CCSIVit

+Â4Z2it + �3it1 (4a)

CCSit = CCSIVit + �CCS

it = �10 +�11w1it + �CCSit 0 (4b)

The slope coefficients in Equation (4a) are asdefined previously, but instead of the actual val-ues of a customer-centric structure, we used the

instrumented values, CCSIVit . The instrumented value

CCSIVit specified in Equation (4b) is a function of an

unobserved LIV, w1it , which follows a Bernoulli dis-tribution w1it ∼ B4�w15, where �w1 = P4w1it = 15 isthe instrument probability. Therefore, the observedcovariate consists of one part (w1it5 that is uncorre-lated with the error �3

it in the performance and onepart (�CCS

it 5 that is correlated with the error �3it . The

influence of the LIV on the observed customer-centricstructure can be captured by �11, whereas �10 is anintercept. By construction, w1it is uncorrelated withthe error term in Equation (4a) to ensure consistency.

We estimated all equations simultaneously usingMarkov chain Monte Carlo recursively sampling fromthe full conditional distributions of the model. Weassumed noninformative priors, normal distributionsfor the slope coefficients, and inverse gamma distribu-tions for the variance coefficients. The burn-in periodscontained 55,000 draws from the full conditional pos-terior distributions, and estimates were stable to thechoice of the burn-in period.

5. Estimation Results5.1. Test of HypothesesWe present the results of the estimation in Table 3,panels A–C. Panel A shows the results of Equation (1),and panels B and C show the results of Equations (2)and (3), respectively. In each panel, we confirm thestability of the estimates, by estimating and report-ing the model results in nested fashion. We report themodel with controls only (model 1 in Table 3), modelwith controls and main effects (model 2 in Table 3),and model with controls, main effects, and moder-ating variables (model 3 in Table 3). For hypothesistesting, we use the third and final model.

We find that customer-centric structure had a pos-itive but insignificant effect on customer satisfaction(posterior mean �11 = 00304, not significant). How-ever, the positive effect of customer-centric structureon customer satisfaction was moderated negativelyby both competitors’ customer-centric structure (�12 =

−00944, zero not in the 95% credible interval [CI])and competitive intensity (�13 = −00629, zero not inthe 90% CI), in support of H2A and H2B. The posi-tive effect of customer-centric structure on customersatisfaction also was moderated positively by indus-try profitability (�14 = 10195, zero not in the 90% CI),in support of H2C. Yet, we do not find support forH2D because firm scope does not significantly mod-erate the positive effect of customer-centric structureon customer satisfaction (�15 = 00059, not significant).

As predicted in H3, a customer-centric structureincreased the coordinating costs (�21 = 20691, zero notin the 95% CI). Also, in support of H4, customersatisfaction enhanced performance (posterior mean

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Table 3 Estimation Results: Effect of Customer-Centric Structure on Long-Term Financial Performance Mediated by Customer Satisfaction andCoordinating Costs

Model 1 Model 2 Model 3Controls only Control and main Control, main, and

effects interactions

Estimate Estimate EstimateHypothesis Mean SD Mean SD Mean SD

A. Effect of customer-centric structure on customer satisfaction (DV: Satisfaction) (DV: Satisfaction) (DV: Satisfaction)Intercept 790576∗∗ 10381 820127 40374 700622 40602Main effect

Customer-centric organizational structure H1 (+) 10337∗∗ 00495 00304 00739Moderating effects

Customer-centric structure × Competitors’customer-centric structure H2A (−) −00944∗∗ 00402

Customer-centric structure × Competitive intensity H2B (−) −00629∗ 00365Customer-centric structure × Industry profitability H2C (+) 10195∗ 00682Customer-centric structure × Firm scope H2D (+) 00059 00097

Control variablesCompetitors’ customer-centric structure 00000 00063 00035 00064 −00008 00059Competitive intensity −40244∗∗ 10180 −30701 10029 −40643∗∗ 10043Industry profitability −00044 20399 10171 20338 10766 20286Firm scope −00113 00122 −00075 00116 −00191 00135Firm size −00117∗ 00074 −00369 00347 00746∗∗ 00442Service ratio −20641∗∗ 00776 −20855∗∗ 10575 −10642∗∗ 00640Restructuring charges −00156 00177 −00152 00176 −00053 00188Industry growth −20684∗∗ 00679 −20697∗∗ 00702 −20294∗∗ 00660Regulated industry −20574∗∗ 00583 −30018∗∗ 00591 −20772∗∗ 00690

B. Effect of customer-centric structure on coordinating costs (DV: Costs) (DV: Costs) (DV: Costs)Intercept 50564∗∗ 10710 −20718 130874 160885∗∗ 90421Main effect

Customer-centric organizational structure H3 (+5 10501∗∗ 00826 20691∗∗ 00599Control variables

Competitors’ customer-centric structure 00011 00027 00004 00035 −00005 00031Competitive intensity −00881∗∗ 00291 −30287∗∗ 10264 −30085∗∗ 00791Industry profitability −00164 00406 30944 30942 00262 10208Firm scope −00441∗∗ 00053 −00437∗∗ 00180 −00451∗∗ 00139Firm size −00065 00159 00741 10400 −10126∗∗ 00891Service ratio −10983∗∗ 00107 −10276 10050 −40344∗∗ 10269Restructuring charges −00021 00081 00027 00140 −00189∗ 00127Industry growth −00487∗∗ 00351 −00469 00580 −10207∗∗ 00589Regulated industry −10454∗∗ 00062 −10622∗∗ 00523 −00884∗∗ 00348

C. Effects of satisfaction and costs on long-term financial performance (DV: Performance) (DV: Performance) (DV: Performance)Intercept 210484∗∗ 50286 00155 80612 −80552 60347Mediating mechanisms

Customer satisfaction H4 (+5 30126∗∗ 10265 30685∗∗ 30279 60367∗∗ 20488Coordinating costs H5 (−5 −70573∗∗ 00399 −20548∗∗ 20409 −20122∗∗ 00596

Main effectCustomer-centric organizational structure 30938 30883 −20169∗∗ 00797

Control variablesCompetitors’ customer-centric structure 00071 00207 00048 00140 −00037 00074Competitive intensity −40295∗ 20594 −30229 30942 −20182 20867Industry profitability 00633 20872 20944 10682 10121 20269Firm scope −30345∗∗ 00551 −00713∗∗ 00626 −00896∗∗ 00608Firm size −00712 10142 −10590 10529 −20732∗∗ 10574Service ratio −130900∗∗ 00607 −30900 30954 −70189∗∗ 00363Restructuring charges −00237 00602 −00230 00297 −00483∗ 00279Industry growth −20468 20336 −00808 10516 −00585 10109Regulated industry 100230∗∗ 10163 −20266∗∗ 10894 −00178 00602

Notes. We tabulated posterior means and standard deviations of the parameters. All coefficients in panels A, B, and C were estimated simultaneously using aBayesian mediation analysis.∗The 90% credible interval does not contain zero (two-sided); ∗∗the 95% credible interval does not contain zero (two-sided).

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�1 = 60367, zero not in the 95% CI). Finally, coordinat-ing costs significantly decreased performance (�2 =

−20122, zero not in the 95% CI) in support of H5.Following Zhang et al. (2009), we conducted a

Bayesian mediation analysis to determine if the effectof customer-centric structure on performance wasmediated by satisfaction and coordinating costs. Wefound that the mediating process through customersatisfaction depends on the value of moderators. Atthe mean levels of moderators, the indirect effect ofcustomer-centric structure on performance throughcustomer satisfaction was positive but not significant(posterior mean = 0.444, not significant). The indirecteffect of customer-centric structure on performancethrough coordinating costs was negative and signif-icant (posterior mean = −50388, zero not in the 95%CI). Thus, coordinating costs mediated the effect ofcustomer-centric structure on performance, but themediated path through customer satisfaction is con-tingent on the competitive environment.

5.2. Sensitivity Analyses

5.2.1. Alternative Operationalization of Customer-Centric Structure. To enhance confidence in our find-ings, we tested our results with an alternative mea-sure of a customer-centric structure. We performed ananalysis on 111 firms with pure organizational struc-tures (i.e., excluding firms with product-geography orcustomer-geography hybrid structures). As model 1 inTable 4 shows, the results were substantively similarto those obtained from the main model.

5.2.2. Alternative Operationalization of Coordi-nating Costs. We examined two alternative measuresof coordinating costs. SG&A is the preferred basis forsecondary metrics capturing coordinating costs (Rayet al. 2009), but not every expense reported underSG&A fit with the definition of coordinating costs. Toconstruct our original measure of coordinating costs,we subtracted the irrelevant items (i.e., R&D, adver-tising, software, bad debt, and pension and retire-ment expenses) from the overall value reported forSG&A. As our first alternative, we used an adjustedSG&A without advertising expenses to exclude allcosts for the use of media and advertising agencyservices but retain R&D costs. Second, we used anadjusted SG&A that subtracted only R&D expenses,but included advertising costs. These sensitivity tests,as represented by models 2 and 3 in Table 4, revealedrobust results with respect to the alternative measuresof coordinating costs. Also, for model free evidence,we compared coordinating costs as a percentage ofsales between firms with internally aligned struc-tures and customer-centric structures; always findingat least a 29% higher value for customer-centric struc-tures regardless of our construction of coordinatingcosts from SG&A.

5.2.3. Additional Alternative Model Specifica-tions. To examine the sensitivity of our results tothe potential bias that could result from the directeffect of the customer-centric structure in the perfor-mance equation (Equation 3), we tested the modelwithout the direct path. As model 4 in Table 4 shows,the findings were consistent. Also, we confirmed thatthe inclusion of lagged performance in the perfor-mance equation (model 5 in Table 4), which cap-tured dynamics in performance, does not change thesubstantive results. Finally, it is possible that firmscould obtain differential rewards to customer-centricstructures, either because they receive different posi-tive performance effects of customer satisfaction (�15,receive different negative performance effects of coor-dinating costs (�25, or because the main and moder-ation effects of customer-centric structure on the pos-itive customer satisfaction pathway (�11 − �155 or thenegative coordinating cost pathway (�215 differ acrossfirms. To account for these various differential effects,we allow for unobserved heterogeneity in the slopecoefficients (in addition to the intercept) and verifythat our results are similar. Specifically, to be system-atic, we estimated eight additional models over andabove the base model (model 3 in Table 3) wherewe specified one of the eight hypothesized coeffi-cients (pertaining to H1, H2A, H2B, H2C, H2D, H3,H4, and H5, respectively) to have a random slopestructure, and tested the hypotheses with the resul-tant estimated. The results across all eight models(not reported here because of brevity but availablefrom the authors upon request) indicate that sub-stantive insights pertaining to the hypotheses remainunchanged.

6. DiscussionConventional wisdom implies that firms with acustomer-centric structure outperform their competi-tors. Presumably acting on this belief, the proportionof Fortune 500 firms with a customer-centric structurehas increased by nearly 50% in the past decade. Yetmany firms have failed to achieve the expected per-formance improvements, begging the question, whendoes customer-centric structures exhibit superior per-formance over internally aligned structures?

We have proposed and tested a model of the effectsof customer-centric structure on long-term financial per-formance, with a focus on understanding how andwhen a firm’s customer-centric structure affects firmperformance. Our finding shows that a customer-centric structure enhances performance by increasingcustomer satisfaction but degrades performance byadding to coordinating costs. We verify that customer-centric structures can provide external benefits asis often claimed by executives initiating reorgani-zation. Thus, attaching the “customer-centric” label

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Tabl

e4

Sens

itivi

tyAn

alys

is:A

ltern

ativ

eM

easu

res

and

Mod

elSp

ecifi

catio

ns

Mod

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Mod

el2

Mod

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Mod

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Mod

el5

Alte

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IV:

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rnat

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Alte

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ting

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natin

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nodi

rect

effe

ctof

CCS

offin

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al(n

ohy

brid

)SG

&A-

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rtisi

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R&D

onpe

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Estim

ate

Estim

ate

Estim

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Estim

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Estim

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Hypo

thes

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SDM

ean

SDM

ean

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A.Ef

fect

ofcu

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n(D

V:Sa

tisfa

ctio

n)(D

V:Sa

tisfa

ctio

n)(D

V:Sa

tisfa

ctio

n)(D

V:Sa

tisfa

ctio

n)(D

V:Sa

tisfa

ctio

n)In

terc

ept

7300

2930

044

7106

16∗∗

3023

07206

67∗∗

3053

37605

46∗∗

1094

57308

11∗∗

1083

0M

ain

effe

ctCu

stom

er-c

entri

cor

gani

zatio

nals

truct

ure

H1(+

510

712∗

∗00

651

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000

643

0063

500

621

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1∗∗

0052

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∗00

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Mod

erat

ing

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8Cu

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nsity

H2B

(−)

−00

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0045

2−

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8∗00

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−00

635∗

0037

8−

0094

6∗∗

0046

8−

0071

200

460

Cust

omer

-cen

tric

stru

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e×In

dust

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C(+

510

373∗

0070

310

225∗

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910

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410

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510

334∗

0069

8Cu

stom

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ure×

Firm

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5−

0065

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0004

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0005

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−00

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∗00

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0013

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ntro

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lity

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ges

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0020

7−

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0018

1−

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900

172

−00

098

0017

4In

dust

rygr

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−20

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Cost

s)(D

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(DV:

Cost

s)(D

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(DV:

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s)In

terc

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1000

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Tabl

e4

(Con

tinue

d)

Mod

el1

Mod

el2

Mod

el3

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el4

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el5

Alte

rnat

ive

IV:

Alte

rnat

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and

cost

son

long

-term

finan

cial

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(DV:

Perf

orm

ance

)(D

V:Pe

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(DV:

Perf

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)(D

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(DV:

Perf

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)In

terc

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8086

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340

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∗00

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∗00

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natin

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post

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nsan

dst

anda

rdde

viat

ions

ofth

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eter

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lcoe

ffici

ents

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A,B,

and

Cw

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ated

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iatio

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∗Th

e90

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(two-

side

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(two-

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d).

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eser

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to a corporate structure aligned with distinct cus-tomer groups appears appropriate. Yet, firms withthese externally aligned structures simultaneouslyincur higher internal costs (complex communication,adding boundary spanners). We offer the empiricaldemonstration that customer satisfaction and coordi-nating costs mediate the effects of customer-centricstructures on performance. Thus, the net performanceeffect depends on whether the external benefits gen-erated exceed the internal costs incurred. Neglect-ing these trade-offs can create misguided manage-rial expectations about the returns from shifting toa customer-centric structure. This finding is espe-cially interesting in light of recent research thatsuggests firms simultaneously pursue improvementsto both customer satisfaction and efficiency follow-ing a corporate merger (Swaminathan et al. 2014).Mergers present an opportunity for corporate levelrestructuring; however, our findings caution that acustomer-centric structure does not always facilitatethe simultaneous pursuit of improvements to cus-tomer satisfaction and efficiency.

Moreover, the trade-off between positive and neg-ative mediating pathways varies with the firm’senvironment, because customer satisfaction bene-fits depend on competitive forces external to thefirm. Our results indicate that increased customer-specific knowledge and commitment, as provided bya customer-centric structure, become less valuablewhen many competitors also adopt customer-centricstructures, which reduces the firm’s unique advan-tage; when many, highly focused competitors effec-tively meet customer needs already (i.e., higher com-petitive intensity); and when few customers desiregreater customization and responsiveness (as indi-cated by lower industry profitability). Thus, man-agers should evaluate their competitive environmentto understand if shifting to a customer-centric struc-ture is appropriate for them.

6.1. Managerial TakeawaysTo provide managerial insight into how the perfor-mance impact of a customer-centric structure variesacross competitive conditions, we conducted two posthoc analyses. For both analyses, we were able toinclude the full set of all Fortune 500 firms (1998–2010)because we no longer required ACSI data to measurecustomer satisfaction as a mediator. In our first posthoc analysis, we split the Fortune 500 into high (topquartile) and low (bottom quartile) groups for each ofthe significant moderating variables, and then com-pared the average long-term financial performance(Tobin’s q) of firms with a customer-centric structureversus those with internally aligned structures acrossthese groups. This approach is independent of modelspecification and generalized to the larger sample.

Firms with a customer-centric structure that hadfew competitors also adopting a customer-centricstructure (bottom 25% of competitors have customer-centric structure) performed 8% better than peer firmswith an internally aligned structure. This providesevidence that structuring around customer groupspays off for Fortune 500 firms whose competitorsdo not have customer-centric structures. In contrast,customer-centric firms that had many competitorsalso adopting a customer-centric structure (top 25%)exhibited 23% lower performance, on average, whenthey also had a customer-centric versus internallyaligned structure. This suggests that greater customersatisfaction fails to materialize from a customer-centric structure in this context, but coordinating costsare still higher.

Firms operating in a less competitive market (bot-tom 25% of competitive intensity) and structuredaround customers performed 3% lower than firmsnot structured around customers. Yet, firms that oper-ated in a competitive market (top 25% of compet-itive intensity) had 21% lower performance whenthey organized around customer groups instead of aninternal basis. This post hoc finding that aligning afirm’s structure around customers is more detrimen-tal for firms that operate in highly competitive mar-kets is consistent with our empirical finding that thebenefits of customer-centric structure is suppressed ascompetitive intensity increases. Firms in a less prof-itable industry (lowest 25% of industry profitability)and aligned with customers performed 18% lowerthan firms not aligned with customers. In contrast,firms with a customer-centric structure that operatedin industries with high profitability (top 25%) yielded10% higher performance than their internally alignedpeers. Aligning around customers paid off very wellfor Fortune 500 firms that operated in a more prof-itable industry.

These findings provide managers with somecaveats to consider before realigning their struc-tures around customer groups. First, adopting acustomer-centric structure enhances firm performanceby increasing customer satisfaction, but damages per-formance by increasing coordinating costs. Second,the net effect appears most positive where customersatisfaction gains are the likeliest: (1) when few com-petitors adopt customer-centric structures, (2) whencompetitive intensity is lowest, and (3) when a firmoperates in a highly profitable industry.

As a second post hoc analysis, we illustrate afew firms with their peers who have customer-centric structures or not and hence reap the bene-fit of customer-centric structure. Oshkosh Corporationand Avnet, Inc. both shifted from internally alignedto customer-centric structures, but Oshkosh’s orga-nizational change yielded a significant performance

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improvement (+46% in Tobin’s q), whereas Avnetrestructuring decreased firm performance (−29%in Tobin’s q). The performance differences maystem from their relative difference in competitors’customer-centric structure: Oshkosh had fewer com-petitors with customer-centric structures (the percent-age of Fortune 500 firms with a customer-centric struc-ture was lower by 86% on average). Thus, Oshkosh’srestructuring provided incremental centricity benefitsthat outweighed their costs. Avnet operated in com-petitive environments where unmet customer needsare not scarce, so its restructuring offered little incre-mental benefit while adding cost and complexity.

6.2. Limitations and Future ResearchThis research has limitations that offer opportunitiesfor future research. First, the nature of our sample—Fortune 500 firms for which customer satisfactiondata were available—limits our results to large, pub-licly traded, U.S. firms. Our findings appear robustin our additional analyses but should be general-ized only with caution to smaller firms. Also, futureresearch should examine cross-country differences inthe effects of customer-centric structures.

Second, the use of 10-K and 10-Q statements lim-ited our measure to capture only if the top-level divi-sion sells to distinct customer groups. We used strictinter-rater reliability criteria, and performed multiplerobustness checks to validate that our results remainunchanged based on variations in the measure’s oper-ationalization, but we acknowledge that our approachis only one way of measuring a heretofore under-studied and interesting construct. Thus, we encour-age replications of our results with survey measures.Future research should further enrich our measureby integrating mid-level and low-level firm organi-zational structures (e.g., sales teams, marketing orga-nization) with the use of complementary methods.It would be helpful to compare the potential directinfluence of top-level structure on customer satisfac-tion and performance with the potential effects of top-level structure on those outcomes through its influ-ence on dictating lower-level structure. Although ourmodel controlled for firm level unobservable factors,it would be interesting for future research to explic-itly identify the impact of processes, culture, metrics,and other important aspects of a fully customer-centric organization, and examine how these orga-nizational design elements interact with customer-centric structures.

Future studies should continue to integrate theorganizational structure as a key variable in market-ing models and recognize how firms use their struc-ture to achieve various marketing objectives. Givenour data confirms the expected, but contingent, link

between top-level customer-centric structure and cus-tomer satisfaction, future research could add rich-ness by incorporating a customer-driven perspectivewhen studying the role of organizational structure(Lee et al. 2014). Organizational structure determineshow units and employees inside of the firm interactwith each other and ultimately with customers whoreside outside of the firm, a firm’s structural designmay leverage various marketing objectives (e.g., inno-vation, channel relationships, branding, and corpo-rate social responsibility). To aid in the discovery ofwhen a customer-centric structure is appropriate, itis worth uncovering the antecedents of a customer-centric structure among firms currently adopting sucha design. Are they acting myopically, copying eachother, or reading market signals appropriately? Inaddition to the variables we propose, other structuraldesign elements may be investigated (e.g., central-ization, formalization, team structure) (Hauser et al.2006). Executives who make restructuring decisionswithout sufficient evidence to support their choicesmay suffer unintended consequences that underminemarketing capabilities and performance. For example,acquisition, divesture, and business unit design deci-sions often focus on financial portfolio or manage-ment issues, rather than on the core marketing con-cern of satisfying customers.

Supplemental MaterialSupplemental material to this paper is available at http://dx.doi.org/10.1287/mksc.2014.0878.

AcknowledgmentsThe authors thank the Marketing Science Institute for sup-porting this research. The authors thank Ajay K. Kohli,Rajdeep Grewal, Eric Fang, Oliver J. Rutz, and Jonathan Z.Zhang for their valuable comments and suggestions. Thesecond author is also grateful to the Smeal College of Busi-ness for summer research funding that enabled this project.

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Effect of Customer-Centric Structure on Long-Term ... et al.: Effect of Customer-Centric Structure on Long-Term Financial Performance 2 Marketing Science, Articles in Advance, pp