See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/266467819

INDUSTRY VERSUS FIRM EFFECTS: WHAT DRIVES FIRM PERFORMANCE IN

CUSTOMER SATISFACTION?

Article · October 2011

CITATIONS READS

0 2,121

1 author:

Paul-Valentin Ngobo
Paris Dauphine University
47 PUBLICATIONS   760 CITATIONS   

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

The trajectory of the demand for socially desirable goods View project

All content following this page was uploaded by Paul-Valentin Ngobo on 08 February 2015.

The user has requested enhancement of the downloaded file.

 INDUSTRY VERSUS FIRM EFFECTS:
WHAT DRIVES FIRM PERFORMANCE IN CUSTOMER SATISFACTION?

Paul-Valentin Ngobo
Assistant Professor of Marketing,
The University of Montpellier II, School of Business Administration
Place Eugene Bataillon, 34095 Montpellier Cedex 5, France
(Phone): 04.67.14.49.23, (Fax): 04.67.14.42.42
E-mail: ngobo@iae.univ-montp2.fr

Abstract

Why do some firms satisfy their customers better than their immediate competitors? In this paper we
argue that firms’ differences in customer satisfaction are due to their industry conditions (or market
structure) and firm-specific effects, and that the impact of these two factors depend on the nature of the
firm’s offering. Industry effects should be more important for goods producing firms and retailers
while the firm effects should be more important for service firms. An analysis of 142 firms
participating in the American Customer satisfaction Index (ACSI) project over 1994 – 1997, using a
variance decomposition approach, shows that industry effects accounts for more variance in the
manufacturing and retailing sectors than firm-specific effects. The latter, however, are more important
in the service sector than industry effects.

Key words: Industry effects; Firm specific effects; Customer satisfaction

Acknowledgements: The author gratefully acknowledges the support of the National Quality Research
Center (NQRC) at the University of Michigan Business School and the American Society for Quality
Control (ASQC).
1. INTRODUCTION

Customer satisfaction has been extensively investigated by marketing scholars. One of the
major questions addressed in these studies has been to understand how consumption experience is
evaluated (Oliver, 1980) and how post-consumption evaluations affect subsequent behaviors (Anderson
and Sullivan, 1993). A more economic perspective to consumer satisfaction has however emerged
(Fornell, 1992) where satisfaction is studied at an aggregate level (Anderson, 1993). This perspective is
interesting as it enables researchers to investigate the economic and strategic implications of
satisfaction for the firm. For example, this approach allowed Anderson, Fornell and Rust (1997) to
investigate the relationship between firm-level customer satisfaction, productivity and profitability.
However, the question regarding why some firms satisfy their customers better than their immediate
competitors has not been the primary focus of many studies in marketing. Yet, the marketing literature
abounds in anecdotes on certain companies like British Airways, Southwest Airlines, and Sears
Roebuck that have been or are being regarded as success stories in customer satisfaction. Fornell and
Johnson (1993) offered a first explanation at the industry level. They showed that the companies which
offered manufactured goods were more disposed to satisfy their customers than those, which operated
in service, oriented industries. The rationale was based on the nature of the offer: it is easier to
differentiate, to standardize the production and the delivery of a good than a service. However, their
study did not investigate the relative impact of industry versus firm-specific effects on firm satisfaction
scores. The issue of the sources of firm performance in customer satisfaction is important for the
managers. Knowing the key factors of success in customer satisfaction makes it possible to know up to
what point a company can " control " the satisfaction of its customers. The main challenge for a
company, indeed, should be to create a sustainable competitive advantage in terms of customer
satisfaction in order to guarantee a good financial performance.
The problems of the success or the failure of the companies are the central theme of strategic
management (Porter, 1991). There is a line of research, in this field, that has been investigating whether
the firm profitability was the result of the market structure (e.g. the level of concentration, entry
barriers) or their own efforts (e.g. differences in resources and capabilities). The empirical studies,
however, present contradictory results. Some authors found that the characteristics of industry
explained more variance than firm specific effects (Schmalensee, 1985; Wernerfelt and Montgomery,
1988) while others observed the opposite (Rumelt, 1991; Roquebert et al. 1996; McGahan and Porter,
1997a). This contradiction of the results has been ascribed to the quality of the data (McGahan and
Porter, 1997b). Indeed, most of the studies in this line have used accounting measures such as return on
assets (Rumelt, 1991; Roquebert et al. 1996; McGahan and Porter, 1997a; 1997b; Mauri and Michaels,
1998) or market share (Wernerfelt and Montgomery, 1989; Chang and Singh, 1996) as firm
performance indicators. The reliability of the accounting measures however can be questioned on the
basis of the anomalies in reporting and measurements – e.g. different rules for booking R&D
expenditures across industries– which may generate distorted industry and firm effects. Similarly, the
positive association between market share and profitability has been questioned. A meta-analysis by
Szymanski et al. (1993) reveals that this positive association exists but the magnitude depends on
sample characteristics (e.g. industrial or consumer product businesses) or measurement characteristics
(e.g. ROI, ROA). The consequence may be a comparison of firms on an unequal scale or false proxies
of firm performance. Other studies instead have used Tobin’s q (Wernerfelt and Montgomery, 1988;
McGahan, 1997) as a measure of firm performance. Tobin’s q reflects the financial claimants’
expectations about the future value of the cash flows that will accrue to the firm assets. Yet, Tobin’s q
does not treat advertising (i.e. brand equity) or R&D expenditures (i.e. knowledge capital) as
capitalized assets but assumes that they are reflected in the value that financial claimants ascribe to the
firm assets.
1
 In this paper, we investigate the sources of the variation of firm performance using customer
satisfaction as a measure of firm performance. Indeed, competition among firms can also be assessed
from the customer perspective with satisfaction and retention rates as the primary indicators (Day and
Wensley, 1988). Customer satisfaction has, in fact, two advantages over traditional measures of firm
performance. First, satisfaction reflects customers’ responses to positional advantages (both in factor
and product markets) and precedes market share and profitability outcomes (Day and Wensley, 1988).
Indeed, it has been found that satisfaction results from perceived quality (i.e. product differentiation
strategy) and perceived value (i.e. cost - leadership strategy), to be positively associated with customer
retention (Fornell et al. 1996) and financial performance (Anderson et al. 1994; Ittner and Larcker,
1996). Similarly, customer satisfaction is a market-based asset that is likely to generate shareholder
value (Srivastava et al. 1998). The higher the value that can be provided to customers, the higher their
satisfaction and willingness to be involved in a relationship with the firm and, consequently, the higher
the potential shareholder value. The position in customer satisfaction achieved by a firm is also
strategically important as it attests of its vulnerability or effectiveness in defending its current
customers and future profits. Customer satisfaction scores achieved by a firm can, therefore, be viewed
as a measure of its performance and broken up between various sources. Our premise here is that, in a
competitive context, we can distinguish winners from losers by the customer satisfaction scores they
achieve over the years. The second advantage we associate with customer satisfaction is that it is a
forward-looking indicator just like Tobin’s q. Today’s satisfied customers are all things being equal,
tomorrow’s sales and profits. Thus, today’s performance in customer satisfaction is an indication of
tomorrow's performance. However, customer satisfaction measures that result from national barometers
(e.g. The Swedish Customer Satisfaction Barometer or the American Customer Satisfaction Index)
differ from measures of Tobin’s q. They reflect customers’ views which are collected by independent
institutions on the same scale and, as a consequence, provide the basis for firm comparison. Thus, in
this regard, customer satisfaction is a better indicator of performance than traditional accounting
measures.
Two major views on the sources of firm performance have emerged in the strategic
management literature: an industry view and a resource-based view. The industry view predicts that the
market structure should explain firm performance more than firm capabilities. The resource-based
view, however, argues that the analysis of firm differences in performance should start with their
differences in capabilities. In relation with these views, this paper addresses the following questions:
(1) what is the relative impact of industry (market structure) versus firm effects (resources and
capabilities) on a company’s performance in customer satisfaction? In other words, are the differences
in customer satisfaction across firms structurally determined or are they attributable to the specific
effort of the firm? And (2) does this influence vary across the sectors? For example, do industry effects
on customer satisfaction for the manufacturing firms differ from those of the retailers or service firms?
With this intention, we decompose the variance included in satisfaction scores
of 142 companies represented in the American Customer Satisfaction Index
(Fornell et al. 1996) between 1994 and 1997 into (1) the effects specific to each
industry or market, and (2) the effects specific to each company. The next section
thus discusses the theoretical background for this research. Then, we discuss the
general propositions regarding the effects of industry characteristics and firm-
specific effects on firm performance in customer satisfaction. Further, we describe
the data set, the modeling approach, present the results and conclude with a
discussion of the research implications and limitations.

2
2. THEORETICAL BACKGROUND

Why do some firms satisfy their customers better than their immediate competitors? Two
answers, reflecting the industry and the resource-based views, can be given to this question. The
industry view answer focuses on the industry effects that refer to the characteristics common to an
industry – e.g. concentration, advertising intensity, and product differentiation. These common industry
characteristics influence the variation in performance outcomes across firms operating in different
industries. For example, Lotus Development Corporation was viewed as a high performer in the late
1980’s because of its participation in the profitable PC software industry (McGahan and Porter, 1997c).
Firm effects, however, reflect the unique firm characteristics – e.g. differences in market share, brand
equity, human resources, differences in managerial competence – that influence the variation in
performance outcomes across firms within an industry. One example of firm effects cited by McGahan
and Porter (1997c) and Hallowell (1997) is Southwest Airlines’ performance in service quality that was
largely due to firm-specific factors. Southwest offered low price, convenience and reliability to
business travelers on short-haul flights between medium-sized cities; it achieved low operating costs
due to route selection, few onboard services (e.g. no need to serve meals) and highly committed
employees. While industry effects reflect similarities in response to market conditions, firm effects
reflect heterogeneity in resources and capabilities due to barriers to imitation and/or the inability to
renew or adapt firm resources and capabilities over time (Mauri and Michaels, 1998; Hunt and Morgan,
1995).
- Industry perspective to firm satisfaction scores
According to the classical industrial economists (Mason, 1939; Bain, 1956) industry structure
(e.g. entry barriers, concentration, product differentiation, market growth rate) determines firms'
strategies (e.g. choice of key decision variables such as price and quality), which in turn determine firm
performance (e.g. innovativeness, increased customer satisfaction and retention, market share, cost
minimization, profitability). Thus, firm performance should be related to its industry conditions.
Although this literature has primarily dealt with firm profitability, its extension to other measures of
firm performance is straightforward. The implication in terms of customer satisfaction, for example, is
that a difference in satisfaction scores between firms, say, in the automotive and airline industries,
should be associated with the fact that firms in the automotive industry are affected by and respond to
different industry characteristics compared with those firms in the airline industry. As a result, there
should be a convergence in the competing profiles and performance of the automotive firms but a
divergence with firms operating in the airline industry. The industry school also accepts intra-industry
differences in performance when firms pursue different strategies (e.g. low-price versus high quality)
but still argues that those strategies are shaped by market structure. As a consequence, industry or
market structure should matter in customer satisfaction more than the specific strategies of the
participating firms.

- The Resource-based perspective to customer satisfaction

A competing view – i.e. the Resource-Based View (RBV) as well as Hunt and Morgan's (1995)
Resource-Advantage Theory (RAT) – ascribes superior performance to resources and capabilities
differences among the firms. The RBV considers that the firms are successful when they have ‘better’
resources than their competitors (Wernerfelt, 1984; Barney, 1991; Conner, 1991; Dierickx and Cool,
1989; Grant, 1991; Lippman and Rumelt, 1982; Prahalad and Hamel, 1990; Reed and DeFillipi, 1990).
Taking a more dynamic perspective, Hunt (1995; Hunt and Morgan, 1995) propose that "competition is
the disequilibrating, ongoing process that consists of the constant struggle among firms for a
comparative advantage in resources that will yield a marketplace position of competitive advantage
and, thereby, superior financial performance. Firms learn through competition as a result of feedback
from relative financial performance "signaling" relative market position, which in turn, signals relative
3
resources" (p.318). Even though Hunt and Morgan (1995) view the firm's financial performance as its
primary objective, they also admit that other objectives are pursued by firms and are enabled by the
accomplishment of superior financial performance. Thus, superior customer satisfaction becomes a
secondary objective the accomplishment of which should be a function of firm resources. Resources
are both tangible and intangible entities available to the firm that enable it to produce efficiently and/or
effectively a market offering that has value for some market segments (Hunt and Morgan, 1995). Better
resources are those which have a great usage value, rare, difficult to imitate and to mobilize (Barney,
1991). From this perspective, differences in firm performance - such as customer satisfaction - result
from the differences in resources and capabilities that the firm developed by sustained investments in
difficult-to-copy attributes (Dierickx and Cool, 1989) and the isolating mechanisms which protect the
firm competitive positions against the imitation (Lippman and Rumelt, 1982). In contrast with the
industry view, which favors industry-level factors, the RBV or Hunt and Morgan's (1995) RAT would
argue that it is firm heterogeneity that accounts for the differences in satisfaction scores between the
firms within the same industry. This heterogeneity should be more important than the common industry
tendencies in customer satisfaction. As a result, firm effects should be more important in customer
satisfaction scores than industry effects.

3. RECONCILABLE DIFFERENCES

Industry and firm views on the relative impact of market structure and firm effects are not
mutually exclusive. Indeed, it is possible that all these effects impact customer satisfaction scores
achieved by a firm in different degrees. McGahan and Porter (1997a), in a study of the American
economy over 14 years, found that the industry and firm-specific effects differed across the sectors of
the economy.
The economic sectors in the study of firm-level satisfaction can be defined on the basis of the
specific nature of the offer as specified by Juran (1988). Juran (1988) identified two major dimensions
of quality: (1) quality that meets customer needs and (2) quality that consists of freedom from
deficiencies. Anderson, Fornell and Rust (1997) have referred to this categorization as customization
quality and standardization quality. Customization quality refers to the design attributes of a product as
well as the way in which service is delivered while standardization quality refers to the degree to which
the design is reliable with respect to the degree of variance customers experience in the set of features,
feature level, and service delivery. The predictive validity of this categorization has been shown on the
relationship between quality/satisfaction, productivity and profitability (Anderson, Fornell and Rust
1997; Huff, Fornell and Anderson, 1996). Hence, an extension to differences in customer satisfaction
across sectors becomes straightforward.
In general, we expect the impact of firm-specific effects on satisfaction scores to be more
important when customer satisfaction is relatively more dependent on customization quality (i.e. when
customers’ needs are heterogeneous, customers require specific features and personalized service). In
this case, achieving greater customer satisfaction would require more effort from each company in
terms of personnel, customer service, attribute design, etc. However, we expect the impact of industry
effects – i.e. the common tendencies in the industry - on customer satisfaction scores to be more
important when customer satisfaction is relatively more dependent on standardization quality. That is
when the product and its delivery can be standardized, it is more likely to observe similar performance
in terms of customer satisfaction across firms than when each firm has to strive with the more
heterogeneous needs of its customers (Fornell and Johnson, 1993).
One way to operationalize these two dimensions of quality is the distinction between goods and
services (Anderson et al. 1997). At the extreme, goods are tangible, can be independently produced and
consumed, and are relatively people-free. These characteristics offer the possibility of providing
customers with relatively differentiated and stable offerings. Fornell and Johnson (1993) found that, on
4
average, product oriented industries are more differentiated than service oriented industries. That is
their offerings are more likely to meet the particular needs of different customers. This is due to the fact
that manufactured goods conform to specifications largely through a production process while
“services must conform to specifications through a production process that involves the human and
nonhuman resources of the firm as well as the customers themselves” (Fornell and Johnson, 1993, p.
686). The consequence is that goods producing firms should exhibit higher scores of satisfaction as
they can differentiate and provide stable offerings compared with service firms. The fact that product
oriented industries are very likely to meet the particular needs of their customers also implies that, on
average, every firm operating in these industries will achieve a high (or satisfactory) customer
satisfaction score. As a consequence, industry effects should account for a major part of satisfaction
scores of firms operating in the manufactured goods industries.
However, it is a priori difficult to predict whether producing goods will require more or less
effort from the firm compared with services. Standardized goods could satisfy the homogeneous needs
of segments of customers and lead to high levels of satisfaction. In this case, producing goods is less
expensive because of the economies of production, which may lead to lower costs, greater value, higher
sales and market share (Fornell, 1992; Szymanski et al. 1993). However, depending on the competitive
intensity in a market, the sustainability of an achieved position in customer value and satisfaction may
require constant effort from the firm in terms of productivity, innovation in processes and products to
keep up with customers’ evolving standards of product evaluation. Much effort may thus be necessary
in highly competitive markets to achieve a high level of customer satisfaction whether it is a good or a
service that is offered. In this case, firm-specific effects can have a large impact compared with
industry effects. Thus, based on this discussion, we hypothesize only that:
Hypothesis 1: On average, industry effects on satisfaction scores of manufacturing firms should be
greater than the impact of firm-specific effects.

Services however are intangible, simultaneously produced and consumed, perishable, and, more
importantly, difficult to standardize and less uniform than goods (Berry, 1980; Hoffman and Bateson,
1997). The fact that there is a large human component involved in delivering services implies that
quality from service operations will tend to be more variable from customer to customer than quality
obtained from goods-producing operations (Berry, 1980). Fornell and Johnson (1993) found that
service industries were less differentiated and had more intermediate levels of satisfaction. This implies
that on average increasing customer satisfaction in these industries should require more effort from the
company compared with goods producing industries. Thus, firm capabilities are more necessary to
increase customer satisfaction in service industries compared with goods producing ones.
Hypothesis 2. On average, the impact of the firm-specific effects on satisfaction scores of service firms
should be greater than the impact of industry effects

In the data set, however, we also have retailing firms. These firms are goods-services sellers and
as a result could be differently affected by industry and firm specific effects. Indeed, retailers sell
tangible products. The fact that these firms sell goods implies that their offerings are largely predictable
and differentiable. Yet, retailers also are labor-intensive with frontline personnel. This means that
service quality (and consequently customer satisfaction) should be partly unpredictable as well. Indeed,
an employee’s attitude, for example, can affect customer satisfaction with the retailer. It has been
shown (Barney and Wright, 1998) or found (Schneider and Bowen, 1995) that human resources
practices affect customers’ perception of service quality. Thus, the fact these firms sell goods will
largely reduce the variance in perceived quality and increase customer satisfaction scores of all
participating firms (an industry effect). But, the human component in retailers’ offerings implies that
the increase of customer satisfaction also requires firm specific efforts (a firm specific effect). Thus, we
hypothesize that:
5
Hypothesis 3 On average, industry effects should account for a greater part of satisfaction scores of
retailers than firm-specific effects
.
Hypothesis 4: Firm-specific effects should be larger in the retailing sector than the manufactured
goods sector.

4. DATA

The relative impact of industry and firm effects is investigated using the data from the
American Customer Satisfaction Index (ACSI) project (see Fornell et al. 1996). The ACSI is an
ongoing project managed by the National Quality Research Center (NQRC) at the University of
Michigan Business School and cosponsored by the American Society for Quality Control (ASQC). In
ACSI, satisfaction with a product or service is a customer’s overall evaluation of her/his purchase and
consumption experience to-date. This cumulative conceptualization is similar to the concept of
‘consumption utility’ and provides meaningful comparisons of entire firms, industries, sectors and
nations (see Anderson, 1993). Satisfaction is measured with three items reflecting the customer’s
overall feeling of satisfaction, evaluation of quality regarding expectations, and quality regarding ideal:
Consider your experiences to date with your _______________
- using a 10 point scale where “1” means “very dissatisfied” and “10” means “very
satisfied”, how satisfied are you with your ______________
- To what extent has your ____________fallen short of your expectations or exceeded
your expectations? (“1” means “falls short of expectations” and “10” means “exceeds
the expectations”)
- How do you think your __________compares with your ideal ________? (“1” means “
Not very close to the ideal” and “10” means “Very close the ideal”)

The project uses a simultaneous equation, Partial Least Squares - estimated econometric model
that produces reliable and valid firm, industry, sector and national indices of satisfaction (see ACSI,
1995). It is based on a national probability sample of household customers of 203 leading firms and
organizations in the United States. Our screened dataset, however, includes 142 firms over 4 years
(1994-1997), for a total number of 568 cases (see Table 1). Excluded are the utilities, public
administrations, government agencies, all firms with missing data, the ‘other companies’ and the US
Post services because of their monopoly power. In the ACSI, seven industries are defined from 10
standard industrial classification (SIC) codes (0 – 9) on the basis of having reachable customers in
households (ACSI, 1995). Not selected industries are all industries in 1-digit SIC codes 0 and 1, and
some parts of SIC code 5 and 6: Agriculture/Forestry/Fishing (0), Mining (1), Construction (1),
Wholesale trade (5), and Real Estate (6). These industries are omitted on the basis of not having
reachable household customers or selling to end-users. Then, the largest 2-digit SIC code industry
groups within each sector are selected on the basis of their contribution to the GDP. Next, within the
selected 2-digit SIC code industry groups, a representation of industries at the 4-digit SIC code level
are identified on the basis of total sales.

6
 Table 1. Screened ACSI firm customer satisfaction

AVERAGE STANDARD
NO OF NO OF CUSTOMER DEVIATION
REPRESENTED FIRMS SATISFACTION
INDUSTRIES SCORE
Manufactured goods 12 75 81.11 3.99
Retailing sector 3 29 73.05 4.85
Service sector 8 38 74.54 5.23
Total 23 142 77.71 5.80

Based on these industries, three sectors were constituted (see Appendix A): manufactured
goods, retailing and services. This aggregation of industries however could give a downward bias in the
importance of the industry effects. Yet, the bias could also be quite small as it has been shown that
estimates of the industry importance are somewhat insensitive to the level of industry aggregation
(Levington, 1977; Farrell, 1974) and because industry effects here capture primarily the nature of the
offerings. In spite of that, our results still have to be considered with caution. The data show that there
is a significant difference in scores of satisfaction across firms (F (141, 426) = 24.328, p<0.000). The
following sections thus will try to understand this difference.

5. MODELING APPROACH

The analysis relies on the following model:

(1) CSijt = µ + α i + φ ij + ε ijt
In Equation (1), CS ijt is customer satisfaction score in year t of firm j in industry i. The term µ
designates the average customer satisfaction score of all the firms over the entire period 1994-1997.
The term α i is the increment to customer satisfaction associated with participation in industry i with i
including all the 23 industries covered in the screened ACSI data. The term φ i , j represents the
increment to customer satisfaction that is related to the specific situation of the firm j in industry i and
ε ijt is the error term.
Equation (1) is analyzed using a fixed effects estimation and a random effects estimation. The
fixed effects estimation is obtained with a simultaneous ANOVA based on the assumptions of the
ordinary least squares where restricted models allow us to verify the importance of various effects. The
random effect estimation is obtained using variance components analysis (see Equation 2):
(2) σ 2cs = σ α2 + σ 2φ + σ 2ε
Variance components analysis assumes that explanatory factors are a random sample derived
from a larger population of possible treatments (Jobson, 1991; Searle, 1971). These random factors are
considered to be important if their contribution to the variance of the dependent variable is relatively
large. The MINQUE procedure was selected, as it does not require the normality assumption.

7
5. EMPIRICAL RESULTS

Analysis-of-variance
The results of our decomposition of the variance included in satisfaction scores are discussed
for each sector where we first present the restricted models, then the incremental explanatory power
associated with each effect and, finally, the results of variance components analysis.
Manufactured goods sector
The results of our analysis-of-variance on equation (1) are shown in Figure 1. First, we estimate
the null model. This model serves as a reference point for the other models. Each of the line below the
null model points to a model in which one type of effect is added. Consider the first order of entry: null
model, industry and firm effects. The F- test shows that industry effects are significant at p<0.000. The
second line, which points to the full model, shows that firm-specific effects also are significant at
p<0.000. Now consider the second order of entry with firm effects coming before industry effects. The
first line which points to a model in which firm-specific effects are included shows that these effects
are statistically significant at p<0.000.

Figure 1: Analysis of variance: OLS estimation of equation 1 for manufacturing firms

Null model
R² = 0.00
Adj. R² = 0.00
<.000 <.000

Industry effects Firm effects

R² = 0.439 R² = 0.790
Adj. R² = 0.418 adj. R² = 0.721

<.000 0
Industry & Firm effects
R² = 0.790
Adj. R² = 0.721

The second line, which points to the full model, however shows that industry effects are not
significant. This means that when firm effects are introduced before industry effects, the latter have no
explanatory power.
Table 2 summarizes the results of Figure 1 on the increment to explanatory power by type of
effect. Following McGahan and Porter (1997b) we calculated the increment to the ordinary and the
adjusted R² with effects introduced in the following order: null model, industry and firm specific
effects. This order of introduction is more informative than the other one because if firm specific
effects are introduced before industry effects, the latter lose their explanatory power, as all the
differences in industries would be previously captured in the firm specific effects.

Table 2: Increment to explanatory power by type of effect (manufacturers)

Ordinary R² Adjusted R²
Industry effects* 43.9% 41.8%
Firm effects ** 35.1% 30.3%
Full model 79.0% 72.1%

8
*Increment in model of industry effects over the null model
** Increment in full model over model of industry effects

Table 2 shows that industry effects account for 41.8% - 43.9% of variance while firm effects
add 30.3% - 35.1% to the variance included in customer satisfaction scores of manufacturing firms.
Thus, firm-specific effects are less important than industry effects in this sector.

Retailing sector
Figure 2 shows that when the industry effects are introduced before firm effects, they are
significant at p<0.000. The inclusion of firm specific effects cannot also be rejected when industry
effects are previously introduced. When firm effects are introduced before industry effects however the
latter lose their explanatory power.

Figure 2: Analysis of variance: OLS estimation of equation 1 for retailers

Null model
R² = 0.00
Adj. R² = 0.00
<.000 <.000

Industry effects Firm effects

R² = 0.525 R² = 0.934
Adj. R² = 0.516 adj. R² = 0.913

<.000 0
Industry & Firm effects
R² = 0.934
Adj. R² = 0.913

Table 3 summarizes the results of Figure 2 on the increment to explanatory power by type of
effect.

Table 3: Increment to explanatory power by type of effect (Retailers)

Ordinary R² Adjusted R²
Industry effects* 52.5% 51.6%
Firm effects ** 40.9% 39.7%
Full model 93.4% 91.3%

*Increment in model of industry effects over the null model

** Increment in full model over model of industry effects

Table 3 shows that industry effects account for 51.6% - 52.5% of the variation in satisfaction
scores and firm effects account for 39.7% - 40.9% of that variation. Thus, industry effects are more
important than firm specific effects in the retailing sector.

Service sector
Figure 3 presents the ANOVA results of equation (1) for the service sector.

9
Figure 3: Analysis of variance: OLS estimation of equation 1 for service firms
Null model
R² = 0.00
Adj. R² = 0.00
<.000 <.000

Industry effects Firm effects

R² = 0.364 R² = 0.774
adj. R² = 0.333 adj. R² = 0.701

<.000 0
Industry & Firm effects
R² = 0.774
adj. R² = 0.701

The different lines indicate that industry effects are significant but only when introduced after
firm specific effects. The increment to the explanatory power is presented in Table 4.

Table 4: Increment to explanatory power by type of effects (Services)

Ordinary R² Adjusted R²
Industry effects* 36.4% 33.3%
Firm effects ** 41.0% 36.8%

Full model 77.4% 70.1%

*Increment in model of industry effects over the null model

** Increment in full model over model of industry effects

Industry effects add 33.3% - 36.4% to the adj. R² and the R² while firm effects add 36.8% -
41.0% . Thus, firm specific effects are more important than industry effects.

Variance Components Analysis

Table 5 shows components of variance for firm customer satisfaction scores by sector. In this
table the first column represents the sector, the second column features the components of variance, the
third column shows the estimate of each component of variance and the fourth column indicates the
percentage of variance for each component.
As can be seen in Table 5, satisfaction scores of firms selling manufactured goods are
principally influenced by industry-level factors. In particular, about 41.76% of the variation in
satisfaction scores in this sector are caused by industry level factors while 32.30% is caused by firm
level factors. These results are similar to those obtained with ANOVA. Thus, we cannot reject
hypothesis 1. Indeed, this hypothesis proposed that on average the impact of the industry effects on
satisfaction scores of manufacturing firms should be greater than the impact of firm-specific effects.
The results indicate that firms operating in the same industry show a homogeneous pattern in
their efforts to satisfy their customers but still differ due to their specific strategies. This homogeneity
could be associated with the standardization of the offerings. The heterogeneity in satisfaction scores
(i.e. firm specific effects) could be associated with the competitive intensity or imitation by existing
competitors which could create the challenge of sustaining the advantage in customer satisfaction.
10
Table 5. The estimate results of Equation 2
MINQUE ML
Sectors Component Estimat Importanc Percent Estimate Importanc Percent
e e e
6.469* 2.54a 39.32%
VAR (Industry 7.163 2.68a 41.76% (1.97)c b
effects) b
5.532*** 2.35 33.63%
VAR (firm effects) 5.539 2.35 32.30% (4.65)
Goods 4.449***
VAR (error) 4.449 25.94% (10.59)
VAR (total) 17.151 100% 16.45
12.174 3.49 50.14%
VAR (Industry 18.698 4.32 60.68% (1.12)
effects)
10.081** 3.17 41.52%
VAR (firm effects) 10.090 3.18 32.75% *
(3.43)
Retailers 2.023***
VAR (error) 2.023 6.57% (6.53)
VAR (total) 30.811 100% 24.278
7.003+ 2.65 25.72%
VAR (Industry 8.423 2.90 29.39% (1.35)
effects)
12.041** 3.47 44.23%
VAR (firm effects) 12.055 3.47 42.07% *
(3.47)
Services 8.180** 30.05%
VAR (error) 8.180 28.54% (2.86)
VAR (total) 28.658 100% 27.224
a importance is approximately the square root of the component (Brush and Bromiley, 1997). This
parameter therefore corresponds to how much the expected value of satisfaction differs across the
dummy variables.
b the ratio of the component to the total
c t - value obtained using the square root of the diagonal element (in the asymptotic covariance matrix)
as the standard error of each component (see Searle et al. 1992)

Table 5 also shows that satisfaction scores of service firms are principally influenced by firm-
level factors. In particular, 42.07% of the variation in satisfaction scores is caused by firm-level factors
while industry factors account for 29.39% of that variation. These results also are consistent with those
ANOVA. Thus, differences in satisfaction scores across service firms are due to their specific
capabilities. As a result, hypothesis 2 cannot be rejected: firm specific effects are more important than
industry effects in the service sector.
Finally, Table 5 shows that satisfaction scores of retailing firms are principally influenced by
industry level effects. About 60.68% of the variation in satisfaction scores are caused by industry or
market structure conditions, which is about double the size of the firm effects. Thus, retailers operating
11
in the same industry present a homogeneous pattern in their satisfaction scores. Hypothesis 3 is thus
accepted as it was expected that the impact of the industry effects on satisfaction scores of retailers
should be greater than firm-specific effects. Hypothesis 4 is also marginally supported. Indeed, firm-
specific effects are more important in the retailing sector than the manufacturing sector. This however
is more pronounced in the ANOVA results (about 40% versus 30%) than the VARCOMP results
(32.75% versus 32.30%).

7. DISCUSSION AND CONCLUSION

The purpose of this research was to investigate why some firms satisfy their customers better
than their immediate competitors using a variance decomposition approach. We proposed that firm
performance in customer satisfaction has two main sources: industry level factors and firm level
factors. Yet, the impact of these factors on firm performance differs on the nature of its offerings.
Estimation of these effects by economic sector shows that industry matters more in the manufacturing
and retailing sectors while firm specific effects matter more in the service sector. These findings imply
that retailing firms and manufacturing firms competing in the same industry tend to perform
homogeneously as far as customer satisfaction is concerned. The greater industry effects means that
imitation should be easy for highly standardized goods. The room for maneuver is, also, reduced for
retailing companies insofar as their performance in customer satisfaction holds much of their
membership of an industry. The importance of industry effects also means that retailers have to monitor
their competitors’ customer satisfaction practices. For instance if all the firms in an industry use TQM,
not using TQM may cause a competitive disadvantage even though its use would not increase the
firm’s position in customer satisfaction. This does not mean that resources and capabilities are not
important. The relatively high percent of firm specific effects in the manufacturing sector implies that
even those manufacturing firms which invest in high value resources and capabilities can create
competitive advantage in customer satisfaction but this advantage can be imitated or dissipated by
competitors.
Firm-specific effects were found to be more important than the industry effects in the service
sector. This implies that it would be more difficult to imitate in highly customized services industries.
Thus, service firms that customize their offerings more than their competitors are likely to reap the
benefits in terms of customer satisfaction and eventually profitability (Anderson, Fornell and Rust,
1997).
The fact that the results indicate that industry matters is consistent with prior research which has
shown that industry characteristics are important factors in firm customer satisfaction (Fornell and
Johnson, 1993; Anderson and Fornell, 1994). These results are also consistent with both the industry
view and the resource-based view of the firm. They are consistent with the industry view because we
find that industry is not totally absent in explaining satisfaction scores. Rather industry is even more
important in the retailing sector than the firm-specific effects. The findings are also consistent with the
resource-based view as we find that firm-specific effects are not absent but account for more variance
in the service sector than industry effects. In this sense, there is support for the idea that industry and
firm effects actually depend on the economic sector (McGahan and Porter, 1997a).
However, the variance decomposition approach does not make it possible to know the specific
market factors or the firm’s resources and capabilities, which are important in its performance in
customer satisfaction. We are thus left with two questions : (1) which of the industry characteristics
(e.g. concentration, advertising intensity, industry growth) and firm characteristics (e.g. human
resources, information systems, market orientation) really affect customer satisfaction and (2) how long
does their effects persist over time? These questions remain unanswered.

12
REFERENCES
ACSI (1995) - American Customer Satisfaction Index - Methodology Report, The National Quality
Research Center, December;

Anderson, Eugene Walter (1993), « Firm, Industry, and National Indices of customer satisfaction:
Implications for services » Advances in Service Marketing Management: Research and Practice,
Teresa Swartz, Stephen W. Brown and David E. Bowen (Eds.) JAI Press, 87-108;

Anderson, Eugene W. and Claes Fornell (1994), “ A customer satisfaction prospectus ” In Service
quality: New directions in theory and practice (Eds.) Roland T. Rust and Richard L. Oliver, Sage
Publications, London,241-268;

Anderson, Eugene W., Claes Fornell, and Donald R. Lehman (1994), “Customer satisfaction, market
share, and profitability: findings from Sweden ” Journal of Marketing, vol.58 (July), 53-66;

Anderson, Eugene W., Claes Fornell and Roland T. Rust (1997), “Customer satisfaction, productivity
and profitability: Differences between goods and services” Marketing Science vol.16 (2), 129-145;

Bain Joe S. (1951), "Relation of profit rate to industry concentration: American manufacturing, 1936-
1940" Quarterly Journal of Economics, vol. 65 (August), 293-324;

Bain Joe S. (1956), Barriers to new competition, Cambridge: Harvard University Press;

Barney Jay B. (1991), "From resources and sustained competitive advantage" Journal of Management,
vol. 17 (1), 99-120;

Barney Jay B. and Patrick M. Wright (1998), “On becoming a strategic partner: The role of human
resources in gaining competitive advantage” Human Resource Management, vol. 37 (1), 31-46;

Chang, Sea-Jing and Harbir Singh (1996), “Corporate and Industry Effects on Business Unit
Competitive Position” Wharton School mimeo

Corner Kathleen (1991), "A historical comparison of resource-based theory and five schools of thought
within industrial-organization economics: Do we have a new theory of the firm?" Journal of
Management, vol. 17, 121-154;

Day, George S. and Robin Wensley (1988), “Assessing advantage: A framework for diagnosing
competitive superiority” Journal of Marketing, vol. 52 (April), 1-20;

Dierickx I. and K. Cool (1989), "Asset stock accumulation and sustainability of competitive advantage"
Management Science, vol. 35, 1504-1511;

Fornell, Claes (1992), “ A National Customer Satisfaction Barometer: The Swedish Experience”
Journal of Marketing, vol.56 (Jan.), 6-21;

Fornell, Claes and Michael D. Johnson (1993), « Differentiation as a basis for explaining customer
satisfaction across industries » Journal of Economic Psychology, vol.14 (Dec.), 681-696;

13
Grant R. M. (1991), "The resource-based theory of competitive advantage: Implications for strategy
formulation" California Management Review, vol. 33, 114-133;

Hallowell, Roger (1996a) "Dual Competitive Advantage For Service Firm" Advances in Services
Marketing and Management, 6, 23-59;

Hoffman, Douglas K. and John E. G. Bateson (1997), Essentials of services marketing, New York: The
Dryden Press

Huff, Leonard, Claes Fornell and Eugene W. Anderson (1996), "Quality and Productivity:
contradictory and complementary" Quality Management Journal, vol. 4 (1), 22-39;

Hunt Shelby D. (1997), "The Resource-Advantage Theory of Competition: Toward Explaining

Productivity and Economic Growth" Journal of Management Inquiry, vol. 4 (4), 317-332;

_______________ and Robert M. Morgan (1995), "The comparative advantage theory of competition"
Journal of Marketing, vol. 59 (April), 1-15;

Jobson, J. D. (1991), Applied Multivariate Data Analysis: Regression and Experimental Design,
Springer-Verlag New York, Inc.

Juran, J. M. (1988), Juran’s Quality Control Handbook, 4th ed., New York: McGraw Hill

Levingston, Miles (1977), “Industry movements of common stocks” Journal of Finance, vol. 32 (June),
861-74;

Lippman S. A. and R. P. Rumelt (1982), "Uncertain imitability" Bell Journal of Economics, vol. 13,
418-438;

Mauri Alfredo J. and Max P. Michaels (1998), "Firm and industry effects within strategic management:
An empirical examination" Strategic Management Journal, vol. 19, 211-219;

McGahan, Anita M. "Competitor Effects on Corporate Performance." Working Paper (December

1997).

McGahan Anita M. and Michael P. Porter (1997a), "How much does industry matter really?" Strategic
Management Journal, vol. 18 (Special Issue), 15-30;

McGahan Anita M. and Michael P. Porter (1997b), "What do we know about variance in accounting
profitability?" Working paper, Harvard Business School, Division of Research, December

Prahalad C. K. and G. Hamel (1990), "The core competence of the corporation" Harvard Business
Review, May-June, 79-91;

Reed R. and R. J. DeFillipini (1990), "Causal ambiguity, barriers to imitation, and sustainable
competitive advantage" Academy of Management Review, vol. 15, 88-117;

Roquebert J. A., R. L. Phillip and P. A. Westfall (1996), "Markets versus Management: what drives
profitability?" Strategic Management Journal, vol. 17 (8), 653-664;
14
Rumelt R. P. (1991), "How much does industry matter?" Strategic Management Journal, vol.12, 167-
185;

Schmalensee, Richard (1985), "Do markets differ much?" American Economic Review, vol. 75 (3),
341-351;

Schneider, B., and D. Bowen (1985), “Employee and Customer Satisfaction: Making empirical and
theoretical connections” Personnel Psychology, vol. 48, 521-536;

Szymanski, Davis M., Sundar G. Bharadwaj and P. Rajan Varadarajan (1993), “An analysis of the
Market Share – Profitability Relationship” Journal of Marketing, vol. 57 (3), 1-18;

Wernerfelt Birger (1984), "A resource-based view of the firm" Strategic Management Journal, vol.5,
171-180;

Wernerfelt Birger and Cynthia A. Montgomery (1988), "Tobin's q and the importance of focus in firm
performance" American Economic Review, vol. 78 (1), 246-250.

15
Appendix A
Screened ACSI industries and firms
MANUFACTURED GOODS SECTOR

Food Processing Industry

Dole Food Company, Inc.
Mars, Inc.
Hershey Foods Corporation
H.J. Heinz Company
Pillsbury, Inc. (Grand Metropolitan PLC)
Nestle, USA
Kraft USA (Philip Morris)
Kellog Company
RJR Nabisco, Inc.
Con Agra, Inc.
Sara Lee Corporation
The Quaker Oats Company
Campbell Soup Company
General Mills, Inc.
Tyson Foods, Inc.

Beverage/Beer Industry
Adolph Coors Company
Miller Brewing Company
Anhueser-Busch Companies, Inc.

Beverage/Soft Drink Industry

PepsiCo, Inc.
The Coca Cola Company

Tobacco/Cigarette Industry
R. J. Reynolds Tobacco Company
Phillip Morris

Apparel/Sportswear Industry
Levi Strauss Associates, Inc.
Liz Claiblorne, Inc.
Fruit of the Loom, Inc.
Sara Lee Corporation
VF Corporation

Apparel/Athletic Shoes Industry

Reebok International, Ltd.
NIKE, Inc.

Personal Care and Cleaning Products

The Clorox Company
The Proctor & Gamble Company
Colgate Palmolive Company
The Dial Corporation
Unilever United States

1
Gasoline Industry
Amoco Corporation
Phillips Petroleum Company
Chevron Corporation
Shell Oil Corporation
Exxon Corporation
Texaco, Inc.
Mobil Corporation
Atlantic Richfield Company (ARCO)

Personal Computer and Computer Printer Industry

Hewlett-Packard Company
IBM Corporation
Compaq Computer corporation
Apple Computer, Inc.

Household Appliances (Major) Industry

Maytag Corporation
General Electric Company
Whirlpool Corporation

Consumer Electronics/TV and VCR Industry

Sony Corporation
Zenith Electronics Corporation
RCA (General Electric)
Mitsubishi Electronics America, Inc.
Emerson Radio Corporation
Philips Electronics North America corporation
Panasonic Company (Matsushita Electric)
Sanyo Fisher USA Corporation
JVC Company of America (Matsushita Electric)

Automobile and Van Industry

Honda Motor Company, Ltd.
Mercedes Benz of North America, Ltd.
Ford/Lincoln Mercury
Toyota Motor Manufacturing, USA, Inc.
General Motors/Saturn
Chrysler (Chrysler Corporation)
Nissan Motor Corporation in U.S.A.
BMW of North America, Inc. (Bayerische Motoren Werke AG)
Ford (Ford Motor Company)
General Motors/Chevrolet, GEO
General Motors/Pontiac
Subaru of America, Inc. Fuji Heavy Industries, Ltd.
Jeep, Eagle (Chrysler Corporation)
Chrysler/Dodge, Plymouth
Mazda Motor of America, Inc.
Volkswagen of America
Hyundai Motor America

2
RETAIL
Department/Discount Store Industry
Nordstrom, Inc.
Dillard Department Stores, Inc.
J.C. Penney Company, Inc.
Federated Department Stores, Inc.
Montgomery Ward & Company, Inc.
Sears, Roebuck and Company
Dayton-Hudson Corporation-discount stores (Target/Mervyn’s)
Wal-mart Stores, Inc.
Meijer, Inc.
Kmart Corporation

Supermarket Industry
PUBLIX Supermarkets, Inc.
Meijers, Inc.
SUPERVALU, Inc.
Food Lion, Inc.
The Kroger Company
Albertson’s Inc.
Winn-Dixie Stores, Inc.
American Stores Company
Safeway, Inc.
Great Atlantic and Pacific Tea Company
Walmart Stores, Inc. (Sam’s Club)

Restaurant/Fast Food, Pizza and Carryout Industry

Wendy’s International, Inc.
Little Caesars Enterprises
Kentucky Fried Chicken (KFC)
Pizza Hut
Domino’s Pizza, Inc.
Burger King Corp. (Pillsbury Inc./Grand Metropolitan PLC)
McDonald’s Corporation
Taco Bell

SERVICES
Parcel Delivery and Express Mail Industry
Federal Express Corporation
United Parcel Service of America, Inc.
U.S. Postal Service (exp mail and pkg. delivery)

Airline (scheduled) Industry

Southwest Airlines, Inc.
Delta Airlines, Inc.
American Corporation (AMR)
Northwest Airlines Corporations

3
 United Corporation (UAL)
USAir Group
Continental Airlines

Long Distance Telephone Service

American Telephone & Telegraph (AT&T)
Sprint Corporation
MCI Communications Corporation

Local Telephone Service

Bellsouth Corporation
Bell Atlantic Corporation
SBC Communications, Inc. (Southwestern Bell Corporation)
Ameritech
NYNEX Corporation
Pacific Telesis Group
US WEST, Inc.
GTE Corporation

Commercial Bank Industry

Norwest Corporation
Banc One Corporation
First Union Corporation
NationsBank Corporation
Citicorp
Wells Fargo & Company (Including First Interstate Bancorp as of 1997)
BankAmerica Corporation

Insurance/Life Industry
The Prudential Insurance Co. Of America
Metropolitan Life Insurance Company
Aetna Life & Casualty

Insurance/Casualty (Personal Property, Home Owners’, & Automobile

State Farm Insurance
Allstate Insurance Group
Farmers Group

Hotel and Motel Industry

Promus
Marriott Corporation
Hilton Hotels
Hyatt Corporation
Ramada Inns

View publication stats