GLOBAL MARKET SEGMENTATION FOR LOGISTICS SERVICES

GLOBAL MARKET SEGMENTATION FOR LOGISTICS SERVICES









John T. Mentzer
Matthew B. Myers
Mee-Shew Cheung






John T. Mentzer is the Harry J. and Vivienne R. Bruce Excellence Chair of Business,
Department of Marketing, Logistics, and Transportation, 310 Stokely Management Center,
University of Tennessee, Knoxville, Tennessee 37996-0530, 865-974-1652, FAX 974-1932,
jmentzer@utk.edu

Matthew B. Myers is an Assistant Professor, Department of Marketing, Logistics, and
Transportation, 310 Stokely Management Center, University of Tennessee, Knoxville,
Tennessee.

Mee-Shew Cheung is a Doctoral Student, Department of Marketing, Logistics, and
Transportation, 310 Stokely Management Center, University of Tennessee, Knoxville,
Tennessee.

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GLOBAL MARKET SEGMENTATION FOR LOGISTICS SERVICES


Abstract


While logistics services have become a significant source of competitive differentiation
between firms, significant challenges exist relative to developing logistics service offerings for
global business customers. Diverse regulations across borders, longer lead times, and increased
transportation costs all add to the difficulty of managing logistics services internationally. As a
service offering, logistics is often characterized as having intensive customer contact, extensive
customization requirements, and a reliance on extrinsic cues for service performance. Because
of these qualities, logistics services are also subject to cultural influences that exist in cross-
border trade. In this paper, we argue that Logistics Service Quality (LSQ) components can be
used to identify global, horizontal, and vertical segments of logistics services customers, and that
cultural and organizational characteristics may modify the LSQ/Customer Satisfaction
relationship. By identifying specific customer segments, some which may transcend national
borders, logistics managers can benefit from reduced costs, enhanced revenue, and the ability to
differentiate their offering from the highly competitive marketplace.



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GLOBAL MARKET SEGMENTATION FOR LOGISTICS SERVICES

Given the recent explosion in business-to-business marketing worldwide, an increased
number of multinational firms have placed an emphasis on global logistics performance. Both
managers and academics have become increasingly aware of the strategic importance of logistics
services to an organization’s overall success (Bienstock, Mentzer, and Bird 1997; Brensinger and
Lambert 1990, Mentzer and Williams 2001), yet logistics in global business is particularly
complex due to disparate trade regulations, shipping distances, and cross-currency issues (Nix
2001). The development of a global marketplace, propelled by regional unification,
standardization of investment and production strategies, and increasing flow of labor,
technologies, and information across borders, is especially conducive to the emergence of
customer groups with common preferences that transcend national borders (Day and
Montgomery 1999). For logistics managers, differences in customer requirements in different
countries may require dealing with different product designs, brands, and packaging (Carpano,
Chrisman, and Roth 1994).

This paper investigates two research questions that are important to the development of
global logistics for the multinational firm:
1. What logistics service factors account for differences in business customer satisfaction
across national borders? In other words, what value differences exist for specific
logistics functions across customers?

2. How do these differences reflect distinct segments in the global logistics services market?

Specifically, are cross-border differences in demand for specific logistics services due to
differences in customer or market segment characteristics, differences in competitive
environments, differences in companies’ logistics service offerings, or differences in national
culture and/or preferences?

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The answers to these questions should help supply chain managers understand the degree
to which logistics services can be, or need to be, customized within and across national
boundaries. In order to accomplish this, we first review the literature regarding the logistics
efforts of multinational companies, along with the Logistics Service Quality (LSQ) elements that
influence customer satisfaction (see Table 1). Next, we discuss the implications of cross-cultural
influences on the relationship between LSQ and customer satisfaction, and offer specific
research propositions that address these influences. We conclude with the implications of a
model of the factors influencing customers’ preferences for global logistics services.

(Place Table 1 About Here)

LOGISTICS SERVICE IN THE GLOBAL DOMAIN

Logistics excellence has clearly been recognized as an area in which firms can create
competitive advantage (Bowersox, Mentzer, and Speh 1995; Kyj and Kyj 1994; Morash, Droge,
and Vickery 1996; Mentzer and Williams 2001), in part because of its visible service impact on
customers (Bienstock, Mentzer, and Bird 1997; Mentzer, Flint, and Hult 2001; Pisharodi and
Langley 1990; Sharma, Grewal, and Levy 1995). In order to successfully use logistics as a
competitive advantage, logisticians must coordinate with marketing (Kahn and Mentzer 1996;
Mentzer and Williams 2001; Murphy and Poist 1996; Williams et. al. 1997). The quality of
logistics service performance is a key marketing component that helps create customer
satisfaction (Bienstock, Mentzer, and Bird 1997; Mentzer, Gomes, and Krapfel 1989), develop
market segmentation strategies (Mentzer, Flint, and Hult 2001), and has been recognized as such
for some time (Perrault and Russ 1974).

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The use of customer-based definitions of logistics service quality (Bienstock, Mentzer,
and Bird 1997; Mentzer, Gomes, and Krapfel 1989; Mentzer, Flint, and Hult 2001; Mentzer,
Flint and Kent 1999; Perreault and Russ 1974; Rinehart, Cooper, and Wagenheim 1989) has
brought logistics research, which traditionally focused on more physically observable operational
attributes, more in line with marketing, which has devoted more attention to understanding such
unobservables as customers’ perceived value. By recognizing, tapping into, and measuring
customer perceptions of logistics service quality, logistics practitioners and researchers have
added to the traditionally measured set of operational service attributes.

Building upon this literature, Mentzer, Flint and Kent (1999) conceptualized and tested
Logistics Service Quality (LSQ) as a second order construct, with nine dimensions:
• Personnel Contact Quality (PQ),
• Order Release Quantities (OR),
Order placement
• Information Quality (IQ),
• Ordering Procedures (OP),
• Order Accuracy (OA),
• Order Condition (OC),
• Order Quality (OQ), Order receipt
• Order Discrepancy Handling (OD),
• Timeliness (TI).
Mentzer, Flint, and Hult (2001) built upon this research to propose and test a “process of
LSQ,” and found that all nine components were important for at least one of the customer
segments tested. This research revealed that logistics service quality is a complex concept
demanding a great deal of attention from supplying firms. They also found that logistics service

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quality is a process, rather than merely as a single concept or second-order construct. When
viewed as a process, suppliers can identify the drivers of various logistics service quality
perceptions. The Mentzer, Flint, and Hult (2001) study suggests that customers’ perceptions of
suppliers’ logistics service quality begin to form as soon as they try to place orders and develop
until they receive complete and accurate orders, in good condition, with all discrepancies
addressed. The process view enables marketers to see the interrelationships among logistics
service quality components, and acknowledges that these interrelationships may differ by
customer segment.
International services are defined as “deeds, performances, and efforts conducted across
national boundaries in critical contact with foreign cultures” (Clark, Rajaratnam, and Smith
1996). As services, logistics offerings are subject to culturally influenced preferences prevalent
in cross-border exchange, as well as more traditional influences such as timeliness and
responsiveness. This increases the difficulty of identifying actionable market segments. The
majority of research has focused on the identification of customer characteristics relevant to the
segmentation of markets for tangible goods, rather than services. However, services – including
post purchase services such as logistics – are more likely candidates for customization for market
segments since service expectations differ across national and cultural boundaries, enhanced
personal interaction frequently occurs in service settings, and service use patterns frequently
differ across countries (Stauss and Mang 1999, Bolton and Myers 2003). In the absence of
customization, logistics service quality ‘gaps’ may develop due to differences between the
performance of logistics service providers from one country and the expectations of logistics
service recipients in another.


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UNDERSTANDING GLOBAL LOGISTICS CUSTOMERS: LSQ SEGMENTATION

Successful development and implementation for any global marketing strategy depends
on the organizations’ ability to segment its markets so that uniform sets of marketing decisions
can be applied to specific customers that exist horizontally, i.e., across nations or cultures (Sethi
1971). Within the literature, global markets have generally been segmented utilizing numerical
taxonomy methods to classify segments within countries (vertically). However, several
exceptions exist. Helsen, Jedidi, and DeSarbo (1993) showed in a study of new product
diffusion how segments exist across borders. Hofstede, Steenkamp, and Wedel (1999) also
identified these “macro-segments” in a study of consumer-product relationships. Similar to these
efforts, we believe business customers in international markets can be segmented, both vertically
(within specific national markets) and horizontally (across national markets) based on their
preferences for logistics services. Specifically, customer preferences for logistics service quality
functions enable firms to provide customized logistics efforts for cross-border buyer segments.

Research within the consumer psychology and behavioral decision theory literature
argues that different customers place disparate values on the same offering. As a result,
managers seek to identify global market segments and target those segments with goods and
services that meet the needs of those buyers (Hassan and Katsanis 1994). Products, services, and
strategies should be developed with specific preferences of the target segment in mind (Hofstede
et al. 1999). For the multinational organization, proper identification of segments is especially
important since they face diverse customer segments where standardization of marketing
decision variables is often impossible (e.g., Syzmanski, Bharadwaj, and Varadarajan 1993), and
market segmentation can reduce operational costs via elimination of redundant efforts, as well as
effectively allocate the firm’s resources to target markets (Berrigan and Finkbeiner 1992).

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The majority of market segmentation research has focused on customer preferences
relevant to tangible goods, as opposed to services. Some argue that specific products (e.g.,
industrial and high technology goods) are more likely candidates for standardization across
multiple segments (Jain 1989). We argue that satisfaction levels differ across customer segments
due to the customization of logistics service quality dimensions, as well as the organizational
characteristics of the customer. Our emphasis on LSQ dimensions results from the contention
that variations in the intrinsic attributes of logistics services affect the overall satisfaction of
business customers. We distinguish between three types of market segments: horizontal
segments that apply to all customers worldwide, horizontal segments that exist across national
borders (for example, within a specific region), and vertical segments that exist within a specific
national market. We contend that needs-based, horizontal market segments exist for logistics
services, where the segmentation variables are customers’ responses to the LSQ dimensions and
organizational characteristics. Furthermore, we posit that certain vertical market segments exist
based on the moderating effects of national or regional influences.

RESEARCH PROPOSITIONS

Due to different needs in logistics service quality dimensions by different customers in
different segments, satisfaction level responses are driven by different constructs in LSQ. For
example, Mentzer, Flint and Hult’s (2001) study found that certain customers care most about
the ease and effectiveness of the ordering process itself and not necessarily about timeliness. In
contrast, both ordering procedures and order discrepancy handling seem to drive satisfaction for
a particular segment. As such, we believe the homogenization of customer needs yields
horizontal segments that cut across country, sometimes regional, boundaries.

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P1: Horizontal market segments exist such that different customer groups’ satisfaction
level responses are driven by the same sets of LSQ dimensions of Perception of Order
Placement Activities and Perception of Order Receipt, and in the same process manner.

Organizational characteristics of customer firms also matter in LSQ satisfaction response
level. Customers serving consumer versus business markets emphasize different LSQ
dimensions of Perception of Order Placement Activities and Perception of Order Receipt.
Satisfaction response level of customers in retail markets and customers in wholesale markets are
driven by different LSQ dimensions. Furthermore, customers’ internal operating systems, such
as the execution of the purchasing and warehousing functions, cause differences in their
preference and emphasis on certain dimensions in LSQ. For example, timing issues – such as
24/7 response centers – may be more important to some customers. In other cases, given a low
capital base, smaller retail outlets might require frequent product deliveries, making timeliness
extremely critical in their evaluation of suppliers’ logistics service quality. Thus, we propose:
P2a: Horizontal market segments exist such that customers with similar organizational
characteristics place similar emphasis on the LSQ dimensions of Perception of Order
Placement Activities.

P2b: Horizontal market segments exist such that customers with similar organizational
characteristics place similar emphasis on the LSQ dimensions of Perception of Order
Receipt.

There are several reasons to believe cultural differences cause managers from different
countries or regions to emphasize different factors influencing their judgments and decisions
about logistics services. First, cultural distance between the countries representing exchange
partners influence managerial decision-making in a global business environment (Kogut and
Singh 1988). Second, behavioral norms and work related values (e.g. Markoczy 2000) that are
influenced by cultural differences cause disparity in the levels of both commitment to exchange
partners and perceived satisfaction with exchange relationships. Third, given that customers

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from different cultures have diverse behavioral norms, they evaluate services differently, with
differing expectations regarding optimal and adequate encounters. For example, how order
accuracy and order discrepancy handling affect overall satisfaction may differ by country or by
region, due to different levels of tolerance toward errors. Firms in transitional economies have
different concerns in logistics services (Byrne & Jozefowski 1994, Reinganum & Helsell 1994,
Batra, 1999) due to the characteristics of the market structure (e.g. system inefficiency, longer
and more fragmented distribution channels, inadequate physical distribution and logistics
infrastructures). Furthermore, organization’s perceptions of the business environment – such as
the criticality of the service to successful business performance – may be more important in
some geographic areas (countries or regions) than in others. As such, we propose:
P3: Vertical market segments exist such that the effects of dimensions of LSQ on
customers’ satisfaction level response are moderated by national and regional variables.


These proposed relationships are illustrated in Figure 1.

(Place Figure 1 About Here)

CONCLUSIONS

While the fundamentals of logistics service are frequently addressed, understanding the
application of logistics service strategies in a global context is still in the early stages of
development. It is the role of future research to continue to investigate the influence of LSQ in a
global context, particularly addressing the research propositions presented in this paper and in
Figure 1.
Logistics services across national boundaries are particularly complex not only due to
enhanced distance and costs constraints, but also due to cultural and organizational conditions

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