What does Mercedes-Benz have in common with H.J. Heinz and Coca-Cola?
The obvious response is an enormously strong brand. But the more significant issue is what creates the strength. The answer carries a powerful lesson for all managers. The potent trio are among the Top Ten US companies for customer satisfaction – and that score is a critical indicator, not only of market strength, but financial success.
The gurus have been preaching the importance of the 'satisfied customer' percentage for even longer than the best-advised companies have been tracking the number. But only in recent years has the issue been narrowed down to truly hard relationships and one hard question. Will the customers buy from you again? Here Fortune reports an astonishing correlation. In Sweden, where the 'Customer Satisfaction Barometer' hinges round that vital question, 'Companies capable of increasing [on the CSB] by one point every year for five years improved the average return on assets during the period by 11.33%'.
Two mechanisms drive the financial correlation. Retention of old customers costs much less than acquisition of new ones. The profit generated from the retained customer must therefore handsomely exceed the harvest reaped from the new clientele. The retained customer base is thus a huge intangible asset. If you want to make it look tangible, use averages like the cost per transaction and the profit margin to work out the net present value of the retained customer base. That value demonstrates the return that's won by successful efforts to satisfy the customers so greatly that their custom stays with you.
The other way round, look no further than McDonald's to see what happens when unhappy customers start passing a business by. Only the taxmen rank lower on the American Customer Satisfaction Index than the hamburger king, whose financial performance has been equally limp. Now, there's no problem in demonstrating the link between liking somebody's hamburgers and coming back for more. In fact, chain eating as a whole ranks low in customer satisfaction – the lowest of all industry groups (at 66 points out of 100). McDonald's well-publicised US troubles with menus and prices (and its entire strategy) have merely made it the worst of a very mediocre bunch.
RETENTION: THE VITAL STATISTIC
Take the case as wholly proven – or as near to complete proof as management theory allows. The next step, having accepted that customer retention is the vital statistic of any business, is to discover the second mechanism. What drives the customer's satisfaction? The answer will be no secret to readers of Thinking Managers. The solution lies with the employees. Everybody 'knows' that a satisfied worker creates a satisfied customer and higher financial returns: and that, by the same token, disgruntled staff lead to customer dissatisfaction. But the evidence for this truism has been largely anecdotal – until now.
Careful research by staff at Sears, the US retailing giant, has established a convincing and clear correlation between employee attitudes, customer attitudes and financial results. The research shows that for every 5 units of improvement in employee attitudes, there are 1.3 units of gain on the 'customer impression' index. Moreover, the latter added up to a 0.5% increase in sales over what they would otherwise have been.That's money in the bank. So far, so good. But what generates the better employee attitude at the start of what Sears calls 'the employee-customer-profit chain'? Just ten questions from the 70 queries in the Sears employee survey proved to have the highest impact on behaviour. The first six questions are concerned with the work and the individual's reactions to the job:
1. Do you like the kind of work you do?
2. Does it give you a sense of accomplishment?
3. Are you proud to say you work for the company?
4. How does the amount of work you are expected to do influence your overall attitude about your job?
5. How do your physical working conditions influence your overall attitude about your job?
6. How does the way you are treated by those who supervise you influence your overall attitude about your job?
It's hardly surprising that these workplace factors affect employee behaviour. But attitudes towards the company also turn out to have an especially marked influence, which may come as more of a surprise. The questions to employees almost sound more appropriate to investors – but, then, employees do invest their lives and financial security in the company. Try these on your people:
7. Do you feel good about the future of the company?
8. Is the company making the changes necessary to compete effectively?
9. Do you understand the company's business strategy? v10. Do you see a connection between the work you do and the company's strategic objectives?
You may question how deeply all employees understand either the changes required to enhance competitive prowess, or the ins and outs of the business strategy. After all, a massive Ernst & Young survey found that middle managers only partially understood their corporations' strategies. It's doubtful whether those further down the ladder had any better understanding, and probable that it was worse. Sears, however, has put abnormal effort into its 'three Cs' and 'three Ps' philosophy, which is easy enough to understand.
The big idea is to combine three values – 'Passion for the customer, our People add value, and Performance leadership' – to make Sears 'a Compelling place to work, shop and invest'. The research has simplified the translation of this credo into strategy. By improving employees' attitudes to the job and the company, you improve their behaviour and their retention. That in turn translates into higher levels of service and helpfulness, and into better merchandise and value.
Customers respond to these benefits with warmer impressions, which naturally generate favourable word of mouth and higher retention (that most vital statistic, remember). The model shows that return on assets, operating margins and revenue growth are all affected by the customer response and its consequences. The conclusion is inescapable. Techniques for improving employee attitudes, customer satisfaction and customer retention are the most important management tools. That importance, however, is not reflected in some interesting research by management consultants Bain & Co.
Working with the Institute of Management, Bain looked at the Top Ten management tools of the five years 1992-96. Only one customer-focussed tool figures alike in Germany, Japan, the US and the UK. That is 'customer satisfaction measurement'. Customer retention figured only in the German and Japanese lists, even though it is demonstrably superior as a measure and more powerful as a tool. For all that, even the Japanese (who rank measuring customer satisfaction second only to reengineering) have retention well down the list in ninth position.
The showing on employee-based tools is no more impressive. Pay for performance is listed, true, in every country save Germany. You could also argue that Total Quality Management, which all countries include, is really a people-based programme – though that is stretching the point. It rings true in a genuine TQM company, but not in the many organisations which, while preaching total quality, stop well short of genuine participation, collective decision-making and self-managed teams.
TOP TEN TECHNIQUES
Self-directed teams are recognised as important in Bain's valuable annual 'executive's guide' to management tools and techniques. Such teams, however, were not used enough to earn a top ten place in any of the four countries. They have certainly risen in importance and popularity since 1996. Managers, though, don't appear to switch their technical favourites much. In the Bain global list, there's only one change between the five year figures and those for 1996 – 'growth strategies' have replaced activity-based costing in tenth place. The full world-wide list for 1996 is as follows, with 1992-96 rankings in brackets:
1. Strategic planning (2)
2. Mission statements (1)
3. Benchmarking (4)
4. Customer satisfaction measurement (3)
5. Core competencies (6)
6. Total Quality Management (5)
7. Reengineering (9)
8. Pay for performance (8)
9. Strategic alliances (10)
10. Growth strategies (-)
Without question, all ten have valuable places in any management's armoury. But the list raises some obvious questions. What kind of strategic planning would not be linked with growth strategies? What's the difference? Bain quotes a finding that revenue-driven profit growth can achieve 25% to 100% greater share price appreciation than cost-driven profit growth. Yet the consultants list as topics related to strategic planning only core competencies ('a special skill or technology that creates unique customer value') and mission and value statements.
'Growth strategies', however, are related only to 'innovation management 'and 'market migration analysis'. If the latter is new to you, it means 'changing the business design (the processes a company employs to target customers, design products, produce and deliver its offering) to focus on areas where value is being created and to avoid those where value is being destroyed'. That's a tall order, which becomes even taller when you know what questions you're supposed to be able to answer:
1. What were the market values and profits of all industry participants (direct and indirect competitors) over time?
2. What business designs were used by companies that respectively (a) gained significant market value, or (b) lost it?
3. How are changes in customer priorities driving changes in purchasing behaviours?
4. How do alternative business designs affect the ability to satisfy customer needs?
5. Where will future profits be made?
Once you've answered all five hard questions (of which the last is unanswerable), you're in a position to 'develop and implement business designs that will create the greatest utility for customers and the highest profitability for the company'. This technique is a somewhat long-winded expression of the principle that you start analysing the business system at the customers' end, and work back from their satisfaction. As you move back along the value chain, you reform or eliminate processes, until you gain competitive advantage: you cost the key activities, find out what drives the costs, and strengthen the links with the customer to differentiate your offering and increase satisfaction.
A LOT OF LEARNING
Look through the Bain book, and you find that many of the tools and techniques listed likewise stress the customer angle heavily. To that extent, the paucity of customer-based techniques is misleading (though the low showing of employee-related tools remains striking). But Bain's work also suggests that the simple measures of satisfaction and retention can be the end-result of complex techniques, some of them familiar to very few managers – like 'five forces analysis' and 'profit pool analysis'. No doubt, it isn't necessary for everybody to master these mysteries. But there's still a lot of learning to be done.
That necessity is brought home sharply by the sad experience of Dalgety, which grew to global size as an agricultural products business. Its top managers decided that the prospects of a commodity trade were inadequate to satisfy their and the shareholders' ambitions, so they decided to diversify into consumer products in Europe. The only problem was that the directors lacked experience of fast-moving consumer goods, and the middle managers shared this deficiency. It seemed like a perfect opportunity for training and re-training
I took part in discussions about building a management development programme that would focus round the strategic needs (above all, the conversion to marketing). The idea was simultaneously to solve problems and to equip the participants with the tools needed to design and implement the solutions. The company was already spending handsome sums on developing managers; but the imposing brochure had no obvious linkages to the huge and difficult conversion task that the consumer goods strategy demanded.
Dalgety's HR people, though, didn't think that top management would buy the proposal. Undaunted, we suggested running a free half-day course for the directors that would use the proposed methodology and thus demonstrate its efficacy. This notion was even more firmly squashed: these men, we were assured, would never enter anything resembling a classroom for any purpose. They are not alone. The more senior the managers in a company, the less likely they are to feel that they have anything to learn.
The Dalgety experience doesn't encourage that belief. After selling the Spillers petfood business, the centrepiece of its marketing ambitions, the group has virtually disappeared. All that's left is agricultural supplies (which is where the saga began) and an outfit called the Pig Improvement Company. The disposals were effected by new management, which decided to break up the business rather than continue struggling with a company that could only manage a 3.7% return on sales in 1996-97. With only 13% of the European market, Dalgety had no hope against the money of Mars (43%) – also far richer in marketing expertise.
You need the expertise to understand the customers you want to retain (which, in the case of petfoods, of course, are the owners, not the pets). You do that, to quote Bain, 'by methodically eliminating drivers of defection and reinforcing drivers of loyalty'. Employee satisfaction, as Sears discovered, is the key driver. Beyond that, however, the issues get less straightforward. 'Relationship marketing' is an example. It involves using IT systems to achieve individual knowledge of the customers in a mass market and to exploit that information to create loyalty.
Research at Harvard Business School, however, has cast great doubt on this fashionable approach. Many customers, it seems, don't want to be courted with tailor-made offers and inquisitive questionnaires. The knowledge obtained is inevitably superficial and may not relate to the customer's choice, anyway. Customers, for instance, are amazingly loyal to banks, many of which give poor service. The relationship may be founded on nothing more useful than heredity: the customer's father banked there, and introduced his son or daughter. After that, inertia and nervousness about money took over to inhibit changing.
Rather than woo individual customers you don't know, it's better to approach them all effectively. Have helpful information systems, staffed by real people: don't keep customers waiting to the sound of scrambled music, or tell them which number to press on their touch-tone telephone, or say mechanically that all your operators are busy, and the customer will be connected to the first one available – have one available. Reward people for pleasing customers and train them in how to do so. Hire only friendly, pleasant people who make a good impression on you, and study how to retain them. Respond to complaints immediately, and deal with them promptly and fairly (in the customer's view, that is).
All these strategies will be more effective in keeping customers than knowing how many times a year they buy your product or take your service. Susan Fournier, one of the Harvard researchers, says that 'A relationship is not getting a newsletter, responding to a questionnaire or holding a frequent-buyer card. It has to do with product quality, consistency, image': in other words, with the brand. Mercedes-Benz and the other satisfaction leaders no doubt send out excellent mail-shots. But it's overall excellence in the whole employee-customer-profit chain that does the trick.