{"id":78,"date":"2001-01-01T11:53:43","date_gmt":"2001-01-01T11:53:43","guid":{"rendered":"http:\/\/www.eprdev.com\/jag\/?p=78"},"modified":"2019-02-14T16:23:39","modified_gmt":"2019-02-14T21:23:39","slug":"competitive-advantages-through-customer-satisfaction","status":"publish","type":"post","link":"https:\/\/www.jagsheth.com\/relationship-marketing\/competitive-advantages-through-customer-satisfaction\/","title":{"rendered":"Competitive Advantages through Customer Satisfaction"},"content":{"rendered":"
My own business experiences have led me to believe that the twin strategies of business success are: Employee Satisfaction and Customer Satisfaction. Productivity of corporate resources including people, money and machinery in all aspects of business operations ranging from research and development, manufacturing and operations, to sales and services depend on how employees and customers feel about the business.<\/p>\n
I have also observed that in the early stages of a company’s life cycle, its success depends heavily on employees and their soldier-like devotion and hard work. You see this in all startup businesses whether it is a retail restaurant, biogenetics or specialty chemicals or a high tech electronics company. We have all read and heard stories of successful entrepreneurs who succeeded against all odds because of extraordinary efforts by themselves and their employees.<\/p>\n
Selecting the right employees, motivating them correctly, and rewarding them handsomely for their hard work becomes extremely important in the early stages of a company\u2019s life cycle. In the process, the company begins to be driven by its employees and internal operations and forgets that you also need satisfied customers to succeed in their business.<\/p>\n
Furthermore, as business grows, so does its bureaucratic structure, which further isolates the company from its customers. lndeed, it is not uncommon for the company\u2019s employees and procedures to feel that the customer is a bloody nuisance, who refuses to go along with their sales forecasts, who has the audacity to criticize and complain, and who wants to change them to suit his requirements<\/p>\n
Thus, when business grows and the company reaches the maturity stage of its life cycle, it is common to find satisfied employees but dissatisfied customers. Smart management, therefore, must focus on the external world of customers and their needs in addition to the internal world of employees and their operations. It must realize that the company now depends much more on its customers and not the other way around; that customers have other choices: and that customers are both technically sophisticated and financially capable to produce products and services rather than buy them from anyone in the market place.<\/p>\n
Unless the company is willing to reorient its people and reorganize its operations to be customer driven, excellence in R&D, manufacturing, and marketing are unable to stop decline in market share, corporate growth and business profitability. It is not a question of doing it right, it is a question of doing the right thing! Furthermore, it doesn’t matter whether you are a big company or a small company, market leader or a niche player. Nor does it matter whether you are in agriculture, chemicals, consumer electronics, automobiles, financial services, health care or telecommunications. Lack of customer focus, especially at the maturity stage of the life cycle, creates a significant negative impact on the company\u2019s profits and growth performance.<\/p>\n
And once you start losing profits, growth and market share, you also lose employee confidence, morale and productivity. Ultimately, excellent employees start to leave the company resulting in employee dissatisfaction. In other words, employee satisfaction also depends on customer satisfaction.<\/p>\n
A number of excellent companies have recently learned this lesson the hard way. Fortunately, they were able to turn the comer before it was too late. Perhaps the best example is Ford Motor Company. It was losing significant market share, incurred record losses and was stagnant in its growth. However, what it had was strong employee loyalty. Before it became too late, they woke up and instituted changes in both corporate culture and operational structure to be customer driven. In less than ten years, the company has scored successive major new product victories across its product line and earned record profits. This includes Escort (small car), Thunderbird (personal car), Taurus (mid-size car), and more recently Lincoln Continental (luxury big car) as well as Probe (sporty car).<\/p>\n
Similarly, after three to four years of flat sales and fluctuating profits, IBM has regained its leadership in the personal computer business as well as in the data processing business by refocusing on the customers.<\/p>\n
Finally, AT&T and its divested Regional Holding Companies have survived the largest industry restructuring by the government because of their customer orientation even in a monopoly situation.<\/p>\n
In this paper, I will discuss at least six major competitive advantages a company can gain through customer satisfaction. All of them contribute positively toward the dual financial objectives of profits and growth.<\/p>\n
Figure 1 summarizes these six competitive advantages which contribute toward the corporate bottom line. A company\u2018s profit objectives are attained by the following three competitive advantages: (1) economy of sale through lower cost of doing repeat business; (2) higher prices commanded through differentiation; and (3) protection from satisfied customers in a crisis situation. Similarly, a company\u2019s growth objectives are attained by the other three competitive advantages; (4) product diversification growth through one stop shopping; (5) new market growth by word of mouth; and (6) new product deve10pment through lead users.<\/p>\n
<\/a><\/p>\n Let’s now discuss each competitive advantage in some depth. The first three competitive advantages are directly relevant for profit improvement. The last three are directly relevant for growth improvement.<\/p>\n In a mature market, perhaps the best competitive advantage a company can maintain is through retaining its customers since as much as 90 to 95 percent of total business comes from existing r m customers. Competitive strategies for retaining existing customers tend to be less costly than those for gaining new customers, especially in mature markets with entrenched competitors. We all know that with repeat purchase, the Cost of doing business with satisfied customers goes down. However, what we often do not realize is that it goes down exponentially with a very sharp decline in costs in the early stages of repeat buying as demonstrated in Figure 2.<\/p>\n <\/a><\/p>\n Underlying this simple concept are some powerful implications.<\/p>\n First, it demonstrates that the economy of scale advantages in manufacturing operations attained through volume and worker experience are equally appropriate concepts and consequences in the sales and service environment. In other words, productivity of marketing-related activities goes up significantly with repeat buying by satisfied customers. And this is likely to become increasingly more important in the near future as we minimize manufacturing costs through just-in-time, quality assurance, and flexible manufacturing; and as we minimize management overheads through downsizing, office automation and reorganization. As both the manufacturing and management costs come down over time, marketing costs as a percent of total costs tend to rise. For example, it is estimated that manufacturing costs in the electronics industry are under 25 percent, management costs under 20 percent, and, therefore. as much as 55 percent of total costs in business are housed in sales, service and value add activities. Therefore, the next challenge of eliminating or minimizing business costs is likely to be in marketing. And the best way to lower costs is to increase satisfied customer base.<\/p>\n Second, we all know that dissatisfied customers increase the cost of sale. They slow down in their payments, elevate complaints to higher level management, and even engage their legal departments to fulfill their expectations. And. If the customers engage their legal departments, we must also engage our legal department, resulting in cost escalation.<\/p>\n It is estimated that one dissatisfied customer takes the profitability out of five satisfied customers. Unfortunately, this is hidden and dispersed throughout the organization, and therefore, not notices by top management.<\/p>\n Third, it is impossible to satisfy all customers. Some customers have very unique requirements; their locations are too remote to serve them properly, and their user environments may not be conducive to proper product use. It is, therefore, important to be extremely selective in your choice of customers.<\/p>\n Unfortunately, customer selectivity as a concept is often contrary to sales incentives and the selling environment in general. We incentize our sales force on revenues and not on profits. Therefore, they generate both good sales and bad sales. Someone in the company pays for the bad sales.<\/p>\n Finally, it is better to prevent customer dissatisfaction than to correct it after it is created. This is comparable to the zero defect concept in quality assurance : A bad component is likely to create more problems after the product is assembled, and it is a lot cheaper to institute front end preventive measures such as the zero defect. It is, therefore, extremely important not to create wrong customer expectations whether it is through advertising, product packaging, or sales presentations. The higher the expectations we create with aggressive sales and marketing tactics. the higher the cost of correcting them if customer expectations are not met by their product experience.<\/p>\n Unless there is a strong incentive, satisfied customers are unlikely to switch suppliers. After all, they have invested significant amount of time, effort and expertise in searching and selecting the right vendors in the first place There are minimal costs associated with switching vendors and in some cases they can be prohibitive. For example, once a customer is linked by computerized order entry systems it is very difficult for him to switch to another supplier.<\/p>\n Satisfied customers want the company to survive any crisis it experiences and they try to assist the company to ensure its survival. Customer satisfaction is probably the best source of insulation against corporate crises. <\/i><\/p>\n Therefore, if a competitor wants to capture your satisfied customers, it must provide significantly better value than you either by lowering prices for the same level of performance or by increasing performance levels at the same price. The larger the satisfied customer base you own, the greater the amount of entry barriers for your competitor. This was the experience of Air Borne and Emery against Federal Express in the overnight delivery business. Similarly, this has been the experience of most of the long distance telephone companies such as MCI and U. S. Sprint as they try to capture AT&T’s customer base. And of course, very few mainframe computer companies have succeeded in taking away the IBM share.<\/p>\n It is my estimate that a minimum of at least five percent price advantage is generated through customer satisfaction<\/i> even in commodity businesses such as industrial chemicals, agricultural commodities, electronic components, and basic raw materials. Also, one would expect, at least theoretically, some maximum price advantages a company gains through satisfied customers. However, the maximum price advantages often tend to be outrageous, especially in highly specialized niche markets or for super premium products or services. In the majority of cases, my experiences have shown a maximum price advantage of around 30 percent in mass markets.<\/p>\n We refer to this price advantage as Differentiation<\/i>. It is created through excellence in one or more specific sources of customer satisfaction. Figure 3 identifies four sources of differentiation: product excellence, service excellence, brand reputation, and customer oriented culture.<\/p>\n <\/p>\n A very good example of price advantage toward product excellence is the 3M Company. It has several excellent products which have retained their performance superiority to command higher prices despite competition. These include the Scotch tapes, Post-it note pads, and 3M floppy disks.<\/p>\n On the other hand, IBM has maintained its price advantage primarily through service excellence especially in the mainframe business. It is not unusual for a large corporate customer to continue to pay at least 20 to 25 percent higher prices for IBM system of hardware, peripherals and software even with the knowledge that competitive products are at par or superior in performance.<\/p>\n A third source of price advantage through differentiation is brand reputation. In areas where quality varies significantly across competitors and the customer is unable to judge or control quality consistency, brand reputation becomes a significant price advantage. This is very true for McDonald\u2019s in the fast foods business, for Marriott in the hospitality business, and for Boeing in the commercial aircraft business. Brand reputation is even more critical in professional services such as health care (Mayo Clinic) consu1ling(McKinsey) and financial services (American Express).<\/p>\n A fourth source of price advantage through differentiation come from customer oriented culture. There are several American and foreign companies where customer satisfaction is part of the corporate creed and practice at the highest level of management. Customers experience this philosophy and develop an image that says: this company cares. Examples include Nordstrom in the department stores business, Singapore Airlines in the airlines business and IBM in all of its businesses.<\/p>\n A third major competitive advantage through customer satisfaction which is linked to profits is in the area of corporate crises. Satisfied customers want the company to survive any crisis it experiences and they try to assist the company to ensure its survival. Customer satisfaction is probably the best source insulation against corporate crises.<\/p>\n A company encounters crises from several sources, some external and others internal. Figure 4 identifies four major sources of crises which are directly relevant to customer satisfaction.<\/p>\n<\/span>l. Repeat Buying Results in Lower Costs<\/span><\/h2>\n
<\/span>2. Customer Satisfaction Creates Price Advantage<\/span><\/h2>\n
<\/span>3. Customer Satisfaction Limits Corporate Crisis<\/span><\/h2>\n