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Winning the Competition for
Customer Relationships
"Winning the Competition for Customer Relationships" (PDF) By Professor George Day . Our Server
The Wharton School
University of Pennsylvania
October 2002
In most markets there are one or two
relationship leaders who outperform their rivals by staying more closely
connected to their customers. Among these leaders are Enterprise Rent-ACar,
Pioneer Hi-Bred Seeds, Fidelity Investments, Lexus, and Intuit. They are well
rewarded for
their prowess. In the credit card industry, Capital One has consistently
out-performed First USA with a strategy that leverages their superior
customer-relating capability.1 They earn 40 percent more interest income from
each customer, with double the profit margin, despite being half the size of
First USA. The boxed insert – “Winning the Credit Card War” – explains why
Capital One is a relationship leader.
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WINNING THE CREDIT CARD WAR
The essence of Capital One’s strategy is to “deliver the right
product, at the right price, to the right customer, at the right time.”
They have consciously avoided the low profit and high churn prime
market, in favor of the super prime and sub prime segments. In the super
prime segment, their focus is on the “high chargers” who generate high
merchant fees in place of interest charges from revolving balances. In
the less appealing sub prime market, they target people with limited
credit histories, like college students. Risks are contained with cards
that have low credit limits and are partially secured. They want to
begin a relationship with these people while they are early in their
credit life cycle, so they stay loyal when they become more affluent. First USA would like to be able to do what Capital One can do. As the credit environment worsens, they have had to deal with a customer attrition rate that climbed from 12 to 19 percent and contributed to a 23 percent decline in revenue in 2000 and their first loss. Their efforts to change will be severely hamstrung by not having the right orientation, information, or configuration for forging customer relationships.
Their ability to handle customer information is unsurpassed in the
industry. Whenever a customer
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What accounts for the advantage these
relationship leaders have earned? Is it deeply embedded in their culture and
capabilities, which would make it hard for followers to catch up? Or could a
technological leap-frog with the latest CRM databases and customer information
systems close the gap? If we believe the mounting evidence that 55 to 75 percent
of all CRM initiatives have a negligible impact,2 then CRM technology on its own
is not the answer.
In seeking a deeper answer, we interviewed managers in 14 diverse companies, including Dow Chemical, Verizon Information Systems, GE Aircraft Engines, Ford Motor Company, and Fidelity Investments, and surveyed senior managers in 342 medium to large businesses (See Appendix 1 for a description of the study). We found three distinct approaches to CRM, with dramatically different results.
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Appendix
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Market-driven approaches make customer relationship management a core element of a strategy that aims to deliver superior customer value through complete solutions, superior service and a willingness to cater to individual requirements.3 CRM technologies support this strategy by facilitating the supporting business process, and giving customers tangible benefits by saving them time and effort, speeding the resolution of problems and recognizing past patronage.
Inner-directed
initiatives aim to gain a coherent and comprehensive picture of customers, that
is otherwise lost in a proliferation of data bases and customer contact points.
The intent is to better organize internal data to cut service costs, help sales
staff close deals faster, and
improve the targeting of marketing activities. These operational tasks are often
assigned to the information technology group who use available software
packages, and have little connection to the competitive strategy. The odds of
disappointment with this approach are high, because the primary motivation is to
solve the company’s problems, not to offer better value to customers.
Defensive
approaches. Some CRM initiatives – including loyalty programs based on redeeming
points in a frequent-flyer or frequent-buyer program – are undertaken to deny an
advantage to a competitor. Like all reactive strategies there is little chance
of gaining an advantage, but at least the status quo is maintained. The CRM
initiative then becomes part of the price the firm pays for being in the
market.3
The market-driven approach that characterizes relationship leaders gives them an
advantage that is difficult to copy. Their rivals will have to think long and
hard about whether to also strive for leadership. But at a minimum they need to
avoid being at a disadvantage. Meanwhile the leaders can’t relax; they need to
understand why they are ahead, and how to stay ahead. To guide both the leaders
and the followers, we devised and tested the diagnostic framework in Figure 1.
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How Relationship Leaders Gained Their Advantage
Our diagnostic framework distinguishes the sources of
relational advantage – which are the competitive strategy and customer-relating
capability – from the positions of advantage based on whether they
deliver superior relational value, and the resulting performance
outcomes. 4
Each block in the figure corresponds to a set of questions that were framed
relative to competition. Table 1 describes the data in more detail.
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Relationship leaders were the 18 percent of the sample with a superior customer-relating capability. They had a significant advantage in developing and managing customer relationships,5 which gave them a significant performance advantage over the followers.
A more persuasive demonstration of the importance of the customer-relating capability, in explaining performance differences, came when this variable was incorporated with strategy and positional advantages in regression equations for each of the relative performance measures (see Table 2 for the details). There were two kinds of positional advantage: relational advantages based on how the business compared to competition in customer service, responsiveness to individual requirements, ease of collaboration, and understanding of customer needs, and product advantages based on quality, performance, and value for money. As expected, the relational advantages were especially influential in explaining customer retention and growth. Neither type of advantage was significantly related to profitability – once the strong direct effect of the customer-relating capability was incorporated.
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Strategy was also important in explaining differences in performance. We asked
about the thrust of the strategy – was customer relationship management the
defining theme of the strategy or a low priority (on a 5-point scale), and was
their motivation mainly defensive or
primarily offensive. Both these aspects of strategy were correlated with all
three measures of performance, and with each other. However in the regression
analysis of Table 2 it was motivation that proved more significant, suggesting
that a strategy gains the most traction in an
organization when it has an explicit goal of beating the competition by offering
relational value that cannot be matched.
THE ANATOMY OF A SUPERIOR CAPABILITY
Case studies, such as the comparison of Capital One and First USA, led us to
conclude that superior performance came from orchestrating the three components
of the customer relating capability:6
(1) an organizational orientation that makes customer retention a priority, and gives employees wide latitude to satisfy customers, as part of an overall willingness to treat customers differently;
(2) information about relationships, reflecting the availability, quality, and depth of relevant customer data and the systems for sharing this information across the firm; and
(3) a configuration that includes the structure of the organization, processes for personalizing the offering, and the incentives for building relationships.
Our exploration of the roles of these three components began by asking the
survey respondents about a large set of indicators of each component. This
ensured that respondents had a common understanding of what was included in each
of the components. This set the stage for an overall judgment of how their
ability on each component compared to their direct competitors.
The first step in the analysis was to see what effect each component had on the
overall customer-relating capability (CRC). The results are shown in Table 3
using both ordinary least squares regression and a continuation ratio logit
model. The latter analysis allowed us to
overcome some of the restrictions of the regression analysis by comparing
respondents in each category of the CRC scale with those in worse categories.
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Our findings confirm that a superior capability is all about how a business builds and manages its organization, and does not have much to do with CRM tools and technologies:
• Configuration best explains differences between businesses in
customer-relating capability. The alignment of the organization toward building
customer relationships, achieve through incentives, metrics, organization
structure, and accountabilities was consistently the most influential component
of the capability.
• Orientation sets the leaders apart. This component had an effect
only at the top end of the capability scale. It takes leadership and
organization-wide emphasis on customer retention to really excel.
• Information technology is merely a necessary condition – on its own, it contributes little to a superior capability. This reinforces the conclusion that inner directed CRM initiatives have little chance of succeeding when the culture and organization are not supportive.
These broad conclusions held up in all types of markets, whether B2B or B2C,
with many or few customers, slow or fast growing, and extremely or moderately
competitive.
While these conclusions are important and validate anecdotal evidence about why
there is often little to show for CRM investments, the real question is what can
be done to improve the customer-relating capability. A battery of indicators was
developed to diagnose each of the
components (see Table 4).
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Orientation Toward Relationships
There are many facets to a relationship orientation. The most important in
this study was the shared belief that customer retention is a high priority for
everyone; not just a concern to be delegated to marketing or sales that does not
engage the rest of the organization. This aspect swamped the effect of some
other facets that were closely correlated, such as employees’ freedom to take
action to satisfy customers, and whether the mindset was transactional or
relational.
Next in importance as an indicator of orientation was the openness of the
organization to sharing information about customers. An orientation is
counter-productive when one function such as sales believes it “owns” the
customer. Potentially useful information is then held closely by one person who
knows the customer and their history, vulnerabilities, and requirements, and
is unlikely to be converted into knowledge that can be shared across teams and
functions.
Similarly, if the mindset and history of the business celebrates customer
acquisitions through individual effort, little energy will be spent on capturing
customer information or assembling it all in one place.
To some degree, a relationship orientation is also shaped by the belief that
different customers should be treated differently, based on their long-run
value. Most companies give lipservice to this notion, but few in the computer
industry went so far as IBM where Lou Gertsner
infused the value of taking on only the best customers – and then doing
everything possible to cater to their needs. This hard-nosed approach saved IBM
from the worst of the problems that HP, Cisco, and Compaq encountered by chasing
every internet start-up without regard to their long-run ability to pay.
Configuration
The strongest indicator of a superior configuration was the availability of
resources to support CRM initiatives. Perhaps this reflected frustration among
respondents, of whom only 10 percent could say that resources were adequate and
deployed effectively. (Another 28 percent said resources were somewhat
adequate). Resources are both fuel for the organization and a signal of the
commitment of the organization to building the proper infrastructure.
Surprisingly few businesses emphasized customer satisfaction and retention in
their incentives. Over half gave them no emphasis at all. Yet the use of these
incentives is another important indicator of a superior configuration. The role
of these incentives is well known but
few companies act as though they believe it. So it is not surprising that Siebel
Systems, the leader in CRM software, is obsessively focused on customer
satisfaction and ties 50 percent of the incentive compensation of management to
measures of customer satisfaction.7 Fully one quarter of the salespeople’s
compensation is based on these measures – but is only paid a year after the
sales contract has been signed and the level of satisfaction with their
performance is known. In most other software companies, salespeople are paid
when a sales contract is signed, which fosters a one-time transaction mindset.
Superior configurations also have organization structures that ensure the
customer has a seamless interaction with the company, rather than “seeing”
several companies because different functional groups do not know about their
other interactions. This seamless connection is often best achieved when there
are clear accountabilities for the overall quality of customer relationships.
Firms organized around customer groups and processes (rather than products,
functions, or geographies) had much higher accountability for the overall
quality of customer
relationships. Forty-nine percent of those saying there was clear accountability
were organized by customer group versus only 2 percent for functional. These
benefits were not lost on other firms, as the number of firms with a
customer-facing organization design is expected to increase by 65 percent within
three years.
The real pay-off comes when all the elements of a configuration – metrics,
incentives, and structures – are properly aligned. This was the challenge to the
General Electric Aircraft Engine Business Group when they found their jet engine
customers were not happy with their service, even though the company’s internal
(Six-Sigma Quality) metrics were showing the opposite. This triggered a CRM
project, based on an in-depth study of what customers really wanted in terms of
responsiveness, reliability, value added, and help in improving their
productivity. This led to wholesale changes in their configuration: new metrics
based on customer requirements were added to traditional functional metrics and
the sales, marketing, and product support groups were organized around
customer-facing processes rather than functions. A corporate Vice
President was assigned to each of the top 50 customers for the sole purpose of
building the relationship, so each customer had a clear channel to the top of
the GEAE organization.
To help customers improve their productivity – which was what they really wanted
out of the relationship – GEAE put leaders of their vaunted Six-Sigma quality
program on site with customers to provide training and work hand-in-hand on
engine service projects as well as
inventory management. Working and learning together, they found the internet was
the best tool for personalizing the delivery of parts, and it became part of the
CRM project. The technology was not the driver of the project, but it did help
to tighten the connections. The last step was to incorporate customer service
metrics into the employee evaluation criteria and provide rewards for superior
service. Throughout the capability-building process all employees were kept
informed; for example a screen appeared in the morning on their workstations
with a summary of GEAE’s performance on key customer requirements, as well as
current engine-related problems such as delays or aborted take-offs, so
corrective action could swiftly be taken.
Information
This component of the customer-relating capability is problematic for most
companies. On one hand it is the least important of the three components when
distinguishing leaders from followers. This is not surprising as most firms were
unhappy with the poor quality of their data
and continuing inability to obtain a full picture of their customer’s history,
activity, requirements, and problems. Yet when we asked our interview
respondents how their time and money were being allocated for building the
capability, almost everything was being spent on databases, software, and data
mining. The typical rationales for this imbalance were “this is the easiest area
to compare to competitors – so we can tell where we are ahead or behind … we
have to match what our competitors are doing … we can get funding for a focused
initiative with clear-cut deliverables and track our progress …” and “software
vendors and consultants keep bringing us new solutions to our database
management problems. We know they are making the same pitch to our competitors
and we don't want to fall behind.” In short, big investments in CRM technology
are yielding negligible competitive advantages. It is the classic “Red Queen”
syndrome; although they are going faster and faster they stay in the same place.
IMPROVING THE CUSTOMER-RELATING CAPABILITY
The design and reach of the improvement program depends on whether the firm is a
leader that wants to stay ahead, a follower trying to avoid a disadvantage, or
an aspirant that sees a chance to change the game in a market where no one is
offering superior relationship value or the leader is vulnerable. These
strategic choices require different objectives and resource commitments.
Followers in particular may have to accept a meager return on their investment –
especially if it involves CRM technology – and base their objectives on where
they would be if they did not have a least a parity level of relational value.
The process of improving any customer-relating capability has much in common
with the allied process of creating a market-driven organization,8 where success
comes when
(1) leadership commitment signals that the firm is serious about the initiative,
(2) the key implementers understand the need for change and see what to do differently, and
(3) there is a sense of urgency.
The best impetus for the improvement process is a realistic assessment of how
the firm compares to its rivals in orientation, information, and configuration.
This must also consider the likely moves and countermoves of the competitors.
What are the consequences of
not catching up? How much will the competitors have improved by the time our
initiative is finished?
These general guidelines are not sufficient because a program for improving a customer relating capability introduces additional complications and pressure points. One recurring problem is that success depends on bringing IT, marketing, and sales together. These groups are not instinctively adversarial, but deep differences in interests, priorities, and backgrounds often frustrate cooperation. Divergent approaches may escalate to turf wars where one part of the business that has a customer database resists having others tap into it because they don’t want someone else spoiling their relationship, or getting a free ride after they have borne the costs.
A further complication is that CRM initiatives prone to being inner-directed
when they are undertaken to fix productivity or service shortcomings. The
antidotes are a deep immersion in the customer experience and an understanding
of what they expect from a closer relationship.9
Those firms aspiring to leadership must also recognize that it is the collective
mind-set, beliefs, and values embedded in an orientation toward relationship
that sets the leaders apart. Yet efforts to change this aspect of the
organization culture directly are unlikely to succeed. Instead, change happens
by altering behavior patterns and helping people understand how the new
behaviors lead to better performance. Eventually these changes will be absorbed
into the underlying norms, beliefs, and mind-set.
To gain organization-wide commitment to the improvement program, we advocate
investing in market understanding, and then aligning the configuration, before
installing CRM technology. Our research also shows that skimping on resources is
a sure way to underperform.
Thus, it is crucial to play to win.
Invest in Understanding Customers
The experience of Fidelity Investments is instructive. In 1997 they began a transformation from a product-centered orientation, which meant pushing only their own funds and treating all customers the same way, toward a relational orientation based on tailored education and investment recommendations. The value proposition was to “provide busy, affluent investors a complete range of innovative investment solutions for their goals and lifestyles delivered on their terms.” This meant broadening their offerings to include non-Fidelity funds, providing education and recommendations tailored to each investors needs, and giving complete flexibility in the choice of channel.
What made the strategy come alive for the organization was the ability to vary
the value proposition in systematic ways within each of 17 customer segments.
These segments were based on four larger groupings of customers: first was the
high value segment with large
complex portfolios where hand-holding was key; second were the core
customers who were not actively involved in investing activities, but
recognized they needed to invest to meet their goals; third were active
traders who simply wanted top-notch execution of their trades; and
fourth were institutions and small businesses offering retirement
plans for employees. Each segment was served with a different organization that
could undertake customer lifetime value analysis, and give each customer a
tailored experience. The intent was to offer such compelling value, and make
access so easy, that the customers would find it very hard to leave for a
competitor.
A major publisher of directories also used segmentation to shape its
transformation. They had always done conventional segmentation studies – which
mostly served to satisfy their curiosity about a very diverse customer base.
Because of the strong conquest mentality of the sales force, and the
unwillingness of the other functions to disrupt their processes, the
organization was not interested in having different types of relationships with
customers of differing value.
The turning point came when they set out to understand how their customers
viewed the total experience of dealing with them. But rather than dwell on what
it was, they also asked what it should be. A diverse array of customers was
asked for their ideal experience. The difference between the expectations of the
largest customers (the 4 percent that represented 45 percent of their revenues)
and the smallest, local customers was startling. The largest customers wanted a
single point of contact where they could resolve issues, coupled with service
tailored to their needs, consultation on how to use the directory to build
relationships, and help in tracking results. The smallest customers wanted a
simple experience with low risk; the predominant view was “leave me alone unless
I need you.” They clearly didn’t require a sales call, and the economics seldom
justify a call. This gave the organization clear signals about how to organize
to meet customer expectations.
Change the Configuration Before Installing CRM
Most post-mortems of CRM failures trace the problems back to the alignment of
incentives and metrics, and the absence of a customer-facing organization. A
common pitfall is to concentrate on the customer contact processes without
making corresponding changes in
internal structures and systems.10 This study provides guidance on how to
overcome these problems and give the CRM initiative a chance to succeed.
Metrics and Incentives. Superior configurations utilize incentives
that emphasize customer retention. But before this can happen, the right metrics
must be in place. This is an immediate problem for companies that don’t know
their customer defection rate. Overall 21 percent of our sample did not know
their customer defection rate, and 24 percent of those who said they knew had no
idea whether it was better or worse than competitors.
Other loyalty measures such as share of customer purchases are equally
problematic. Even if these metrics are available, they cannot easily be traced
back to specific parts of the organization. Are the defections and declining
share of wallet due to service shortcomings,
quality problems, or delivery missteps? Alternatively, are the defectors simply
attracted by a competitor or consciously polygamous? This prompts many firms to
tie their incentives to customer satisfaction measures, as we saw with Siebel.
But for this to work the organization has
to believe the metric, which is hard to do when as many as 90 percent of
customers do not respond and those that do may have a courtesy bias and not give
a rating below four on a five point scale.
A better approach is to have a portfolio of metrics that collectively reveal the
long-term profitability of the customers. This does not preclude loyalty or
customer satisfaction, but supplements them with measures of cost to acquire and
serve, share of wallet, and proxies such as employee retention, complaints, and
performance on attributes that are important to customers.
Organization Structure. Companies with a superior
customer-relating capability were much more likely than others to be organized
by customer group or segment. This ensures the entire organization focuses on
the needs of a distinct set of customers, enables a more integrated picture of
the customer, and ensures clear accountability for customer relationships. This
is one reason why Nokia has split its monolithic $21 billion mobile-phone unit
into nine customer units, each with its own product R&D, marketing, and P&L
responsibility.11 One unit will serve business users, while another will focus
on barebones handsets for users in developing countries.
However, this organizational model is not always appropriate. It works best when
there are distinct segments, the customers want a bundle of products and
services, and the strategy is motivated to deliver superior relational value
through intimate understanding of customers.
There must be a willingness to treat different kinds of customers differently,
and a tolerance for the accounting and organizational complexities that threaten
to erode economies of scale. Microsoft has tried to organize around different
types of customers to get product-development groups closer to customers. The
intent was admirable but the effort came undone because decisions about
wide-utility products such as Windows were spread across too many of the new
divisions. Short of organizing entirely around customer segments, there are
intermediate practices that offer some of the benefits, by using key account
managers and orienting customer contact functions around segments while leaving
manufacturing and development organized by product.
Orchestrating the Improvement Program
Canadian Pacific Hotels has very successfully combined deep customer insights
with configuration changes to build greater loyalty with business travelers.
Although CP Hotels had 27 hotels in the quality tier, and were proficient with
conventions and group travel, the chain was not well regarded by business
travelers. This is a notoriously demanding and diverse group to serve, but also
very lucrative and much coveted by other hotel chains. CP Hotels began by
investing in deep learning about this segment to find what would most satisfy
them. Frequent guest programs had little appeal, because they preferred airline
mileage. They also appreciated beyond-the-call-of-duty efforts to rectify
problems immediately. What they mostly wanted was recognition of their
individual preferences and lots of flexibility on when to arrive and check out.
CP Hotels responded by committing to customers in its frequent-guest club that
they would make extraordinary efforts always to satisfy their preference for
type of bed, location in hotel, and other amenities. Delivering on this promise
proved remarkably difficult. The company
began by mapping each step of the “guest experience” from check-in and parking
valet to checkout and setting a standard of performance for each activity. Then
it looked to see what had to be done to meet the commitment to personalized
service. What services should be offered? What processes were needed? What did
the staff need in order to make the process work flawlessly?
The biggest hurdle was the firm's historic bias toward handling large tour
groups, so the skills, mind-sets, and processes at hand were not the ones needed
to satisfy individual executives who didn't like to be asked about their needs
every time they checked in. Even small
enhancements such as free local calls or gift shop discounts required
significant changes in information systems. The management structure was
changed, so each hotel had a champion with broad, cross-functional authority to
ensure the hotel lived up to its ambitious commitment. Lastly, they put further
systems and incentives in place to make sure every property was in
compliance and performance was meeting or exceeding the standards.
After implementing these changes, CP Hotels’ share of Canadian business travel
jumped by 16 percent in a flat market, without adding any new properties. By all
measures CP Hotels had won greater loyalty from its target segment. Long-term
success will take sustained
commitment to keep ahead of competitors who want to match or leap-frog. In this
spirit, it is important to keep improving by continually experimenting, and
questioning familiar assumptions. Firms that sustain their commitment this way
send a signal to both their employees
and customers that their customer-relating capability is one of the centerpieces
of their strategy.
Footnotes
1 This case comparison is based on interviews with the management of Capital
One and First
USA, plus security analysts reports, public sources, and “Capital One Financial
Corporation,”
Harvard Business School case 9-700-124 (May 1, 2001).
2 See, for example, J. Caulfield (2001), ‘Facing up to CRM,” Business 2.0
(August-September),
149-150; L. Yu (2001), “Successful Customer Relationship Management,” MIT Sloan
Management Review, 43 (Summer), 89-105; “How to Avoid a CRM Failure,” e-Week
(May 17,
2002); and L. Dignan (2002), “Is CRM All It’s Cracked Up to Be?” CNET, April 3.
3 G. Dowling (2002), “Customer Relationship Management: In B2C Markets, Often
Less is
More,” California Management Review 44 (Sprint), 87-104.
4 G. S. Day and R. Wensley (1988), “Assessing Advantage: A Framework for
Diagnosing
Competitive Superiority,” Journal of Marketing, (April).
5 The customer-relating ability is one source of advantage that is supported and
facilitated by
other resources of the firm. See R. Amit and P. J. H. Schoemaker (1993),
“Strategic Assets and
Organization Rent,” Strategic Management Journal, 14, 33-46, and B. Wernerfelt
(1984), “A
Resource-Based View of the Firm,” Strategic Management Journal, 5, 171-180.
6 These three components are also represented in the three factors of resources,
processes, and
values used to define an organizations’ set of capabilities by C.M. Christensen
and M.
Oberdorf (2000), “Meeting the Challenge of Disruptive Change,” Harvard Business
Review,
(March-April), 67-76.
7 B. Fryer (2001), “High Tech the Old Fashioned Way,” Harvard Business Review,
(March), 99-
125.
8 G. S. Day (1999), “Creating a Market-Driven Organization,” MIT Sloan
Management Review,
41, 11-22.
9 Other approaches to understanding customers’ experiences can be found in P. B.
Seybold
(2001), “Get Inside the Lives of Your Customers,” Harvard Business Review, 79
(May), 80-
91.
10 D. K. Digby, F. K. Reichheld, and Paul Scheffer (2002), “Avoid the Four
Pitfalls of CRM,”
Harvard Business Review, (February), 101-109.
11 A. Reinhardt (2002), “Nokia’s Next Act,” Business Week, July 1, 56-58.
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