Managing Customer Value

Creating Quality and Service That Customers Can Se

Bradley Gale

• Publisher: Free Press
• Year: 2009
• Print ISBN: 9781451612929
• eBook ISBN: 9781439188361
• Topic: Business
• Subtopic: Forecasting
• Index: Business

Even today with quality improvement the battle cry of American industry, the quality programs in most companies are limited to "conformance to technical standards," according to quality expert Bradley Gale. While some have ventured a step farther to measure customer satisfaction, few of them, Gale demonstrates, have attempted to track market-perceived "quality" -- how buyers select among competing suppliers, why orders are won or lost, and which competitors are succeeding in which market segments.

Using cases including Milliken & Company; AT&T, United Van Lines, and Gillette, Gale shows how leading-edge companies have gone beyond the minimal achievements of conformance quality and customer satisfaction to focus on the third, higher stage, "market-perceived quality versus competitors" and aspire to an emerging fourth stage, "true strategic management." Drawing on his extensive research at AT&T, Johnson & Johnson, Parke-Davis, and other world-class companies, Gale provides new metrics for market-perceived quality that are straightforward and easy to interpret. His set of seven integrative tools for customer value analysis makes up the heart of the "war room wall" to help guide business-unit teams in their effort to outperform competitors in satisfying customers. The great value of these tools is that they are derived from a future-oriented strategic navigation system that tracks competitive information and market-perceived quality. Learning to master this system accelerates customer satisfaction from a slogan to a science and leads ultimately to true strategic management -- the fourth stage of Total Quality Management.

The processes described in this book provide an insider's perspective on the criteria of the Baldrige Award. Bradley Gale's insights and innovative methods for defining, measuring, and improving market-perceived quality will create an entirely new thrust for the worldwide quality movement.

PART ONE

Making Quality a Strategic Weapon

Chapter 1

The Four Steps to Customer Value Management

Chapter 2

Moving “Customer Satisfaction” from a Slogan to a Science

CHAPTER 1

The Four Steps to Customer Value Management

Curt Reimann is the most unlikely national leader imaginable—a mild-mannered chemist who has spent virtually his entire career in Gaithersburg, Maryland, at the National Bureau of Standards and its successor, the National Institute of Standards and Technology.

He hasn’t had much business experience. But he clearly has not lacked vision. No one in the decades since World War II has done more to advance U.S. management thinking.

Reimann deserves primary credit for the success of the Malcolm Baldrige National Quality Award. In the mid-1980s, when Reimann was the unknown deputy director of the Bureau of Standards’ National Measurement Laboratory, he was chosen to head the bureau’s Quality Council.

Then things began to happen fast. Malcolm Baldrige, Ronald Reagan’s secretary of commerce and an advocate of a national quality award, died suddenly in a fall from a horse. Backers of the award suggested it be named after Baldrige. The Bureau of Standards promised to give the first award in Baldrige’s memory before the Reagan administration left office. As a result, the administration threw its whole support behind the idea, and Congress approved it in the summer of 1987.

Thus, Reimann had to develop ways to define quality, to select companies that really achieved it, and to present the first awards, all within seventeen months. It was an almost unimaginably difficult task.

Most difficult of all, he had to do everything without alienating the thousands of advocates of “quality”—who defined that term in hundreds of different, often contradictory ways.

In 1987, quality advocates were divided into factions supporting competing gurus—W. Edwards Deming, J. M. Juran, Philip Crosby, and others. And unfortunately, companies could achieve quality as any of the gurus defined it, yet still fail to produce a product that would win and keep customers.

So Reimann’s job was hard. “Trying to create a state religion might have been easier,” Reimann says.

Yet Reimann succeeded to a far greater extent than anyone had a right to expect. From the time President Reagan gave out the first award in December 1988, the Malcolm Baldrige National Quality Award has been a key standard of excellence throughout the United States and, indeed, much of the world. Thousands of executives testify that studying the Baldrige award criteria has helped them make dramatic improvements in their organizations.

How did Reimann do it? The most important fact was that he thought carefully about the basic question: “What is quality?”

As a result, he and his committee defined quality in a more complete way than anyone had up to that time. And in doing so, Reimann not only made his award highly sought-after; he also made it easier for U.S. companies to deliver quality and value their customers would recognize and delight in.

The quality movement in the United States has developed in four stages, driven largely by the learning that Reimann set in motion. Many organizations today are just entering the third stage; only a handful are ready to enter the fourth.

The entire period prior to the introduction of the Baldrige award can be called the conformance quality stage. The introduction of the award, with its customer-oriented judging criteria, quickly moved the movement to a second stage focused on customer satisfaction. The Baldrige award criteria laid the groundwork for a third, more sophisticated stage, focusing on the achievement of superior market-perceived quality and value versus competitors. Finally, the Baldrige award and its judging criteria pointed toward a fourth stage, customer value management, that will build on the learning of the first three and enable organizations to understand and think about their strategies and their roles in society better than they ever have in the past. That stage is just now on the horizon.

The purpose of this book is to help you and your organization achieve the full benefits of the third and fourth stages of the quality movement by learning to use a set of tools called customer value analysis. The development of these tools began before the Baldrige award was even conceived of. The experience that went into them helped Reimann and his staff develop the original Baldrige criteria.

Today, these tools have been greatly refined. With them, you can now reliably track how customers in your marketplace judge your product or service in comparison to the competition’s. Then you can use that knowledge to delight customers and to choose profitable markets and technologies, thus creating a truly prosperous organization.

This book will offer a tested set of metrics that will tell you how well you’re doing and where to focus your efforts so you’ll satisfy more customers more profitably. It will present a clearly defined set of methods that will help you learn from those metrics and communicate the learning to the key people who must understand it. It will tell detailed stories of numerous companies that have used these tools successfully. And finally, it will provide clear evidence, from new studies using the world’s only complete database of corporate competitive information, that achieving superior quality and customer value as we are defining those terms in this book really leads to superior profits.

In other words, this book will introduce a complete customer value management methodology, based on ideas that helped Reimannand his associates create the Baldrige Award. It will provide clear evidence that the methodology works. And it will demonstratethat this is an approach to strategic management that will dependably produce superior profits through happy customers.

When a Company Does It Right

American Telephone & Telegraph is one company that has learned to track and provide customer value well. Over the past six years it has developed some of the methods of customer value analysis we will discuss in this book, and its commitment to customer value management makes it one of the leaders in moving into Stage Four of the quality movement.

Consider how customer value analysis methods have benefited AT&T in just one business, long-distance network services. They showed the company how to turn around a potential disaster.

AT&T spent the years after its breakup in 1983 losing market share. As we’ll describe in Chapter 4, the losses were particularly painful to quality advocates, because AT&T’s old-fashioned “customer satisfaction” surveys showed the company was scoring well even in the businesses that were losing share most dramatically.

In long-distance, the company’s core business, the share losses were running at six points a year—equivalent to more than a billion dollars a year in sales. Many executives despaired of maintaining AT&T’s premium-priced position. They advocated wholesale cost-cutting and a price war with MCI and Sprint.

But two AT&T associates, Ray Kordupleski and Paul Dernier, began to use customer value analysis techniques to analyze the problem. We’ll discuss the techniques in detail in later chapters, but here it’s enough to say that Kordupleski and Dernier showed that customers were willing to pay for quality in long-distance and that customers could recognize superior quality. Moreover, even as AT&T lost market share, customers still perceived AT&T’s technical quality to be better than that of competitors.

Kordupleski and Dernier showed the key problem was that AT&T’s overall lead in perceived quality just wasn’t enough to justify its perceived higher price: First, customers perceived AT&T’s price premium to be higher than it really was. And second, AT&T’s lead in perceived quality was narrowing. MCI and Sprint had newer networks, with more modern fiber optic cable and thus less noise. The competitors were also challenging AT&T in billing and installation quality.

If AT&T continued with its existing programs, it would continue to provide excellent technical quality—but it wouldn’t be the best relative quality any more. And Kordupleski and Dernier’s analysis showed that AT&T needed superior relative quality to justify its market leadership.

What happened? Influential young executives convinced AT&T’s top leadership to make changes. One decision: AT&T would write off fully $6 billion of obsolete plant and equipment years ahead of schedule and add $2 billion a year to capital spending.

As a result, in 1988 AT&T reported the first loss in its one-hundred-year history.

But spending began to boost AT&T’s technical quality. And not a moment too soon. Surveys showed that AT&T’s perceived technical quality continued to decline during 1988. It hit a low in October 1988—when customers found AT&T’s performance was just at parity with competitors’. But then it bounced back. Meanwhile, AT&T set up teams to improve the billing and installation processes. And the company used its new understanding of perceived prices to design a series of “I came back” ads, in which customers declared that the savings they expected in switching from AT&T proved illusory. Surveys showed the company’s perceived price disadvantage reached its maximum in May 1988, and then declined through August 1989—though actual relative prices were stable.

Follow-up research showed AT&T had nearly lost its leadership in long-distance. Its overall worth-what-paid-for score actually fell behind competitors in May 1988, and the company didn’t return to parity until March 1989. But then after remaining even with MCI for two months, it began to pull ahead in mid-1989.

The ultimate result: AT&T’s market share losses were virtually halted and its dominant position in the marketplace maintained. The company, which as we’ll show in Chapter 4 has begun to use customer value techniques throughout its operations, has become a model of excellent American management as well as a paradigm of profitable growth. According to AT&T’s 1992 Annual Report, it earned $6.27 billion of operating income in 1992.

Why Customer Value Analysis? The Legacy of Stage One

In this chapter, we’ll look at the evolution of the “quality movement” and show why it must move toward “customer value management.” To understand what needs to be changed in your own organization, it’s vital to comprehend what America has already accomplished.

Today, the performance of a handful of companies like AT&T, who understand market-perceived quality versus competitors and customer value management, differs vastly from the business world of 1987, when the Baldrige award was introduced. At that time, most managers and consultants were still at Stage One in the management of quality: they focused on quality as conformance.

They’d been inspired by the NBC “White Paper” television documentary “If Japan Can—Why Can’t We?” which introduced W. Edwards Deming in 1980. Or they had read Philip Crosby’s 1980 book Quality Is Free. Deming and Crosby both emphasized getting control of processes so that production would conform to specifications. They helped companies realize that “doing things right the first time” would lead to better products at lower costs. As a result, companies introduced statistical quality control and sought every opportunity to reduce errors, scrap, and rework. By 1987, American products had begun to improve because of these efforts.

This work was vitally important. It had been neglected for decades. Disputes among the gurus dealt with important matters of both style and substance.

Unfortunately, however, the conformance quality that companies were seeking in Stage One wouldn’t, by itself, lead to business success. A product with “zero defects” won’t necessarily make customers happy. What if the specifications that a company is trying to conform to are wrong—that is, what if they don’t represent what the customer actually wants to buy?

Stage Two: Customer Satisfaction

Inevitably, companies had to move beyond Stage One. Exhibit 1-1 shows the path that companies have typically taken.¹ By 1987 a few, led by Xerox and its president David Kearns, had moved into Stage Two, customer satisfaction. They realized that the purpose of quality programs was to create happy customers. So they began talking to customers more and asking them if they were satisfied on a range of issues.

When Reimann started work on the Baldri...

Table of contents

• Cover Page
• Title Page
• Contents
• Preface
• Acknowledgments
• PART ONE Making Quality a Strategic Weapon
• CHAPTER 1 The Four Steps to Customer Value Management
• CHAPTER 2 Moving “Customer Satisfaction” from a Slogan to a Science
• PART TWO Role Models Companies That Delivered Market Perceived Quality and Value
• CHAPTER 3 How Milliken & Co Built a Competitive Powerhouse
• CHAPTER 4 “Customer Value Added” at AT&T A Competitive Strategy Milestone
• CHAPTER 5 Communicating the Complex Truth About Cholesterol
• CHAPTER 6 How to Achieve Quality Service
• PART THREE Managing Some Big Issues with Customer Value Management
• CHAPTER 7 Creating Power Brands
• CHAPTER 8 Assessing Competing Technologies and Nurturing a Long Term Winner
• PART FOUR The Tools and Metrics of Customer Value Analysis
• CHAPTER 9 The Seven Tools of Customer Value Analysis
• CHAPTER 10 Putting the Power of Your Whole Organization in a Single Room The War Room Wall and Strategic Navigation
• CHAPTER 11 Aligning Your Quality Initiatives with the Goal of True Customer Value Management
• PART FIVE The Payoff from Providing Superior Quality and Value
• CHAPTER 12 Here’s the Proof Superior Quality Drives the Bottom Line and Shareholder Value
• CHAPTER 13 Learning from the Malcolm Baldrige National Quality Award
• CHAPTER 14 Comprehensive Alignment Key to True Competitiveness
• What’s Next
• APPENDIX A Malcolm Baldrige National Quality Award 1994 Award Examination Criteria and Guidelines
• APPENDIX B Why Do Patients Demand a Large Drop in Total Cholesterol
• APPENDIXC Building Our Store of Case Examples and Empirical Evidence
• APPENDIX D Questionnaire to Aid Benchmarking
• Notes
• Index