Lecture3 Customer Relationships

8/6/2019 Lecture3 Customer Relationships

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Principle 3: Bringing the Customerinto the Organization

Ranjay Gulati

Michael L. Nemmers Distinguished Professor of Strategy and Organizations

Kellogg School of ManagementNorthwestern University

[email protected]

Session 3


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Roadmap

Introduction Customer Management as a Key Differentiator

Identity

Dialogue Interpret

Respond

Internal and External Challenges Conclusion


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Challenges for Firms

Commoditization can become amajor threat to a firms profitmargins because: the products that are becomingcommodities have only one distinguishingpurchase criterion: price. a company's offering becomesindistinguishable from the offerings of itscompetitors, and consumers cease to payattention to brands and instead focus ontypes of products. consumers' costs of switching brandsare almost zero.

margins become razor thin, and profitsbegin to depend heavily on the number of unit sales.


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Characteristics of a Commodity

and Its Market

Commodity Market

Alternative Sources more than one source of the

product or service beingpurchased

Competitive Imitation the products or services being

offered as alternatives arefairly comparable

Buyer Confidence the confidence (but not

necessarily the competence) tomeasure the quality andassess the features of theproduct or service

Buyer Risk a low sense of risk for the

purchase and only a moderateamount of concern for itsperformance

Source: Shapiro, Benson, Specialties vs Commodities,: The Battle for Profit Margins, HBS Note, 1987

Pure

Commodity

Partial

Commodity


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Why is the Customer so Important Today?

Commoditization

"A commodity used to besomething like corn, nowcommoditization refers tothe inexorable tendency of

technology to makeproducts nearly

indistinguishable, drivingdown prices and driving out

companies.

Margaret Graham, aprofessor of strategy

and business historianat McGill University

$2000

$1800

$1600

$1400

$1200

$1000

$8001996 1998 2000 2002

Source: International Data Corp.

The average price of a PC in the US


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Examples of Partial Commoditization

P & G Proctor and gamble thought its $50Swiffer WetJet mop would be the killer app ofhousecleaning. But then Cloroxs ReadyMopforced P&G to cut its price by half in sevenmonths.

EMC For a decade the Symmetrix unitwas the Goliath of the data-storage industrycosting up to $3 million bringing in hugemargins for EMC. In 2001, IBM and HitachiData Systems launched similar boxes.Prices plunged 60% last year, and are downabout 35% this year

Kyocera The Kyocera QCP 6035Smartphone model priced at $500 in 2001and looked like a winner. Later that yearSamsung launched a similar PDA-phone witha color screen. The current price for theKyocera model is around $150

Other forms of commoditization

occur when product differencesexist but consumers either areindifferent to or do notunderstand these differences.Thus, the differences do notaffect consumers' purchasedecisions or they are selectofferings based on trade - offs inboth price and performance.These forms of commoditizationmay eventually lead to a morepure form if the market continuesto evolve

PartialCommoditization


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Current Example: Commoditization of IT

The move heralds thebeginning of what IBMhopes will become a

lucrative revenue stream for the company. "Flexible

infrastructure will enablecompanies to control costs

so they can begin moving atthe speed of the market,"

says

Dave Turek, IBM'svice president for

Linux clusters andgrid solutions

"Our estimatesare that

outsourcing andon-demand

computing willcut IT costs[buying and

operating] in half over the next five

years."

IBM announced that Petroleum Geo-Services would become the first

customer of Big Blue's nascent on-demand computing division. PGS usesmassive server farms to crunch sonar

data in its hunt for oil deposits. Thecompany will outsource to IBM a thirdof the supercomputing capacity it

needs, rather than purchase andmanage machines itself. "PGS has

been looking for a more flexiblebusiness model which addresses peakcomputing requirements," PGS's Chris

Usher said in a statement.

Both Hewlett-Packard (HPQ ) and Sun Microsystems(SUNW ) announced their own on-demand businessunits late last year. HP's is called Adaptive

Infrastructure, and Sun's is N1

Frank Gillett,principal analyst

with Forrester

Research


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Why is the Customer so Important Today?Commoditization

CAGR over time

0%

20%

40%

60%

80%

100%

Growth Consolidation Maturity Decline

Industry trend

Focus


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Select Strategies to Forestall the Effects of Commoditization

Source: Adapted from Beating the Commodity Magnet V. Kasturi Rangan and George Bowman. Harvard Business School Note 1994

Value

Price

High

Low

Cost-to-Service HighLow

IndustryPressures

Value AddedStrategy Sony

SegmentationStrategy Mercedes

Charles Schwab

ServiceInnovation DELL

Coca Cola

ProcessInnovation

Wal-mart

Differentiation

Low Cost

Dog House


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Alternative Vehicles for Customer-

driven Differentiation

1) Product Differentiation

2) Customer Centric Marketing

3) From Products to Solutions


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Case Study: Harrahs Entertainment

1997 Started a Total Gold program to track all 15million guests at electronic gaming machines .

These machines account for 80% of operating profits

More than 20 million custom offers each year Comps (comps) good toward shows, meals or hotel

rooms.

Links 40,000 machines in 12 states. Instantinformation on customer spending

Segmented based on likelihood of spending,predicted spending, opportunities to cross-sell


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Results

Harrahs vs. DOW

72% increase in cross property visits

$50 million in profits attributed to cross

property visits60% after tax rate of return


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Multiple Data Sources and the rise of customer management

People have typically sought an understandingof their customer by using one or two of thesesourcesindependently

Customer Research

MarketData

InternalData

ObservationData

What ispurchased,not why

Behavioralnot

attitudinal

Attitudinalnot behavioralor fact-based

Marketconditions,

not customer preferences

GAP

Source: Arthur Anderson, 2002

The Rise of CRM software161 CRM companies funded since 1998

$1.3 billion raised by CRM companies

v To deepen customer

relationships.

v To build customer loyalty

v To increase profitability

Purpose of Information


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And The FallSurveys show 55

per cent of NorthAmericanexecutives don't

believe they've seena return on their

CRM investments.

Gartner Group 2002

Despite the troublesCRM software salesare expected to rise10% to $4 billion in

2002 and to rise 33%to $29.4 billion in

2003

And rebound

55%


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Economic Benefits of Customer Focus

IncreaseRevenues

DirectImpact

Acquire new customers

Increase revenues fromexisting customers

Develop new products &services

IndirectImpact

Increase brandawareness & perceptions

Increase customer satisfaction

Increase consumer

loyalty

DirectImpact

Improve productivity andinformation leverage

Displace Costs

Reduce capitalinvestments

IndirectImpact

Increase speed to market

Reduce consumer contact/support reqmts

Reduce fulfillment &

consumer response errors

ReduceCost

Bottom LineTop Line

Willingness to Pay

Supplier opportunity cost

Cost

PriceValue Captured

by Customer

Value Capturedby Firm

Value Capturedby Supplier

The Goal is toincrease the Wedge


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Roadmap


Identity

Dialogue Interpret

Respond



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Customer Management Loop

Respond

Identify

Dialogue

Interpret

1. Decide what you will do with the information. Make it a part of your overall customer plan.2. Establish customers as the information pivot in your organization. Gather the right Customer

Information (Who what when where and WHY) from the right customers through the right means(not the most expensive).

3. Make this information useable, available and actionable throughout the organization where it isneeded.

4. Add context to the information. Interact with customers and understand their needs.


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Customers Are Not Created Equal

F r e q u e n c y :

N u m

b e r o

f

C u s t o m e r s a

t E a c h

V a l u e

L e v e

l

Value Per Customer

MeanStandard Deviation

Why are theyunprofitable?Can behavior orcost be changed?Should wedisengage?

Unprofitable

Modestlyprofitableor break even

Modestlyprofitable

What can be done to

develop the profitabilityof these customers?

Who are thesecustomers? How dowe keep them, attractmore like them?

Veryprofitable

Identify


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According to my Zip Code, I prefer non-spicy foods, enjoy tennis morethan golf, subscribe to at least one news-oriented periodical, ownbetween thirty and thirty-five ties, never buy lemon-scented products,and have a power tool in my basement, but none of that is true.

Identify


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Tufts Plan As the pie shrinksthe table manners

get worse .

A prominent physician onthe current state of physician satisfaction

.01% = $7,880 PMPM

5% = $1,191 PMPM

95% = $22 Per

Member Per Month(PMPM)

The Problem

Information Solution -Patient Identification and Treatment RecommendationWorkflow StandardizationMulti-disciplinary CollaborationAlerts care managers enables them to intervene earlyPersistently reminds and motivates patients, families andproviders to comply with proven health management careplans

Information Solution -Patient Identification and Treatment RecommendationWorkflow StandardizationMulti-disciplinary CollaborationAlerts care managers enables them to intervene earlyPersistently reminds and motivates patients, families and

providers to comply with proven health management careplans

Results from

similar programs: 44% reduction inreadmission

36% reduction inhospital days for

patients withcongestive heart

failure 400% ROI for

pediatric asthma

program 12% annual cost

savings for diabetes

management

Results fromsimilar programs: 44% reduction in

readmission 36% reduction inhospital days for

patients withcongestive heart

failure 400% ROI for

pediatric asthmaprogram

12% annual costsavings for

diabetesmanagement

Identify


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Pfizer Health Care

Physicians

Patients

Insurance/Gov.

Pharmacies

Defining your customersIdentify


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Tribunes Customers

The Reader The Advertiser

The Brick WallThe Division Between Church and State

20% of Revenues 80% of Revenues

Identify


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General Electric Medical Systems Customers

HospitalPurchasing

Department

The LabTechnicians

Doctors

Hospital Administration

Patients

Identify


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Guidants Customers

Electro-

Physiologists

ImplantingCardiologists

CardiologistsPrimary CarePhysicians

Patients

PrimaryRelationship

SecondaryRelationships

Referral Chain

Identify


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Going too far

ID: 47095, Published in the New Yorker 1/7/2002

Identify


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Using Customer Information to

Initiate Dialogue

Customized WebInterface

Customer Serviceand Support

EmailPop-up ads

Sales Force CallsBulk Mailers

Broadcast ads

Internet Physical

Push

Pull

Dialogue


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Going Too Far

Sure they can call me at dinner, but I cant

reach them on the phone. They can send me100 pieces of mail per year, but I cant register one meaningful response with them. Companiesclaim that theyre interested in the customer. But

the focus is on the company

From Preventing the Premature Deathof Relationship Marketing Fournier,

Dobscha, and Mick, HBR 1997.

Dialogue


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The Customer Pyramid

PlatinumPlatinum

GoldGold

IronIron

LeadLeadLeast

Profitable

MostProfitableDifferentiateCustomers

Depending on theLevel of

Involvement

Source: the Customer Pyramid, Zeithaml, Rust, and Lemon. Cal. Management Review, Summer 2001

InterpretPrediction toOptimize

C t B k E A l i


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Customer Break Even Analysis

Cost to Serve

Price

High

Low

Low High

Goal is tomove

Customersfrom below

the lineabove theline or tolower the

line

B r e a k E

v e n P o

i n t

InterpretUnderstanding Customers patterns


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The potential of segmentation has

vastly increased

In the past, segmentation was mostly static using demo-

and socio-graphics, attitudes and customer value. Currently,segmentation is behavior based, real-time and dynamic

Is there no value in static segmentations anymore and doesevery segmentation have to be real-time?

Is behavioral segmentation the means to all ends and howdo you integrate it with existing segmentation methods?

Can multiple segmentations methods be used

simultaneously for different value creation purposes?

Interpret

Segmentation of Customers


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Target rightcustomers

Cross-selling

Reducelapse rate

Attractmore effectiveacquisition

DevelopMore sales percustomer per

year

RetainIncreasecustomerlifetime

Source of impact Typical lever

Stages of customerrelationshiplifecycle

Churn

Market capitalisation

($ bn)

Market cap./customer ($)

Churn

Market capitalisation

($ bn)

Market cap./customer ($)

5.4%

7.0

3,721

5.4%

7.0

3,721

1.4%

35.3

5,883

1.4%

35.3

5,883

CRM Creates Value by Improving Attraction,Development, and Retention of Customers

Average revenue percustomer per year ($)

Average assets per account

($)

Average revenue percustomer per year ($)

Average assets per account

($)

130

21,000

130

21,000

170

102,000

170

102,000

Number of accountsNew accounts (Q4 1999)

Average acquisition costs ($)

Number of accountsNew accounts (Q4 1999)

Average acquisition costs ($)

E-trade

1,881,000413,500

360

E-trade

1,881,000413,500

360

CharlesSchwab

6,000,000390,000

200

CharlesSchwab

6,000,000390,000

200

Interpret


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SegmentationSegmentation

Victorias Secret places all visitors on its slower servers but once a customer places something in

the shopping cart they are switched to a faster server.

Customer PatternsCustomer Patterns

Amazon monitors browsing and makessuggestions. Customer who bought this book also

purchased a book by.

Businesses that use

Differential TreatmentRespond


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Respond


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Case Study: Eli Lilly

Customer centricity means shaping discovery, development,

demand realization, and branding activities by balancing directcustomer input with our own realities to produce win-winoutcomes. A customer-centric Lilly will have programs,

processes, and people that directly serve customer needs andtruly empower Lilly employees, capitalizing on their natural wish

to better serve customers.

To remain competitive, Lilly must adoptgenuine customer-centricity as the

organizing principle for those activities inour business. To gain competitive

advantage in the future, we must listen andrespond to our customers to an

unprecedented degree.


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Case Study: Lilly Center forWomens Health

Respond

Identify

Dialogue

Interpret

That is what this center is about we are trying tochange the definition of womens health, that it is not a

disease or a set of diseases it is really a mindsetabout the whole person.

Increasingstudies of

womens healthissues

Lets start thinking abouthow these other diseases such as heart disease anddiabetes impact women

differently from men.

LCWH also sought to createexternal womens health franchises

with women and their personalmedical channels, including

healthcare professionals, friends,

and the Internet.

Lillywomenshealth.com


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Roadmap


Identity

Dialogue Interpret

Respond



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The Internal and External

Challenges

External ChallengesExternal Challenges

Alignment

Channel Economic

Competitive

Having Information Using Information

Lock-in Loyalty

Two Dimensional Multi-Dimensional

Vs

.Vs.

Vs.

Internal ChallengesInternal Challenges1

2


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Internal Challenges Having Information

Wall Street doesnt care how much product wesell to a particular customer.A Corporate Executive

Getting the information from the business silos andcombining it to see all interaction with a customer

CoordinatingMechanism

Unified View of the Customer Aggregate theinformationBusiness

Silos

We had 86 internalaccounts for IBM

We aggregatedall IBM

information

One view of thebig picture of IBM


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Internal Challenges- Using Information

FinancialReporting

HS

Coordination with Hospital ServicesRequires Two Way CommunicationAutonomous

BusinessUnits

Give and Take

A A BB CC A B C

Product Silos Solution


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Internal Challenges: Attitude Information Does NotEqual Loyalty

Truly Loyal Accessible

Locked-in High Risk

Attitude

Behavior Positive Negative

High

Low

Source: Stakeholder Power, 2001 Steven Walker and Jeffrey W. Marr Perseus Publishing

Purchase Dont Purchase

Enjoy

Despise

Data = Satisfaction = LoyaltyData = Satisfaction = Loyalty


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ChaosConflict

Coordination Failure

Ownership and Accountability

From Two Dimensional to Multi-Dimensional Focus

CEO

Region 1 Region 2 Region 3

Softgoods

Hardgoods

Electronics

Outdoors

Geography

F u n c t i o n

C u s t o m e r 1

2

3

1

2

Matrix 2


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Overcoming Internal Challenges

Foundation for a

LearningOrganization

Meaning

Measurement Management

In order for learning to become ameaningful corporate goal, it must beunderstood by everyone who is partof the organizations learning.

Concepts and tools thathelp assess the rate andlevel of learning.

Modes of practice as well asguidelines that helporganizations achieve their goalsof learning.

Source: David Garvin, The Processes of Organization and Management , HBR 1998


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The Internal and External Challenges

External ChallengesExternal ChallengesAlignment

Channel Economic

Competitive


Lock-in Loyalty

Two Dimensional Multi-Dimensional

Vs

.Vs.

Vs.


2


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External - Alignment Challenges

11 N e w s p a p e r s

2 Cable Channels

BroadcastPrint

InteractiveEvents

Advertising Agencies

MissMatch

TMN

2 3 B r o a d c a s t S t a t i o n s

In te ra c t i ve

E v e n t s


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External - Economic Challenges

It takes a substantial investment to:identify the market

And Interpret the Market

Adapt to the Market

Supplier opportunity cost

Added Value - Goal is todrive a wedge betweenwillingness to pay and(supplier opportunity) cost

Willingness to Pay

Cost

Price

Value Captured byCustomer

Value Capturedby Firm

Value Capturedby Supplier

Value Added


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The Customization Continuum

Going Too Far: The Limits of MassCustomization

DELLs ChoiceBoard Options

PureStandardization

SegmentedStandardization

CustomizedStandardization

TailoredCustomization

PureCustomization

TheModel T

ColdCereal

A tailoredsuit

Source: Lampel and Mintzberg SMR 1996


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External Competition: Mega Aggregators

Scheduling

ElectronicCharting

InsuranceReimbursement

Co-payElectronic

Prescription

Reporting

Compliance

Offers the Physician one software, hardware and support to allowan office to move all records to electronic format.


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Roadmap

Introduction

Customer Management as a Key Differentiator

Identity

Dialogue Interpret

Respond



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Relationship vs. Loyalty

Respond

Identify

Dialogue

Interpret


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The External and Internal

Challenges

External ChallengesExternal ChallengesAlignment

Channel Economic

Competitive


Lock-in Loyalty

Few Focuses Many Focuses

Vs

.Vs.

Vs.


2

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