cdc

1. CDC principles

Companies with clearly defined customer focus are more profitable than profit-driven companies CC is clear, focused, profitable, ethical and rewarding for all! Situation in practice

o Companies show little interest in customers (not truly committed)o Most companies do not reflect customer’s understanding of qualityo 50 % do no market researcho 80 % have no executive with marketing background in top managemento Customer is not well definedo Take any customer who is willing to payo No dialogue with customers, do not meet frequently with customers

Milestones in understanding of economyo Mercantilism

Unpacked and undifferentiated goods Profit by distribution (price ↑ demand ↓) Adam smith: the invisible hand, the wealth of nations

o Industrialization Production know how Profit by production (move products instead of people, standard products) Frederic Taylor, Henry Ford (a car for everyone, black car)

o Differentiation and competition Strategy, management Profit by volume (economies of scale) Michael Porter, BCG (goal: growing big low costs, high profits)

o Value management Customer centricity Profit by value (value chain) Peter Drucker (produce what market needs ≠ sell what company produces)

Customer orientation/centricityo America lost sight on the customero Peter Drucker: marketing and innovation are the only 2 basic functions

Innovation: Joseph Schumpeter (creative destruction) Marketing: Peter Drucker

o Marketing concept: a simple idea but hard to implement in practice Validity and soundness: abstract, how to analyze customer needs,

understand what firms can do well (core competencies) Errors in implementing: long term, seems not very attractive Conflicts between marketing and other management functions Managerial confusion in search of profits

Kaizen, Lean Management, Reengineering, TQM etc. each year another fad making strategy ineffective

Chief Marketing Officer (CMO) compared to other C-suite roleso Difficulties and challenges

Young position lack of experience

CDC Summary (Kraigher-Krainer) 1

Requires a mix of skills and broad experience Transformation often takes longer than expected Operational visibility difficult

o Chances and skills Great opportunities in an increasingly customer focused marketplace Broker of knowledge about the customer Must speak the company language of finance and profits Think strategically Marketing not as a cost center but as a profit driver

Stakeholder approacho The opposite of CC, but still very popularo Everybody-pulling-approach (managers, investors, customers, retailers, suppliers,

others, e.g. logistics, media, politicians, tax consultants, banks) Procter&Gamble: a customer focused company

o Understand customerso Brand creation, > 250 brands (trust, respect, love)o “Why is it relevant for the consumer?”o Market research customer behavioro Consumer is the centre of anything they doo More effective and efficient targetingo Packaging differentiation (different in each market place, e.g. colour, name)o Continuous innovation is challenging but funo Technology to get in contact with customerso Word-of-mouth tends to be underestimated

Defining termso Customer driven/centric/intimate = value management many terms, one ideao Conformance quality: zero defect products, not necessarily make customer happyo Customer satisfaction: customer needs, but neglect competitoro Market perceived quality: customer’s opinion of products compared to competitiono Customer value: bundle of sacrifices (effort, time, distance, etc.)o Value management (superior profits through happy customers)o 2 meanings of customer value

Value for customers: market perceived net benefits = benefits – expenses relative to competition (focus of this lecture!)

Value of customers = customer lifetime value: profits made with an average customer over an average retention period (new thinking/change perspective, instead of transactions CLV)

Paradigmatic differences

Traditional management Customer value management Thinking in periods, e.g. quarterly Cause-effect-thinking Short term rewards Realism Targets, measures, reengineering Quality is objective and measurable

Thinking in time series Loop-thinking Long term rewards Constructivism Co-evolution, co-realization Quality depends on expectations


Management is about technique Derived from hard sciences

Management is about people Derived from soft sciences

2. CDC and strategy

“Business must be run at profit, else it will die. But when it solely run for profit, then also the business must die, because there is no longer a reason for existence” Henry Ford

3 strategies where profit come fromo Volume strategy: low price (economies of scale)o Margin strategy: qualityo Quality strategy: combination of low price and quality cc company

Tracking customer-perceived quality Importance of quality for profitability Quality precedes and causes high market share High correlation between market share and profitability

because of economies of scale, experience curve, more money for R&D, less risk perception of customers

Time delay problem: transformation of CV into market share and profit


Do value leaders face higher costs? No.

Low perceived quality businesses have the highest costs

Loyalty effect no 1: 5% improvement in customer retention rate (how many customers can we keep) will yield a 25-100% increase in profits

o Reasons for increased profitability Base profit (margin) Revenue growth : cross-selling, customers buy more Cost savings: customers become less costly Referrals: positive word-of-mouth Price premium: customers become less price-sensitive + customer tenure grows exponentially with retention rate

Loyalty effect no 2: the cycle effect: customer loyalty employee loyalty investor loyalty Well recognized strategic approaches helpful in understanding CV?

e.g. 5 forces, Ansoff matrix, swot analysis, experience curve, BCG-matrix, strategic advantageo these models are basically about growtho unfortunately do not help a lot to find cc companies

the micro-perspective of value management – the company value chain

value = benefits – price

benefit = attributes desirable to customer

price = total costs to customer

superior perceived value = net value in buying/using product compared

to alternative’s value

value network


the macro perspective of value management: value networks

resume on customer oriented strategyo find segments you can serve better than anyone else, provide superior value,

communicate externally as well as internally and stick to that principleo cycle of strategic value management

1. identify set of skills where you’re superior (core competencies = starting point) segmenting, targeting

2. check whether these skills are perceived as valuable by market segment3. provide the value4. communicate the value (externally + internally)5. deliver and continuously improve the value + find new combinations6. start all over again


3. Market perceived value

Net customer value = benefits - expenditureso Benefits relative to reference points

Core product and quality Pre- and after-sales services Brands, prestige and status Availability and ease of access

o Expenditures relative to reference points Sales price time invested physical and cognitive effort costs of ownership and disposal

however: different people have different needs


degrees of segmentationo mass marketing: an attempt to sell the same thing to a wide range of customerso market segmentation: dividing market into distinct groups of buyers with different

needs and behavior who might require separate productso niche marketing: a segment of a segment with very specialized interestso customized marketing: serving each customer individuallyo mass customization: customers get the impression that the product is customized

segmentation methodso no segmentation: mass marketing, niche marketingo cultural and geographic segmentation: language, geography, religiono demographic characteristics: age, gender, family size, social classo based on usageo psychographic characteristicso benefit segmentation

further considerations on segmenting marketso business markets: type of industry, order size, product usage, personal characterist.o international markets: geographic, economic, political/legal, cultural factors

possible catalogue for finding the right customers

evaluate 4 segments

resources = company based

choose the segment with the highest score

Comparing markets to resources


Customer value profile has 2 elementso Market-perceived benefits profileo Market-perceived expenses profile Customer value map

o Simple, but time-consumingo Ask customers to list factors that are imprtant for the purchase decisiono Ask how these facotrs are weihgtedo Ask them to rate the performance of each (0-10)o Multiply each busnesses scor by the weight of this factor

> 100 superior to competiion = 100 average < 100 inferior to competition

Value mapo Expenses

direct costs: aquisition costs (collect info, physical & cognitive effort) implementation, operation, disposal: cost of ownership (energy, repair) switching costs: additional direct costs, opportunity costs, sunk costs worries about post purchase phase: cognitive dissonance, compaints,

returns, anger, social and status costso benefits

pleasant time qulaity and performance

image and reputation

design entertaiment get the product

immediately extraodinary

service


Tracey/Wiersema approach on customer value


Core condiseration: product superiority

competition superiority

o Achive low cost position on product/service support ORo Build a better rpduct, for which customers will pay a preium ORo Solve the client’s broader problem

Three most convincing value propositionso Operational excellence “best total cost” Hofer, Wal-Mart

Middle-of-the-market produts at the best price with the least inconvenience Low price and hassle-free service

o Product leadership “best product” Sony, Intel, Nike Product differentiation Continuous innovation

o Customer intimacy “best total solution IBM Focus on what specific sutomers want Cultivate relationships, customer responsive

4. Customer loyalty

The importance of satisfaction and loyaltyo more diffiult & expensive (5*)to find a new customer than retaining an existing one o if you lose a customer temporarily, he might find out about a competitior’s producto you may not only lose the next transaction but a customer lifetime profito loyal customera are mcuh more profitalbe (loyalty effects)o loyal customers talk positive about the company (positive word-of-mouth)o dissatisfies customers talk abouth their fustrations frquently (negative WOM)

improving customer loyaltyo select customers diligentlyo develop a rich databaseo use key accountso improve relationship continuously


o build strong brandso develop dialogue instruments, e.g. 7/24 call centers, websites, e-mail-marketingo develop lock-in-methods, e.g. contracts, replacement parts (nespresso capsules)o employ and empower good people, especially frontline peopleo be fastero provide extraordinary serviceo training and sonsultationo provide customers with unique tools and softwareo gifts & briberyo reward systems, e.g. clubs and cards CRM

decision funnel1. aware

i. knows the brand (unaided recall, aided recall, recognition)2. familiar3. condiered4. bought5. satisfied6. loyal

Song Airline: Low cost isn’t necessarily low qualityo Leather seats instead of textile seats

Reduced cleaning time + costs Increased the time the plane is in the air Lower prices for the customers

o Increase utilisation + more seatso Flight attendents work more hours a day, but less hours a month (more days off)o Focussed on women (decision takers): discounts, healthy food, entertainment

Who is our competition?o Always customer perceivedo Basically there are 4 layers of current competition

Generic layer: competition for the money of custoemrs (holiday vs new car) Functional layer: all competitors offering same function

(all transport, e.g. railway, airlines, public transport) Product class layer: those in the same product class (car industry)

not necessarily direct competitors Segment layer: aapeling the same target group direct competitors

eg. BMW vs. Mercedeso Regarding future competition

New possible competitors within our segment Substitutes, e.g. steel vs plastic (automotive industry) Forward and backward integration

o Good or bad? One, two or three competitors usually add credibility to a category, which

tends to broaden the market rather than hurt the pioneer To be a leader you have to have followers


5. The path to salient product attributes

Finding out what the customer really wants!

1) Item collectiono Secondary research:

Consumer reports, Web-forums, Prior studies, Complaint reports, Sales reportso Primary research:

Focus groups with customers, experts, R&D, sales reps, lead users, etc. In-depth interviews Customer visit Critical incident technique (pos./neg. emotional event)

2) Item reductiono Omit items that obviously do not meet the characteristics mentioned aboveo Pre-test the remaining 30 itemso Identify bundles by correlations matrices and reduce over-represented factorso Pre-test the remaining 20 itemso Find underlying dimensions and items with highest factor loadings

3) Importance estimationo Distribute 100 points to quality factors and another 100 points to cost-related factorso By groups to identify segments

4) Performance mappingo Value map related methods: quality and price relative to competitiono ECIDo Graphs: image profiles and image spaces


5) Future estimates - “What will be salient tomorrow?”o Difficult, but possibleo Experts and Delphi-method, scenario technique, trend researcho Combine basic motives of people with company competencies (innovation tree)o Laddering technique: combine motives with product attributeso Brainstorming, brain writing, SWOT analysis

Performance metrics

Pre-economic measures (as they precede economic development)o Tracking developments by updating funnel analysis or value mapo Satisfaction measureso Likelihood of recommendationo Quality- and price-profiles

Economic measures:market share, price premium and volume premium, cost advantages, customer loyalty and retention rates, financial data, sales data

6. Company culture

“5-R”-idea of CRM in CDC clear hierarchy of activities1. Retention of profitable customers and strengthening the ties to them2. Recovery of lost customers by winning them back3. Reanimating unprofitable relations4. Release of still unprofitable customers5. Recruitment of new customers

Assessing customers by activity-based costs (ABC) “What does it cost to satisfy each customer?” Problem: difficult to calculate, figures often not available ABC or CLV frequently generate 3 groups

20/80 customers intensive care 80/20 customers cross selling 30/50 customers customer visits + following programs

Upgrading Price corrections Cross selling by adding premium products Joint activities to reduce costs

Clubs, cards, bonus-programs Direct marketing

Importance of customer prioritization (Homburg et al. 2008) Firms frequently fail to implement customer prioritization strategies Customer prioritization ultimately leads to higher average customer profitability and a

higher return on sales because Affects relationships with top-tier customers positively but does not affect

relationships with bottom-tier customers Reduces marketing and sales costs

Moderator variables (link between firm’s prioritization strategy & customer prioritizat.) Ability to assess customer profitability


Quality of customer information Selective organizational alignment Selective senior-level involvement Selective elaboration of planning and control

Paradigm shift toward competitiveness

From to

Driven by financial marketplace driven by customer marketplace

Short-term financial focus longer-term competitiveness focus

Long-product-development circle short-product-development circle

Technology, product-forward view market-back, competitive view

Mega, administrative business units BUs defined by competitive reality

Functional business units interfunctional business units

Fundamental state of leadership In a crisis, most mangers are forced to enter a state of fundamental leadership However, you do not have to wait for such a crisis.

Getting there requires a shift along 4 dimensions

In the normal state I .. in the fundamental state I .. stick with what I know am comfort centered follow the path of least resistance

beyond familiar territory result centered ambitious new outcome

feel safe, yet ultimately meaningless am externally directed comply with others to keep the peace conform to current culture

am internally directed (behave according to my values)

have clarified my values have increased my integrity & authenticity

Place my interests above group’s interests Self focus over time leads to feelings of

isolation

Put the collective good first Others reward us with trust & respect Create enriched sense of community

Block out external stimuli (task-focus, avoid risk)

Self-protection separates us from the ever-changing world

Learn from environment (open-minded) Recognize outside signals and need for

change

Market orientation and profitability (Narver and Slater 1990) 5 possible factors

Customer orientation Competitor orientation triangle of market orientation Interfunctional coordination Long term horizon Profit focus

interviews with managers customer orientation is the most reliable measure of market orientation market orientation and performance are strongly related long term horizon and profit focus are weak measures market orientat. is a company-wide phenomenon by interfunctional coordinat.


Market orientation has a significant positive effect on profits High market orientation always leads to high profits, which underscores the idea

that usually serving existing customers is cheaper than finding new ones In rapidly growing markets smaller but market oriented businesses gain profits,

whereas large businesses with little market orientation lose profits due to their inadequate reactions on market change

Technology-oriented subcultures tend to overlook market changes Measures

Customer orientationc commitment, create CV, understand c needs, c satisfaction objective, measure c satisfaction, after sales service

Competitor orientationsalespeople share competitor information, respond rapidly to competitors’ actions, top management discuss competitors’ strategies, target opportunities for competitive advantage

Interfunctional coordinationinterfunctional customer calls, information shared among functions, functional integration in strategy, all functions contribute to CV, share resources with other business units

Webster (2002) on corporate culture = pattern of shared values and beliefs that help the organization understand its function We know surprisingly little about the c orientation construct – it’s still more a phrase

Kohli and Jaworsky (1990) on market orientation Customer focus

center of market orientation more than a philosophy, requires market data on c needs, instruments on

anticipating future needs, market intelligence, impact of changing environment Integrated marketing

Primarily driven by market intelligence Applied by the management to make the right decisions

Profits instead of sales volume Profits as a result of market orientation

Market orientation is strongly correlated with Visible top management support for market orientation Reward systems directly tied to tracking and responding to market needs Strong connectedness of departments within the organization Decentralized decision making

Important hinderers of market orientation Top management’s risk aversion Interdepartmental conflicts

Furthermore market orientation Increases employees’ morale and commitment to the organization Increases business performance

Steps towards the customer near organization


CDC implementation program (Webster 2002)1. Customer focus + build customer commitment throughout the organization

CEO must be the chief advocate in showing that customers always come first2. Invest in market intelligence

customer knowledge is the key distinctive competence and strategic asset Secondary information about markets Customer database Studies of customer behavior Define distinctive competence

3. Select customers carefully4. Develop and communicate the value proposition5. Manage for profitability, not sales volume6. Put value capture into the business model7. Position the firm carefully in the value chain8. Develop customer relationships and manage customer loyalty9. Build and manage brand equity10. Develop strategic partnerships with vendors and resellers11. Innovate and improve continuously12. Define the business as a service business13. Create customized solutions14. Don’t confuse marketing with selling15. Destroy marketing bureaucracy

Easier said than done! What is more tempting?

Satisfying investors or customers Quarterly earnings per share or a growing community of hardly heard customers Immediate profits or long term profits Momentary media or subtle positive WOM of communities

Although the CDC concept is the most convincing concept for a company to survive, it nonetheless is the most difficult concept to sell within the company

Frequently customer orientation comes in times of troubles and goes in times of success can easily outperform the large stock corporations by growing first better & then bigger


cdc

Documents

customer needs

customer peter drucker

customer focused company

management profit

defined customer focus

customer happy cust

marketing background

customers milestones