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Category: Loyalty Research

Customer Capitalism: Does It Pay Off?

A recent Harvard Business Review article suggests a new management paradigm is developing. In “The Age of Customer Capitalism,” Roger Martin provides a brief history of management theory; simply put, Martin calls out two periods of managerial capitalism to date:

1)      Management Capitalism This period, which started in the early 1930’s, created the notion of professional management, prompted by the work of Adolf A. Berle and Gardiner C. Means, whose book The Modern Corporation and Private Property made the case for management that was separate from ownership of the firm. This work ushered in a period in which management became a valued discipline by creating processes and roles that help to fuel the economic growth of firms. It could be said that by creating the division of labor between owners (who are, ostensibly, more entrepreneurially-oriented and therefore more focused on the vision of the firm) and management (who are more oriented toward building systems and infrastructure that facilitates the realization of the vision), firms leveraged the unique skills of individuals in a way that was not only scalable, but also increased the probability of firm success.

2)      Shareholder Value Capitalism The second period emerged in the mid-1970’s, when Michael C. Jensen and William H. Meckling  suggested in their article “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” that managers focused on their own financial well-being at the expense of the firm (and, therefore, shareholders). This work (along with other management-critical treatises such as The Peter Principle: Why Things Always Go Wrong, which posited that managers in a firm advance to their level of incompetence) created a skeptical view of management; Jensen and Meckling suggested that a better focus for the firm would be shareholder value maximization.

Professor Martin suggests that shareholder value capitalism is also a flawed theory, and provides some compelling evidence that the shareholder value paradigm did not pay off for shareholders (in short – between 1933 and 1976, when management capitalism was king, the S&P earned compounded annual returns of 7.6%; between 1977 and 2008, during which shareholder value capitalism has been in vogue, the S&P created compounded annual returns of 5.9%). Further, Martin argues that shareholder return cannot increase in perpetuity.

So, what is a firm to do? Martin suggests that the answer is Customer Value Capitalism – that is, the path to shareholder value creation comes by maximizing what we at Walker call customer loyalty. In Professor Martin’s words:

“…companies should seek to maximize customer satisfaction while ensuring that shareholders earn an acceptable risk-adjusted return on their equity.”[1]

Why can’t the firm focus on both customer value as well as shareholder value? Professor Martin provides two arguments. First, from the perspective of optimization theory, you can only maximize one variable while controlling for all other variables. While this is technically correct, the second reason cited is more compelling – shareholder value reflects the value stockholders place on the company’s future earnings, and it is impossible to any firm to continuously raise –and deliver on – expectations. If we assume that customers are the source of all future earnings, then logic would suggest that maximizing customer value would be the best way in which to maximize shareholder return in the long run.

Do the data bear this out? Professor Martin provides some anecdotal examples in support of customer capitalism; we can add several more from our work with clients (many of which we have previously discussed in this blog – see this entry and this entry for more information):

1)      We continue to see a statistical connection between what customers say they will do and what they actually do;

2)      We have witnessed the correlation between a customer’s loyalty and his/her revenue growth rate, profitability, willingness to buy across a firm’s multiple categories, etc.

3)      The Walker Index, a composite of Walker’s publicly-traded customers, continues to outpace the broader market indices in total (see this entry for more discussion on the Walker Index);

In addition, the academic literature provides analysis consistent with what we see in our client work.

However, the notion of Customer Capitalism is another example of easy strategy that is extremely hard to execute. In my next blog, I’ll look at some of things firms should be mindful of – and prepared to do – if they aspire to adopt the strategy of Customer Capitalism. In the meantime, what do you think – what has worked in your firm (or what have you witnessed as a best practice among firms, brands, or products that you use)?

Mark A. Ratekin
Sr. Vice President, Consulting Services & Resource Management



[1] Martin, Roger. “The Age of Customer Capitalism.” Harvard Business Review, Volume 88 (January-February 2010). 62.

Chris Woolard

Importance of Training

This month marks my 10th year at Walker.  Over that time, I have done hundreds of employee loyalty/engagement surveys on companies in a variety of industries, sizes, and parts of the world.  A fairly consistent area of weakness is long-term training and development.  Companies continue to ignore this problem in hopes it will go away.  Unfortunately, what usually happens is the employee is the one who goes away, to a company who cares about offering long-term training and development. 

Companies complain about providing new skills and abilities to their employees for fear they will be more marketable and leave.  A former colleague of mine always fought that argument by telling these companies they have two choices, they can train their employees and they might leave, or they can not train their employees and they will stay, leaving you with an untrained and unmotivated workforce.  

Cisco is a company that understands the importance of training and development and is willing to invest in it.  This article outlines their program for giving training and development to high performers.  The cost is about $10,000 per employee.  However, the program has already generated ideas that could net the company billions, not a bad ROI.  Also, only two of the 360 participants in the program have left the company.  That is a company that understands the importance of training and development employees rather than face the alternative. 

Analytic best practices: Overcoming information overload

There are more ways than ever before to efficiently analyze information. All of this readily available information can be overwhelming, but using it wisely can provide robust, actionable guidance. The following paragraphs attempt to provide some guidance on navigating all of this available information.

·         First and foremost, know the question(s) you are trying to answer. Sample design, survey design and how the data is analyzed, all should tie-back to the question.
 

·         Understand your sample plan– know to whom your findings do and do not generalize.
 

·         Do your homework before designing the survey. This will help to ensure that important measures are not excluded.

o   There are a myriad of available statistics to help assess the goodness of the model and variables measured. The findings from these techniques can be used to guide survey design moving forward.
 

·         Use all pieces of available information to answer the question- survey results- both closed and open-ended measures, behavioral data, voice of the customer, competitive data and information, historical data, news and industry information, etc.

o   Using all available information helps to provide a robust answer to the question, but keep this in-mind- some findings may appear to be inconsistent. These apparent inconsistencies can be another valuable source of information (assuming no errors have been made).
 

·         Understand the level of data being used- is it being analyzed at an individual customer level, or is the data being used at an aggregate level (e.g., by account, by call center, by region, etc.). 

o   Post-data collection is also the time to re-evaluate sample representativeness- are there customer non-response issues, how do the sample distributions align with the population distributions, etc.
 

·         Use the most appropriate statistics to effectively and efficiently answer questions.

o   Rather than just comparing performance scores, statistical testing can be used to narrow down where statistically meaningful differences exist between scores.

o   Multivariate analytic techniques can further help to direct focus on the measures that most effectively distinguish or help in understanding customer attitudes and behaviors.

o   Do not assume that if you do not see patterns in the data, that none exist. Sometimes the failure to see patterns in the data is a result of not appropriately segmenting the data. As a follow-up to customer segmentation, profiling techniques can be applied for further understanding and description of customer segments.
 

·         Answering the question often leads to new questions being asked. A single program cannot/should not be designed to answer all questions.

o   Tracking the questions and answers over time, and analyzing how these things have evolved, can again, lead to further insights. Review this process periodically to adapt to the ever-changing business world.
 

It can be very easy to become lost in the vast amount of available data and analysis. Having a clear understanding of the question(s) to be answered is the first step in not getting overwhelmed. Who to sample, how to analyze the data, etc., should always build from that question. Answers to questions often lead to more questions, and the process starts all-over again…

Amy Heleine
Director, Marketing Sciences

Chris Woolard

Weird Things to Say in an Interview

I stumbled on this article on CNN.com.  It shares the 43 weirdest things said in an interview.  What does this have to do with employee loyalty and loyalty in the workplace?  I have no idea.  I just know it is a gray, rainy day here in Indy and these cheered me up so I hope the do the same for you.

Let me share a personal story of a dumb thing to say in an interview.  One of my best friends was interviewing for a job and was asked the traditional question, "Where do you see yourself in five years?".  His response was, "Hopefully laid up at home with a work-related injury"  Now, this was a quote from a popular morning radio show and my friend had hoped if he said this, it would break the ice a bit and loosen up the interview.  My friend said the interviewer clearly did not listen to the show because he did not crack a smile, just stared at him for a moment and then moved on to the next question.  He did not get the job. 

Do you have any funny interviewing stories?

When might a decline in customer count

The importance of looking at geography when analyzing declining customer counts

  • When might a decline in retailer customer count and spend reflect variability in unemployment rates across the US, rather than be the result of diminished customer loyalty? Geography is not usually the first variable that is looked at when doing customer segmentation in customer loyalty research.  However, with the downturn in the economy, there is much to be learned that can help explain changes in customer counts. 
     
  • Unemployment statistics released today by the Bureau of Labor Statistics, Regional and State Employment and Unemployment, April 2009, provide insights.
    • It is likely that Retail will experience further softening, especially with customers in populous states with the highest number of unemployed, namely California, Florida, Ohio and Illinois.
    • However, there is more opportunity to attract and retain new customers among populous states that have not been as hard hit by the recession, such as Texas, Pennsylvania, and New York, and smaller states that have fared well throughout this recession, namely North Dakota, South Dakota, Nebraska, and Wyoming (all with unemployment rates below 5%).
       

Pamela Toft, Ph.D.
Walker Information