Question: What one factor can drive organic corporate growth, sustainable earnings, strong profitability, a growing market capitalization and brand equity appreciation? Answer: Customer Value. At the heart of a firm’s sustained financial health is the faithful creation and delivery of customer value defined as the rewards—real or perceived, tangible or intangible–garnered by customers through their experience of selecting and using a company’s products and services. Yet, in most boardrooms, the issue of customer value gets largely ignored.
Weaving Customer Value into Board Oversight
In his book, Boards That Deliver, Ram Charan writes, “How a board goes about its monitoring function has a big impact on the business. The board’s approach to monitoring sends important signals to management. If the board solely ensures regulatory and legal compliance and digs into the minutiae, management tends to focus on details and reporting requirements. If, on the other hand, the board broadens its monitoring role to include an assessment of the drivers of business health, it helps management be more forward looking and focused on critical issues. The board’s monitoring can then add significant value.”
Sadly, in many boardrooms, very little time is routinely dedicated to issues that drive the company’s future performance. What’s a board to do? Look for ways to integrate customer value issues into already-established oversight areas including (1) corporate strategy, (2) financial performance, (3) operations performance and (4) risk management. What follows is a quick look at each of these areas and some suggestions on how a customer value focus can help a board director make richer contributions to each of the four.
Shaping and Monitoring Corporate Strategy
The most important part of a board’s role is to set corporate strategy in cooperation with management, define the risk parameters inherent in the strategy and ensure the corporation has the talent to realize the strategy. However, board participation should not stop there. The board should also periodically ‘test’ the strategy’s competitive resilience through questions that center around customer value issues. Such questions could include:
What key factors drive customer purchase decisions and customer perceptions of value? How does this strategy address them?
What are customers’ most important priorities and what elements of this strategy are matched to them? What priorities are not well served?
How does this strategy compare to competitors? What differentiates it, and does the customer care about that differentiation?
How are old and new competitors affecting key customer purchase drivers and the customer’s perception of value? How does this strategy address these shifts?
How do we make money with this strategy? What are customers willing to pay a premium for?
How long will this strategy be sustainable? What changes in customer value priorities will require a change in current strategy?
What set of short-term metrics can be used to determine how well the strategy is working and when changes to the strategy may be needed?
Monitoring Financial Health
By their very nature, a company’s financial results are lagging indicators, and can remain strong even while powerful, damaging customer value shifts are in the making. The forward-looking board also focuses on leading indicators to help shed insight on what the future holds. Directors should consider the following four financial sensors and how they can help detect customer value shifts.
Margin. In their book, Winning the Race for Value, authors Sheehy, Bracey and Frazier observe, “If you watch where margin is going, you will find it is usually chasing value. Margin is a surrogate for value; when value shifts, margin follows. Thus tracking the margins of your firm and competing firms can point you to where value is headed. By tracking margin, you can actually “see” the movement of value in the numbers. If a product commands 20% margins in an industry whose overall margins are 5% to 6%, then something is up. The perceived value of this product is clearly higher than its competitors.”
Case in Point: Where can a director find great role models for commanding high margins? Look for firms that excel in commodity-infested markets. Meet Granite Rock co-CEO Bruce Woolpert whose family’s one-hundred-plus-year old business quarries granite and has a dozen sites between San Francisco and Monterey. In an industry where low bid typically reigns supreme, Granite Rock customers have historically paid, on average, 6 percent more than they would with the competition.
Citing one of many customer-value lessons, Woolpert reported, “We thought we had done a great job after we had done our mining process and run the rock through the plant, and created these beautiful, uniform stockpiles of rock.” But customer value research showed Woolpert that getting customer trucks loaded and back on the road was more important to this segment of customers. “And so we developed a new system called Granite Express with our benchmarking partner Wells Fargo Bank. Our new system automatically loads trucks like an ATM machine.” The truck driver simply swipes an authorization card that closely resembles a credit card, pulls the truck in, and a machine loads the truck automatically. This loading service is available to drivers 24/7. Woolpert reported, “It used to take twenty four minutes from the time you left the public road to get loaded, get your sales tag, and be out on the public road again. We’ve got that down to seven minutes now. And …..[he quotes California’s trucking minute valuation at the time of the interview] so that seventeen minute savings is now something that cities and counties and contractors and individuals who come into our quarries can benefit from.”
How did the marketplace reward Granite Rock? Market share doubled. And, explained Woolpert, “We did it not by cutting prices, not by stealing our competitors’ salespeople, or any of those kinds of things. We did it by changing ourselves.”
Competitive Growth Rates. A director should monitor who, among the firm’s competitors, is not growing and who is. When doing so, put aside size and profitability comparisons and focus singularly on growth. Customer value winners often start small, but grow very quickly. Probing management about the “why’s” behind this growth and its affect on corporate strategy can help a director fulfill the customer value watch-dog role.
Market Valuation. As irrational as the market can seem at times, it is still one of the best and most useful value barometers available to directors of public companies. The board’s routine monitoring of market valuation of all the players in a firm’s competitive space can reveal insightful, important patterns regarding customer value shifts.
Brand Equity Changes. The value of a brand–it’s equity– is a powerful, invisible asset for determining corporate value. (At the heart of strong brand equity is strong value as perceived by the customer.) Strong brand equity allows your firm to (1) command a price premium without suffering a loss of revenue and (2) command a larger market share, at a give price, vs. competitors. So how does a board measure brand equity? One effective approach is offered by USC Marketing Professors Deborah MacInnis and C.W. Park who outline their straight-forward, two-part calculation (using a firm’s basic financial information) in their instructive article, “How to Measure Brand Equity” (HYPERLINK “http://www.MarketingProfs.com”www.MarketingProfs.com). In monitoring the brand equity metric, a director should probe on the following:
When brand equity is on the rise: What factor(s) are driving this escalation? Is it sustainable? Why or why not?
When brand equity is on a downward trend: What factor(s) are driving this decline? How can the decline be halted?
When band equity is stable: How can brand equity be
jump-started into an upward trajectory?
Measuring What Matters. While financials report how the business performed yesterday, it’s critical that the board monitor what is happening now, operationally, that, in turn leads to future financial results. Ideally, this monitoring begins with management and the board identifying the critical activities driving financial performance and how to measure them. A director’s healthy skepticism is helpful here, because management is often confused about what the important customer value drivers really are. As the following case, (originally profiled in the Harvard Business Review article “Bringing Customers Into the Boardroom” authored by McGovern, Court, Quelch and Crawford) shows, customer value research can help.
Case in Point. Innovation is a much acclaimed jewel in Starbuck’s customer value proposition. ( Think: “ Half Caff, Triple Tall, French Vanilla, Soy, No Foam, 140 degrees, With Whip, Carmel Maccahiato” Starbucks beverage order.) To drive growth, the coffee giant has steadily pursued new beverage development for its retail stores. But mysteriously, over time, as menu innovations increased, customer satisfaction scores decreased. (Starbuck researched showed a “highly satisfied” customer spent $4.42 per visit , while an “unsatisfied customer” spent $3.88.) Customer value research revealed that 75% of customers reported fast, friendly, convenient service was highly important, while only 15% considered new, innovative beverages to be highly important. Bottomline, customer wait time was crucial to the customer’s perception of value delivery. With this insight, Starbucks aggressively added staff to cut wait times, streamlined order taking and drink preparation and introduced the Starbucks Card to quicken payment . The result: Customer satisfaction levels jumped 20%. Before these wait time improvements, 54% of customers were served in less than three minutes. Afterward the improvements, 85% of customers were served in less than three minutes. But the value saga continues….
The customer’s value definition is always in flux and an “over-delivery” on one value factor may cause under-performance on another. That was Starbucks Chairman Howard Schultz’s big worry earlier this year, when, as reported by the Wall Street Journal, he sent a blunt memo to Starbucks executives via email with the subject line “The Commoditization of the Starbucks Experience.” In it, he specifically questioned whether the chain’s aggressive growth and efficiency initiatives (i.e. wait times, etc.) were now robbing the customer of the unique experience so pivotal to the brand’s storied success. About the chain’s switch to automatic espresso machines, he wrote, “We solved a major problem in terms of speed of service and efficiency. At the same time, we overlooked the fact that we would remove much of the romance and theatre.” The decision to move to this new machine, he wrote, “became even more damaging” since it “blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista.” Regarding the move to “flavor locking packaging” which eliminated the need for fresh coffee to be scooped from bins, he observed, “We achieved fresh roasted bagged coffee, but at what cost? [We suffered] the loss of aroma—perhaps the most powerful non-verbal signal we had in our stores.”
A firm must continually scrutinize its customer value delivery and directors can serve as important “sets of eyes” in this critical oversight.
The Employee–Customer Value Connection. Who creates and delivers customer value? Employees. That’s why keeping employees ‘engaged’ should be an important area for management and its board to monitor. Just ask customer service champion, Wachovia. The banking leader routinely measures employee engagement and defines it by three areas: speaking positively about the organization, exhibiting a strong desire to continue working for the organization, and exerting extra effort to serve customers and contribute to the organization’s success.
Do engaged employees drive financial results? Retail giant Best Buy’s analytics say yes. For the past decade, the retailer has been measuring employee engagement and its effect on store performance. Analytics have shown that for every 10th of a point increase in employee engagement, the stores saw a $100,000 increase in operating income.
But what about disengaged employees? Now more than ever, the dark side of employee behavior demands board oversight. That’s because the Internet is a virtual tool kit for disgruntled employees who want to damage a company’s customer value delivery systems. Consider the case of UBS PaineWebber analyst Roger Duronio. Upset by what he considered to be a meager annual bonus, the employee released a logic bomb virus that disabled 2,000 of the firm’s Unix servers. Because of this sabotage, UBS financial traders were unable to make trades for up to several weeks in some locations. Four long years later, the company reports that some of the systems have still not been recovered. While not disclosing the cost of the lost business, the firm reported costs of $3 million for system reinstatement. (Mr. Duronio was convicted of computer sabotage and sentenced to 97 months in prison.)
When contemplating financial risks, a director must keep an eye out for possible customer value “potholes”. Consider the following four examples:
Customer Revenue Risk. When it comes to customer revenue distribution, forget the 80/20 rule. Most firms have far more revenue concentrated with a few large customers than the Pareto Principle contends. (A recent customer analysis for the regional office of a “Big Four” accounting firm found 63% of the region’s net revenue was driven by just 3% of the firm’s clients!) Directors should periodically probe for such risks, ensuring management has thought through the necessary “what if” contingencies.
Analytical Competitors. A new breed of competitor is emerging in most every industry: The company that uses analytics, data and fact-based decision making. Look no further than Casino operator Harrah’s and its enormous financial success. Reports Harrah’s CEO Gary Loveman, “We use database marketing and decision-science-based analytical tools to widen the gap between us and casino operators who base their customer incentives more on intuition than evidence.”
To succeed as an analytical competitor, data intelligence must be focused on the “right”, high-impact areas of the business. For Harrah’s, that means leveraging the data to provide custom-tailored service experiences for high value customers. Directors should assist management in anticipating this new form of competition, where its application can provide greatest leverage for the firm, and how to best prepare to compete on this emerging turf.
Over-reliance on “Old Media”. Is the firm’s marketing plan focused primarily on “old” media such as TV, radio, print, billboards? Or has “new”, Internet-related media earned a budget line or, at minimum, some experimentation opportunity within the firm’s media mix? Are metrics in place to measure ROI? Younger consumers are Internet users and an over-reliance on old media can be a risk to future sales. Ensuring that management is routinely evaluating new media opportunities should be an important board oversight.
New Products and the Talent Pool to Deliver Them. A director’s focus on customer value should prompt questions about the firm’s future pipeline of products and services: Where is customer value migrating and how is that impacting the company’s product development strategies? What new employee skill sets will be necessary to execute these plans?
Winning Customer Value Starts in the Boardroom
Leveraging customer value is a critical, challenging corporate discipline that deserves board oversight. But doing it well can be tough. Why? Because the oversight requires a willful “forward-focused” director mentality and a hefty tolerance for “shades of grey.” This can be especially difficult for any board director accustomed to debating issues that are largely “black and white.” Additionally, the more successful the firm’s history, the harder the director must often work to help management move beyond its “we’ve always done it this way” mindset and address the possible value shifts looming on the horizon. Two factors can help a board accomplish its oversight responsibilities: (1) Maintain a healthy skepticism when probing management about customer value — become a careful listener for “fact” vs. “management gut feel.” (2) Know that, as a director, your true value to management, shareholders, and all other stakeholders resides in your thoughtful “what if” probes and your willingness to challenge the status quo. After all, winning the race for customer value begins in the boardroom.