All things being equal, what would make a customer choose one product over another?Companies can gain a competitive edge by focusing on customer value—

building an actual emotional bond with the customer.

Measuring Customer Value:Gaining the Strategic

Advantage

HOWARD E. BUTZ, JR. LEONARD D. GOODSTEIN

A merican businesses have long believed inII. the importance of value added. Themore a producer adds value to a product orservice, the more distinctive that product orservice becomes to the customer. This in turncan lead to higher prices and, presumably,higher margins and greater profits. One sig-nificant and unresolved issue exists, however:Who defines the value added?

In most organizations, the producers as-sume they know what the consumer will valueand therefore buy. Unfortunately, the corpo-rate past provides too many examples in whichthose assumptions were far from the mark. TheFord Edsel and McDonald's McLean Burgerare notorious cases in point. But there are moregeneral—and more serious—examples. For atime the entire Anterican auto industry seemedat risk when manufacturers failed to respond tothe growing desire of their customers for small-er, more fuel-efficient cars. The result: Foreignmanufacturers seriously eroded their marketshare. Still more striking is the near total loss ofthe domestic consumer electronics market tothe Japanese because American producersfailed to meet emerging customer needs.

Even casual observers of business appre-

ciate that it is the customer who decides ifthere is value added or not. The emerging con-cept of customer value is the first attempt to se-riously understand the notion of customer-de-fined value added and how to use this conceptto strategic advantage. We define customervalue as we understand the concept and pro-pose an approach to its measurement.

CUSTOMER VALUE

By customer value, we mean the emotionalbond established between a customer and aproducer after the customer has used a salientproduct or service produced by that supplierand found the product to provide an addedvalue. Such a resulting emotional bond leadsthe customer to buy repeatedly or, better yet,exclusively from that supplier, to recommendthat supplier to friends and family, and towithstand the blandishments of otherproviders. This is a stricter definition than thatof Richard Cross and Janet Smith who definebonding simply as "the process of buildingcustomer relationships that withstand the rig-ors of today's fragmented, over-commercial-

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Howard E. Butz, Jr. is the director of to-tal quality for AAI Corporation, a defensecontractor in Hunt Valley, Maryland. Hisbackground includes managing MIS and ma-jor defense programs. He received his B.E.S.in electrical engineering from John's HopkinsUniversity and his M.S. in administrationfrom George Washington University. He isthe founder of the Maryland based TQM Di-rectors Network and co-founder of TQM/100,a strategic benchmarking alliance ofaerospace and defense contractors. His cur-rent work is in the areas of qualify, processreengineering, and customer-value basedstrategic planning. His publications include"Strategic Planning: the Missing Link inTQM" in Quality Progress (May 1995) and"Managing for Customer Value: IntegratingQuality and Productivity Strategies foAchieve Sustained Business Success" (withT.C. Tuffle and W.D. Leach). Mr. Butz is afrequent speaker on the subjects of TQM andstrategic planning. He serves on fhe boardof direcfors for the Mid-Atlantic Planning As-sociation and the Baltimore County Chamberof Commerce.

on providing exemplary customer service;bonding will take care of itself.

Federal Express (FedEx) has as its missionhaving a completely satisfied customer at the endof each transaction. We believe that the compa-ny's outstanding and continued .success is a di-rect result of the commitment of rank-and-fileFedEx employees to make this concept a reality.This commitment is also supported by the vari-ous FedEx systems and processes. For example,its tracking system enables employees to an-swer customers' queries and its performanceappraisal system rewards customer focus.

As total quality management (TQM) af-fects more and more organizations, it becomesharder for individual companies to stand outfrom the pack—to create customer bonding.One unforeseen consequence of the qualityrevolution has been to reduce more productsand services to the commodity level. To coun-teract this leveling effect, companies bendover backward to differentiate themselves byproviding customer value. The developmentof frequent flyer programs in the airline in-dustry is an attempt at such differentiation.American Airlines pioneered these programs,but all U.S. carriers quickly followed. Interna-tional carriers finally, and reluctantly, joinedas well. The current programs target businesstravelers who fly frequently. For those who flya specified total of miles annually, they pro-vide special status—"AAdvantage Gold,""Delta Medallion," and so on. This special sta-tus not only provides bonus miles, but (moreimportant for many travelers) allows them toupgrade to a first-class seat for a minimumpayment. Once a traveler achieves this specialstatus, customer bonding has occurred.

Another illustration is from Cathay Pacif-ic Airways, whose top management deter-mined that many travelers were avoidingHong Kong because of lengthy delays at im-migration. Rather than assuming that this wasa problem they could not solve, Cathay's se-nior staff asked the Hong Kong governmenthow to avoid these immigration delays. Afterlengthy negotiations, the airline agreed tomake an annual grant-in-aid to the govern-ment to hire more immigration inspectors—but these reinforcements would service pri-

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marily the Cathay Pacific gates. The reducedwaiting period increased customer value andthus strengthened customer bonding. This ex-ample suggests how the application of the no-tion of seamless scii>ice produced a reduction incustomer delay, an increase in net customervalue, and greater customer bonding.

The Chalone Wine Group, the California-based producer of Chalone premium wines,has developed a unique approach to customerbonding. Anyone who owns 100 or moreshares of this company is invited to an annualcelebration party where they sample the newreleases and feast on gourmet delicacies. Moreimportant, these stockholders are the onlypeople who can purchase difficult-to-obtaincases of Chalone wines directly from the win-ery. Although the company's stock has neverpaid a dividend, this strategy has producedover 10,000 shareholders who are stronglybonded to the company. Of course, othervineyards have followed with their own ap-proaches to customer bonding, primarilythrough winery-sponsored "clubs" that offer"member" discounts, access to limited pro-duction wines, and newsletters.

It should be apparent from this discussionthat customer bonding is not easy to achieveor retain. It requires a focused strategy andhard work! Successful companies now seemmore than willing to go to elaborate lengths tofind unique strategies to achieve customerbonding. Such bonding provides a significantstrategic advantage for the supplier, assuringrepeat sales and rendering that customer vir-tually impervious to the competition.

Leonard D. Goodstein. a consulting psy-chologist located in Washington. D.C, spe-cializes in strategic planning and manage-ment, as well as organizational andexecutive development. After an academiccareer of over 30 years, he served as Presi-dent of University Associates—an interna-tional publisher—and as CEO of the Ameri-can Psychological Association, He haspublistied widely, including several prior arti-cles in Organizational Dyriamics. His mostrecent book is Applied Strategic Plannmg:How to Develop Plans ttiat Really Work, pub-listied in 1993 by McGraw-Hill. Goodsfeinalso serves as a visiting faculty member atGeorgetown University.

LEVELS OF CUSTOMER VALUE

The notion of levels of customer value was in-troduced by Noriaka Kano. We feel that is use-ful to differentiate three levels of customervalue; (1) the expected level; (2) the desiredlevel; and (3) the unanticipated level.

Expected Value

The expected or basic level is the level that isnormal or modal to that business or industry.

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At this level, the company provides thosegoods and services that customers have cometo expect.

Domestic airlines are one example. Theyprovide reasonably priced more-or-Iess on-time travel service between most Americancities. There is nothing particularly memorableabout their service and not much to distin-guish one from another. Each attempt to addcustomer value is quickly copied by the com-petition. Thus, there is little in the way of cus-tomer bonding (except for the committed fre-quent flyers). The occasional traveler regardsairline travel as a commodity, selecting a carri-er based on price and convenience (̂ f schedule.

Southwest Airlines broke that mold byencouraging its cabin attendants to be inno-vative in their pre- and in-flight announce-ments and engage passengers in less formalways. These changes were intended to makeflying Southwest a different, more pleasantexperience. The fact that it also is consistentlythe low-cost airline with the best on-time per-formance adds additional net customer value.Airport newsstands are another example.Typically, expected customer value at thesenewsstands consists of overpriced merchan-dise sold by under-motivated employees. TheW. H. Smith Group, pic, a British news ven-dor, has made significant inroads on its com-petition by providing a wider range of prod-ucts at downtown prices and with a clearsense of customer value. They are obviouslyattempting to live up to the Smith motto,"There's more to discover at W. H. Smith."

Desired Value

The second level of customer value is the de-sired level. These are features that add valuefor the customer but simply are not expectedbecause of company or industry standards. Itdoes not require sophisticated market re-search lo detect that postal customers wantclean and attractive post offices, friendly andattentive desk clerks, and their mail deliveredon time. Unfortunately, many customershave learned not to expect these featuresfrom the U. S. Postal Ser\'ice. They have bond-ed, however, with competitors that met their

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needs, especially FedEx. An understanding ofwhat customers truly care about provides theorganization with an opportunity to meetthose desires. The degree to which the orga-nization can find ways of increasing customervalue enables it to distinguish itself from itscompetitors and develop customer bonding.

The rise of ftO-minute photo finishingshops is an example of how an industry hasbeen transformed by meeting the needs for aquick turnaround for personal photos. Simi-larly, Domino's "pizza in 30 minutes" alsomeets many Americans' needs for quick ser-vice, although perhaps not for gourmet food.It is important to note that in these instanceswhat was originally the desired level has be-come the expected level. As we have de-scribed earlier, the integration of TQM intoorganizations has leveled the playing fieldand directly produced these rising customerexpectafions. We believe that, as this trend ofrising expectations accelerates over the nextfew years, the desired level of customer valuewill become the baseline required to survive.

Once an organization establishes a de-sired level of customer value, failure to main-tain that level can be dangerous. The IntelCorporation provides a recent example. Intelhad invested an enormous amount of time,energy, and money to develop market aware-ness of its products by its "Intel Inside" cam-paign. It is obvious that the campaign was in-tended to develop customer bonding in thehighly competitive personal computer mar-ket and it had been largely successful. Whenit was revealed, however, in the autumn of1994 that Intel s Pentium chip had a process-ing flaw, Intel's initial response was to dismissthe matter as "a minor technical problem,"one that would not affect most of its cus-tomers.

The company attempted to control dam-age by offering replacements only to thoseusers who performed complex mathematicalcomputations, initially insisting that pur-chasers demonstrate their need for a replace-ment chip. The outrage of customers took ona life of its own, requiring Intel to purchasefull-page advertisements apologizing for itsbehavior and offering both replacement chips

Internal Customers

All of our examples have been aboutconsumer products. This does not mean,however, that customer value is importantonly in the direct consumer marketplace; ev-erything we have said applies equally well tothose of us who have internal customers.

RelaHonships between internal produc-ers and their customers are often troubled.The internal customers face the requirementof using the company's legal staff, printshop, and other services. This has led, ofcourse, to high levels of usage—but usagethat is experienced as a set of chains, not anemotional bonding. These internal providersare all too often seen as overpriced, unre-sponsive producers of .shoddy services andgoods—ones that do not provide net cus-

tomer value. Cross-charges, especially whenthese charges are noncompetitive with theexternal marketplace, heighten these nega-tive views. Such dissatisfaction fuels thegrowing trend toward outsourcing.

Internal providers can prosper onlywhen they approach their customers withthe desire to provide the same level of in-creased net value as their external competi-tors. This should be relatively easy. Giventheir closeness in both background and ge-ography, internal providers should knowtheir customers, understand their problems,and be able to help these customers solvethese problems quickly, economically, andbetter than anyone else. When this isachieved, the threat of outsourcing lessens.

and technical assistance in their installation.The still-unanswered question, of course, ishow this incident will affect customers' long-term bonding with Intel.

Unanticipated Value

The third and ultimate level of customer val-ue is the unanticipated or unexpected level.Here the organization finds ways to add val-ue that is beyond the customer's expectationsor even desires, at least on a conscious level.This can include unusually prompt service,greater willingness to find a way of resolvinga customer's problems, additional services atno extra charge, or anything else that unex-pectedly meets customer needs.

The Seattle-based Nordstrom's depart-ment stores have provided such unanticipatedcustomer value so often that accounts of theirservice have become legendary. An examplefrom our own experience: A Nordstromsalesclerk stopped a customer and asked if theshoes that she was wearing had been boughtthere. When the customer said yes, the clerkinsisted on replacing them on the spot as "theyhad not worn as well as they should." Thegood will resulting from the many times thatwe have repeated this tale covers the expense

of the pair of shoes by an enormous factor.These unanticipated features are those thatproduce strong customer bonding.

There is another way of thinking aboutunanticipated levels of customer satisfaction.Customers have many needs that are well be-low their threshold of awareness—latentneeds. Who knew that we needed VCRs be-fore they were commercially available? Howmany of us knew we needed the ubiquitousFAX machine 10 years ago? Were we awarethat we needed on-line computer servicessuch as CompuServe or America Online be-fore they appeared? Or cellular telephones?How many of us think that we need the videotelephones now on the horizon? Knowing theanswers to these questions would allow us toincrease customer value.

The development of the disposable diaperprovides a good case study of meeting latentneeds. In the late 1950s, there was no statedneed for disposable diapers because they didnot exist. But Procter & Gamble had regularlyleamed from its ongoing market research thatparents of infants strongly disliked dealingwith soiled diapers. P&G recognized that thisunhappiness might provide a marketing op-portunity. The problem was turned over tothe research and development; the result is a

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EXHIBIT 2CHANGING TO A CUSTOMIIK-VALUB DRIVEN ORGANIZATION

Not only(Customer SatisfactionAttitude'sAttribuiesCustomer/Supplier Boundaries(CompetitionQualityMarket Researchliargalning

But alsoCustomer ValueBehaviors(ConsequencesProblem SolutionsStrategic AlliancesBest Net Customer Value(Customer UnderstandingCustomer Bonding

$4 billion annual business, a direct result offinding a solution that reduced a source of dis-satisfaction, that met a latent need .

Another example of finding new ways ofproviding unanticipated levels tif customerservice is found in the partnership thatGoodyear Tire has managed to develop overtime with one of its industrial customers, truckmanufacturer Navistar. By demonstrating itsunderstanding of this customer's problems,Goodyear was able to take over the operationof the tire warehouse in the Navistar plant.Goodyear's expertise in managing tire inven-tories enabled the ctimpany to reduce Navis-tar's tire inventory by 75 percent with consid-erable financial savings to Navistar. Inaddition, Goodyear's advanced knciwledge oftruck orders that initially specified competi-tors' tires enabled it to induce many of Navis-tar's truck customers to switch to the Goodyearbrand. While the obvious result has been a sig-nificant increase in Goodyear's percentage ofNavistar's business, a more relevant outcomehas been the increase in Navistar's bondingwith Goodyear, producing a far more difficultenvironment for Goodyear's competitors.

Those firms that genuinely listen to theircustomers and understand their problems arethose that will find solutions for those prob-lems. In so doing, they provide customer val-ue and develop bonding. The moral of thesestories should be clear. To reach the unantici-pated level of customer value, we need to findnew and different ways of providing already

established goods and services to our cus-tomers and develop products and servicesthat fill our customers' latent needs {or createsuch needs). But even this may not suffice—we must have both the courage and the mar-keting skill to develop the market for these in-novative products and services—which canbecome a bet-your-company gamble.

AT&T's response to the cellular telephonemarket provides a recent example of what canoccur when that foresight and courage arelacking. In 1984 AT&T's strategists estimatedthe total market for cellular telephones by 1995at less than one million units—a niche marketthat they chose to avoid. By the end of 1994,however, there were actually over 2X} millionunits in sen ice. To compensate for this colos-sal error and enter this critically importantmarket, late in 1994 AT&T purchased McCawCellular Communications for $12 billion^—acostly price for a failure of courage.

As can be seen from our discussion,adopting the imperative of customer value asa driving force requires many changes in ap-proach to customers, suppliers, markets, andstrategy development. These changes are list-ed in Exhibit 2.

STEPS IN CUSTOMERUNDERSTANDING

With the foregoing definition of customer val-ue clearly in mind, we can turn our attention

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lo its measurement. Becau.se of the complexi-ty of this process and the general lack ofawareness and knowledge that we generallyhave encountered in its application, we havetermed this process "Customer Understand-ing." There are five major steps in this cus-tomer understanding process: (1) customeridentification; (2) planning the data collec-tion; (3) collecting the data; (4) measurement;and (5) implementation.

The approach outlined in these steps isquite different from the typical market re-search approach that has served as the basisfor most of our current understanding of cus-tomers and their needs.

Step 1. Customer Identification

The starting point is to clearly idenfify thecustomer, including everyone who affects the"buy decision" in our definition of "cus-tomer." This is not as straightforward as it firslmay seem, especially when other businessesare the customers, because, in such cases, thedecision-making process is typically complex.We often find procurement agents, contract-ing officers, multiple layers of management,and even boards of directors involved in theprocess.

Nearly all businesses can immediatelypoint to their primary customers. In our ex-perience, however, other strategically impor-tant people in the decision-making processare often overlooked. For example, a defensecontractor must consider not only the pro-curement agency or the contracfing agency asthe customer but also the research laborato-ries that developed the specifications, the enduser{s), and any number of sponsors in thegovernment agency and in Congress. Becausemany of these will value various aspects ofthe product differentially, a complete under-standing of these several customer compo-nents and what each values is necessary toland contracts successfully.

Consider tme further example, a manu-facturer of hand tools with two productlines—one nafionally branded and a second,lower priced private-label line. In both cases,end users and a variety of others, such as

chain-store buyers and store managers, are in-volved in the buying decision. The end user isfar more important to the nationally brandedline than to the private label. A customer whois bonded to a nationally branded product—who sees that product as having high cus-tomer value—will continue to shop for thatproduct, even if it requires additional effort.For the privately labeled product, however,the values of the chain's hand-tool buyer willprobably be more important in making pur-chasing decisions. In both cases, however, theviews of the end user are important. Thequestion here, as always, is one of relative im-portance.

Today, decisions made by only one indi-vidual are quite rare. We all must recognizethat anyone who can exert infltience—posi-tive or negative—on the decision to buy mustbe included as a customer. Initially the influ-ence of some of these participants in the deci-sion-making process may not be known.Many current management strategies—em-powerment, employee involvement, and self-directed work teams—will expand this poolof decision makers and their influence. As ourknowledge of the customer understandingprocess evolves, it is important to be on thelooktmt for these yet-unknown influencesand begin to study them systematically.

This list of customers must then be put inpriority order based on the degree of infiu-ence each has on the "buy decision." Devel-oping that priority list requires input from allthose in the business who regularly deal withthe customers; thus, arriving at a priority listmay be more difficult than initially assumed.The needs of each customer must be identi-fied. Then a relative weight should be as-signed to the importance of that need in eachcustomer's decision to buy. At the very least,we need to identify the key decision makers,those who can derail any decision, and makecertain that we meet their needs.

Step 2. Planning Data Collection

Conducting a complete customer under-standing process is both time-consuming andexpensive. It can also disrupt the often fragile

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EXHIBIT 3A SAMPLE CHECKLIST FOR T HI-: CUSTOMER UNDERSTANDING PROCESS

Understanding the customer/product interaction• \X hy does this customer ust- our product?• How does this customer use t)ur pn)duct?• >X̂ .it customer problem tloes our product solve?• What adt!ition;il or new problems does our product create?• How could our product be easier tor this customer lo use?• How could we expand our sfr\ice(s) to reduce thi.s cu-stomcr s problems?Understanding lhc customer's values• H()\\ docs this customer dctine success?• What does this customer .see as its distinctive competence?• What are this customer s problems?• I low can we make this customer more successful?• >X hat does thi.s cu.stomer value?• V£ hat changes does this customer see coming in his or her environment?Understanding the customer bond• How does thi.s customer make his or her selection decision?• How much of ihe total product budget does this customer spend with us?• Vtiiat would we have to do to increase our percentage of this customer's budget?• How do we compare to our competition?• What does this customer see as our distinctive competence?• Under what circumstance might we lose this customer?

relafionship between the customer and thesupplier. By simply inquiring about how wellwe are serving our customer, we are implicit-ly raising the customer's expectations aboutour service. When asked, customers often willexpress some of their needs and expect a pos-ifive response to this expression.

There must be explicit support for thisprocess in the highest levels of the organiza-tion. This support requires an understandingof the pnxress—its costs, including the risks,on the one hand, and its benefits, on the oth-er. More important, there must also be a com-mitment to using the results of this analysis indeveloping the strategic plan of the organiza-tion. We recommend against even beginningthis process without this "legitimization."

Developing customer understanding in-variably involves actually visiting customersin their usual place of business. It is not possi-ble to develop an adequate understanding ofthe customers and their needs without suchvisits. Careful planning must precede any vis-it. Just playing golf with the customer, buyinghim or her a meal, or asking him or her tocomplete a satisfacfion quesfionnaire will not

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lead to the kind of customer understandingthat provides strategic direction and long-term success.

One question that frequently arises inplanning customer visits is at what level thevisit should be conducted. Though thereclearly needs to be dialogue at the most seniorlevels of management, there are significantadvantages to broader interacfions as weil.Dul'ont recently reorganized in an effort tobecome closer to its customer—to increase itsnet customer value. As part of this process,DuPont has begun to send operators from itsnylon spinning mills to visit those factorieswhere DuPont nylon is transformed intoswimsuits and brassieres—and talk to the op-erators there about the quality problems theyexperience in using DuPont nylon.

One planning question is whether thecustomer will even want to participate in sucha process. How will participafion benefit thecustomer? One possible answer is that thecustomer will be helping the supplier positionitseU to meet both present and emerging cus-tomer needs. Another is that there will befewer problems during the course of ordinary

business between customers and suppliers. Itis important to have ready answers for cus-tomers when they ask why they should par-ticipate in a process that initially appears tohave advantages only for the supplier. Theanswer{s) offered should be tailored to thesupplier's understanding of this customerand what would be appealing as a benefit tooffset the costs involved in entertaining sucha visit.

Each customer/supplier interacfion isunique. The goal of customer visits is to un-derstand this unique interacfion in two ways.The first goal is to determine how the cus-tomer decides today's "best value"; the sec-ond, to begin the process of discovering howto provide unanticipated value in the future.The former addresses the current compefifiveenvironment and how to increase marketshare. The latter leads to strategies for creat-ing new customer relafions in the future.

We must begin the planning process bycollecting and analyzing whatever data we al-ready have about the customer. This in-housereview should focus on understanding thecustomer's core values. This may mean study-ing the customer's annual reports and otherrelevant documents, the customer's missionstatement, and the like. We need to under-stand the customer's corporate goals, culture,and "driving forces," if you will. This under-standing will give the planning team insight,a starting point for understanding the cus-tomer's perspective.

Next, we need to plan the data collecfion.We need to decide exactly what quesfions toask during our visit with the customer. Be-sides any quesfions that have emerged fromthe in-house review, we need to understandhow the customer uses our product (prefer-ably by direct observafion). Then we need todetermine how we can increase the value ofthat product to that customer, how the cus-tomer measures success, and what factors thatmight change the customer's use of our prod-uct. The focus of the visit should be on discov-ering the fundamental needs of the customerand how the product is actually used by thiscustomer and not on product features.

A data collecHon checklist should be pre-

pared before every visit. Such a checklistshould help focus discussion on issues of cus-tomer value. Because each customer relation-ship is unique, each checklist will be unique. Asample checklist is provided in Exhibit 3. Theactual quesfions asked of the customer, ofcourse, will be less formal and should appearmore spontaneous. For example, to exploreproduct use, ask the customer, "How do youuse our...?" or "Can you show me how you in-staU our...?" Never ask the vague, "How do youlike our new ...?" It is important to understandthe current customer/product interacfion aswell as the customer's more general problemsand goals as both can lead to ideas for creatingincreased net customer value in the future.

Step 3. Collecting the Data

Typically, many people are involved in mak-ing the decision to buy and use products orservices. To fully understand how to increasecustomer value, it is essential to include each asa source of data.

One issue that must be addressed iswhich customers to include in an analysis.Clearly, current "bonded" customers will pro-vide important information. But so will for-mer customers—those that have been lostover the years for one reason or another.These former customers can provide addi-tional data that gives several different per-spectives. Also important are compefitors'customers—those who are implicitly stafingthat they do not think that you can meet theirneeds. Talking candidly to these customers isimportant, especially since their opinion is toooften discounted. "They only care aboutprice" or "They really aren't interested inquality" are frequent comments. But if we lis-ten, and thus hear more substanfive reasons,we can often learn a good bit about how wehave failed to meet the needs of certain ele-ments of the marketplace.

The data-collection checklist serves to steerthe data collection. If the checklist has beencarefully and thoughtfully prepared before-hand, the actual collecfion process should bestraightforward. Collecting data in this open-ended fashion is quite different from a typical

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customer survey. The topics on the checklistguide the discussion with the customer. Thecustomer's responses require follow-up ques-tions and interpretafion to develop a full un-derstanding of customer value. A checklist isonly a guide to keep the discussion focused onthe customer's fundamental needs.

What are we really trying to learn fromthese data? Simply, we want to know whatour product should do from the customer'spoint of view. What are the attributes of aproduct that meet the customer's needs—thatprovide highest net value to the customer?The answers to this question are multifaceted.They should include not only specific perfor-mance characteristics such as reliability, easeof use, and the like, but also such aspects asprice, delivery, and service. Getting such in-formation from a customer is not an easy task,not even from a willing one.

We are not suggesting that this processwill enable the customer to design the prod-uct for you, nor quickly give you a list of at-tributes. Rather, it will provide important datato those who design and produce productsthat meet customer needs. Those who can de-sign and produce such products will be thesuccessful ones.

Black & Decker provides an example of aproducer that listens to its customers. Severalyears ago, the company's data showed an ero-sion of its industrial power tool business to for-eign compefitors such as Makita and Ryobi.What their customers were telling them wasthat they needed to distinguish their industri-al line from the entry-point line sold by themass retailers. By listening carefully. Black &Decker realized that it could not meet this cus-tomer need without abandoning the cherishedBlack & Decker label. The company did recog-nize, however, that these industrial customerswere still bonded to its then-dormant DeWaltbrand name. Therefore, they introduced anenhanced DeWalt line of industrial-qualitypower tools to this market. This move wasphenomenally successful, growing from zeroto over $250 million in less than three years.This example provides an illustration of boththe power of listening to your customer (andusing that informafion) and how important

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bonding can be as a driver of buying decisions.Data collection requires skills and sophis-

tication in interviewing, skills that many per-sons do not have. There also is a tendency forcustomers to sugarcoat their answer in theirdirect contacts with a supplier. Selecting theright persons to conduct these customer visitsis critical to the success of this process. We rec-ommend that senior level people be used,perhaps accompanied by a consultant who isfamiliar with the company and who possess-es outstanding listening and interpretativeskills. This is clearly not a task to be delegatedto traditionally oriented market researchers.

In asking these questions, we must becareful to recognize that customers tend togive socially acceptable answers to many ques-tions. For example, McDonald's developed theMcLean Burger because its market research re-ported that customers wanted a "healthy"food—the socially acceptable response. Whenconfronted by the choice between the newhealthy product and the tradifional Big Mac,however, the customers' true preferencequickly emerged. One way to avoid such falseleads is by asking customers comparative ques-fions. For example, under what circumstanceswould they feel that they would choose Prod-uct A over Product B or Product C. What kindof price difference would lead the customer tochange that choice? The interviewer must re-member that the purpose of this interview is togather informafion on the customer's values,not to change them.

Also, companies must understand thatgetting useful data from the customer re-quires both in-depth quesfioning and inter-pretation of what is obtained. One of ourcompanies is a manufacturer of automatedweather observing equipment. This equip-ment automatically and confinually collectsweather data, e.g., temperature, dew point,wind velocity, etc. Pilots can then access thisinformation by radio in order to plan theirlanding. These pilots are the company's end-user customers, although they are not thepurchasers (the FAA or airport managementmakes the buy decision). The needs of theend-user customer are difficult to obtain. It isonly when they are asked about how they

would prefer to have this vital informationdisplayed that their previous unarticulatedneeds emerge. What they are reporting theywant is a single visual display that tells themwhether it is safe to land at the airport inquestion, or if a landing should be attemptedat all. Once the manufacturer understandsthese needs, it can focus clearly on what prod-uct enhancements will lead to a groundsweliof support among pilots—support that even-tually will enhance the company's chances ofmaintaining and increasing its market share.But this represents a great deal of hard work.

Step 4. Measurement

Nothing is so crifical to organizational successas increasing the net value that we provide tothe customer. Thus, measuring these increas-es in net customer value provides a critical suc-cess indicator of organization vitality. There aretwo elements to consider in any measure-ment of customer value—inifial selection(short-term) and bonding (long-term). Selec-tion as the customer's supplier depends onhow well we provide current customer value;it can be measured by market share, sales, ser-vicing orders, and so on. Bonding refers to thedepth of our relationship with the customerand the customer's future selection behavior.

It is useful to think of five ever-increasinglevels of bonding:

• Preferential: "Let's try them this time."• Favoritism: "All things being equal,

they get the order."• Commitment: "They are our supplier."• Referential: "You ought to buy from

these guys."• Exclusive: "No one else has a chance to

get an order."We can look at these levels of bonding as

representing increasing levels of trust andcommitment. At the preferential level, there islittle trust or ongoing confidence; the cus-tomer is often seeking a supplier in which toinvest trust. At the favoritism level, there is acontinuing albeit modest level of trust andconfidence. When trust and confidence havebeen earned over time, customers ordinarilybecome committed.

At the fourth level, people recommendproducts or services to others based on theirconfidence that the value they received is notunique to their experience, but rather thattheir experience is representafive of the netcustomer value provided by that supplier andthat supplier's product(s).

While all of us would clearly prefer to beat the fifth level of bonding, that is typicallyimpossible. Indeed, it is rare to find this levelof bonding these days, given the nature ofmost marketplaces. What is important, how-ever, is to (a) discover the current level ofbonding and then (b) develop strategies forincreasing it, or, at the very least, maintainingthe current level.

The current focus on building strategic al-liances between industrial customers andtheir suppliers clearly reflects a generalizedincreasing desire by customers for a higherlevel of bonding. Suppliers who are not pre-pared to enter such bonded relationships areobviously at risk.

Several of these levels of bonding requirestrong efforts to retain customers. There are,however, dangers inherent in naively focus-ing on customer retention. Such a focus canoverlook how much of its total budget for ourproduct or service that customer is spendingwith us. We may be retaining customers overa long period but they may be spending mostof their budget elsewhere. In one study of theretail industry, those customers retained thelongest were the least profitable. These long-term customers had learned how to shop thestores for sales and bargains, picking the leastprofitable mix of merchandise. Similar exam-ples can be found in the industrial market-place. Therefore, an important piece of infor-mation to obtain during this customerunderstanding process is how much of the to-tal budget the customer spends with you ascompared to the competition. This is clearlythe most significant tneasure of bonding thatcan be obtained.

It is typically necessary to use external re-sources to evaluate the level of customerbonding. Customers will rarely give accuratedata about their level of bonding to their sup-pliers. It is far too confrontational for most

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managers. Some indicators of bonding suchas referrals or repeat orders (a measure ofcommitment) may be readily apparent, butalso may reveal an incomplete picture of thelevel of bonding.

Step 5. Implementation

The payoff for customer understanding is in itsapplication to strategy development and im-plementation. Once the aistomer understand-ing prtKess is complete, at least lor the time be-ing, then the organi/afion's strategic planningteam needs to be convened to receive, digest,and apply the findings of this analysis. With-out such an implementafion step there is noreason to even begin the customer under-standing process. One reason that such imple-mentation often fails is that the customer un-derstanding process reveals truths that theorganizafion cannot or will not face.

Understanding customer value is equallyimportant in helping organizations avoidstrategic mistakes. Consider the case of a de-fense contractor with a long history of cus-tomer satisfacfion in developing ammunition.During a study of ways to reduce cost, thecompany made plans to eliminate the specialshop that produced the prototypes for am-munifion tests. This special facility had muchhigher costs than the main shop, and by mov-ing the prototype work to the main shop, thecontractor would see a significant cost reduc-tion. However, the ability of the prototypeshop to make changes overnight and thus notinterrupt a scheduled test for a customer wasa significant (though unstated) aspect of cus-tomer decision making. Had the defense con-tractor implemented this apparently rafionaldecision, its competitive advantage wouldhave been lost.

Another example of the danger in mak-ing decisions without understanding cus-tomer value conies from a small company inthe rotary printing business. Its biggest cus-tomer is one of the world's largest consumerproduct companies—and one with a highlybureaucratic structure. There was great diffi-culty getting internal agreement on any newadverfising campaigns. Markefing, sales.

product line managers, legal, etc. would battleover details. Once the rotary printer under-stood what was happening, it was able toforce these factions to meet and resolve issuesso deadlines were met. Before developing thiscustomer understanding, the supplier was to-tally unaware that such an intervention couldprovide a strategic advantage. Initially, it didnot have systems in place to protect or en-hance this competency. But a customer valueanalysis helped recfify this.

Achieving customer understanding, how-ever, is not enough. Success requires actionsbased on that understanding. And often thoseactions involve changes in basic managementprocesses, changes that are often difficult formanagement to consider. For example. Na-tional Car Rental Systems had to change itsperformance rating process for its telephonereservationists. Instead of rating agents on thefime spent on each call, they were evaluatedon the number of reservations actually made.Such reservations, of course, allowed Nation-al the opportunity to provide customer valueand thus to succeed in the marketplace.

One way to think about customer under-standing in the context of strategic planningis to regard it as one way of conducting theusual SWOT analysis. That is, the customerunderstanding analysis can provide an orga-nizafion with a unique view of its Strengths,Weaknesses, Opportunifies, and Threats, allfrom the customer's point of view.

The customer understanding processprovides critical information for segmentingmarkets. It typically reveals that there arecustomers with significantly different needs.Different product features may be requiredor some attribute such as just-in-time deliv-ery or training in product use may be differ-entially important. The customer under-standing process should provide data onsuch issues, allowing for intelligent decisionsto be made that will enhance customer value.

SUMMARY AND CONCLUSIONS

Building customer value—establishing anemofional bond—between a customer and a

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supplier is best regarded as an issue of man-aging and fulfilling customer expectafionsand of building trust. The process of customerunderstanding is thus a way of examining thenature and extent of the trust established be-tween the two parties. A high level of trust be-tween the customer and the supplier is expe-rienced by both customer and supplier as anemofional bond.

The customer understanding processprovides a conceptual framework for con-verting raw data about transactions betweenthe customer and supplier into information—a framework for making the data meaningfuland useful. There are two important kinds ofinformation that the process should yield.First, what are the customer's present needsand how well are we meeting them? Second,

what are the customer's emerging needs andhow can we position ourselves to meet these?

Maintaining and solidifying these currentcustomer values and develciping tactics formeeting these unanticipated emerging needsprovides the basis for either developing ormodifying the company's strategic plan. It isthis application that makes the customer un-derstanding analysis pay off.

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SELECTED BIBLIOGRAPHY

Readers wanfing a more in-depth discussionof customer value should see Bradley T. Gale,Managing Customer Value (New York: FreePress, 1994); Michael Stiles and GregoryBounds (eds.). Competing Globally ThroughCustomer Value (Westport, CT: QuorumBooks, 1991); and Kari Albrecht, NorthboundTrain (New York: AMACOM, 1994). Crossand Smith provide a discussion of customerbonding from a markefing perspective in Cus-tomer Bo)uiin'^ (Lincolnvvood, IL: NIC Busi-ness Books, 1995). Christopher Fay provides agood discussion of the importance of differ-entiating what customers say from what theydo in "Royalties from Loyalties," lournal ofBusiness Stratesi^ies, Vol. 15,1994. The financial

advantage of managing customer retention isdescribed in Frederick Reichold, "Loyalty-Based Management," Han>ard Business Reznew,March-April 1993.

The concept of levels of customer value isbased on the work of Kano, Seraku, Taka-hashi, and Tsuji, in "Attractive Quality andMust-Be Quality," Quality, Vol. 14, No. 2. Fora thorough presentation of the entire strategicplanning process of which understandingcustomer value and measuring customerbonding are a fundamental part, see LeonardGoodstein, Timothy Nolan, and WilliamPfeiffer, Applied Strategic Plamiin;^: How to De-velop a Plan That Really Works (New York: Mc-Graw-Hill, 1993).

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ORGANIZATION WATCHEditor's Note: We itwitcd renders to respond to Todd lick's commentary.

"Accelerating Organizational Change" (Summer J995) with additional ifisights intohow change can be managed. Here is a sampling of the responsea.

Readers' Forum

NEW PERSONNEL AS CHANGECATALYSTS

While employed with a well-know firm in theconsumer foods industry, ! was called uponby a divisional general manager to advise onimproving the culture and operating effec-tiveness of his urtit. The consumer food prod-ucts industry was changing rapidly. The firm'schairman wanted the division to be more flex-ible, fast, and innovative. And he wanted thischange to occur as quickjy as possible.

The company had a long history of pater-nalistic leadership. Those who "didn't rockthe boat" and who showed up to do "thesame work over and over" could expect life-time employment and a nice watch after 30years. Employees resisted change and manyheld back on innovative ideas. Obviously,there was little sense of urgency. This was notthe employees' fault. They had been condi-tioned to act that way.

We proceeded with a highly participativechange effort, following all of the usual pre-scriptions. Even so, real change was slow. Itbecame increasingly clear that the effort wasbeing impeded by some well-placed managerswho had been feigning support. This groupthen became the new focal point of our efforts.Once we were able to repbce the recalcitrant"old guard" with transformational leaders,change within the company accelerated.

This episode, and others I have had sincethen, lead me to conclude that change rarelyoccurs fast unless there is a change-oriented

team of leaders in place. In many companiesthat's not the case—and therefore the onlyreal way to accelerate change is through theassessment, development, and selection ofnew leaders—people who are less threatenedby tlie change and have the least to lose.

The food industry division has made sig-nificant strides since the change effort wasredirected. The general manager has retired,but he left the division in a much healthierand robust state.

Robert CenekExecutive Assistant, Organization DeiKlopment

Montana Pozoer Cotnpany/Entech DivisionButte, Moitana

TO MAINTAIN CHANGEMOMENTUM, MINIMIZEREGRESSION TO THE MEAN

To sustain its commitment to continuous im-provement, the Farmington, Connecticut,public school system engages a committee ofcommunity experts in an annual review of acontent area. In evaluating a science program,for example, the committee included a physi-cist, a medical researcher, and a DNA biolo-gist, as well as selected staff and citizens.These evaluations result in recommendationsfor important curriculum changes.

The changes, however, have not alwaysbeen sustained over time. Consider one suchprogram.

In the mid 1970s, we developed an exem-

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plary writing program based, in part, on thework of Donald Murray, a Pulitzer Prize win-ning author. Children learned to write bywriting—writing leads, searching for specifics,finding an audience, and learning to "showrather than tell." We taught the theory andpedagogy of the program in summer teacherinstitutes using students and video feedback.Classrooms became writing laboratories. Aftera year in the program, eighth graders werewriting as well as beginning high school ju-niors. We reported the results to the researchcommunity, and many schools in the regioncame to observe.

Six years later, however, the program ex-isted only in the minds of a few of its originalsupporters. The program's demise supportedan intuitive proposition that I have heid formany years:

• Every high-quality program willregress toward the mean over time. As pro-gram complexity increases, regression accel-erates.

In other words, a simple textbook change"sticks to the organizational ribs" muchlonger than a complex writing program. Apost-mortem showed inadequate attention aswell as administrator and teacher turnover asthe primary causes for its loss.

We responded with six principles: recruit,recruit, recruit and induct, induct, induct. Ournew teacher application procedure collectedinformation tin pedagogical skills in programsimportant to us. Demonstration teaching be-came a requirement. Credit was also given tocandidates for "breath of experiences." Thefact, for example, that a candidate had cycledacross the country became an asset. We foundpathways to colleges and universities thatequipped candidates with skills in harmonywith our goals. Induction of these new teach-ers and principals became more directed. Ourmessage was clear: "Our programs are thestrength of our system—they have resulted inhigh-performing students. We wilJ train youand support your learning of these programs.You will be given a great deal of latitude to ex-periment and innovate, but it will be withinprogram parameters."

This "purposing of the organization" be-came the first priority, and it has helped us ac-celerate change by minimizing regression to-ward the mean.

William H. StreichEducational Consultant

Farmington, Connecticut

PAY AS CHANGE CATALYST

Although Todd Jick makes a number of in-sightful points about accelerating change, hedoes not touch on the power ot" an organiza-tion's pay system as a change catalyst. Indeed,until recently, most writers on the subject ofchange have ignored this ingredient.

Because pay is a powerful communicatorof values, companies have commonly viewedpay as a support system. However, this ischanging. Recent research by the AmericanCompensation Associafion dixruments the in-creased use of pay to lead, rather than support,change.

Recognition and reward systems can aidchange by emphasizing two elements:

1. Development—encouraging people toacquire the competencies (behaviors, skills,knowledge) required to support new compa-ny directions, and

2. Results—incentives for converting de-velopment into meaningful outcomes.

Various forms of skill or competency payare now commonly used to encourage devel-opment. And pay-for-performance plans, of-ten involving variable pay or lump sumawards as an alternative to base pay increases,support results. A number of major companies,including Monsanto, General Electric, Xerox,General Mills, Solectron, Hewlett-Packard, andFrito-Lay use competency pay, variable pay, orboth as tools to support new initiatives.

Pat Zingheim and Jay SchusterSchuster-Zingheim and Associates, Inc.

Los Angeles, CA

Responses to Organizational Dynamics articlesshould lie sent to the editor at the address given inthe masthead, faxed to us at (212) 903-8168. orsent via e-mail to orgdynam@amanet.org

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