New Rules in Strategy

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New Rules in Strategy

Adapted from Dr. Claes Fornell's book | May 12, 2017
The Satisfied Customer: Winners and Losers in the Battle for Buyer Preference

Firms that treat their customers well realize an advantage over their competitors, and investors that put their money into such firms reap returns that outperform the stock market.

Like productivity, much of what is considered "competitive strategy" is also leftover from a bygone era. The idea of beating competition as a central focus of the enterprise is going to be replaced by and become a by-product of creating a satisfied customer—or rather portfolios of satisfied customers.

Downgrading or offloading service in order to beat competition on technology, price, and gadgetry, as in personal computers, cable TV, and telephone service, is not going to work. Beating competition is only worth it if there is a prize. But that prize isn't the demise of a competitor or more assets on the balance sheet, but long-term customer patronage.

Satisfied customers are assets of demand, but only assets of supply get recorded on the balance sheet. Because balance sheet assets tell us less and less about the future fortunes of a company, in a buyer-driven economy, they lose much of their value, leverage, as well as profit-forecasting ability.

The principles of "winning," "beating the competition," and "improving productivity" are so ingrained in business that they are going to be difficult to dislodge, but look at what they have led to. Services, which are growing much more rapidly than manufacturing in all advanced countries and now make up the largest proportion of economic activity, are often of poor quality.

As consumers become more empowered relative to sellers, this will change. In fact, we are already beginning to see changes, with companies such as Apple and Amazon leading the way.

As sellers' power weakens, they will also bear more of the cost of poor service. In a role reversal, it will be the buyer who does the "cost" cutting by not going back to the same supplier. This is different than the situation we have become used to, where the cost of poor service is largely paid for by buyers (time, effort, frustration and irritation, risk of product failure as warranty coverage shrinks, etc.).

Considering all the unabsorbed and unrecorded costs of poor service quality, there are serious macroeconomic implications as well. While cramped airline seats, cryptic product manuals, incompetent service people, and long waits on the phone might seem like relatively minor nuisances in the greater scope of things, there are negative consequences for growth and business returns. Declining customer satisfaction reduces demand and sets in motion a vicious circle of effects that includes erosion of firms' economic value, labor uncertainty, and, ultimately, slower economic growth.

Since the costs of poor service are huge, customer dissatisfaction also represents a largely untapped profit opportunity. Firms that treat their customers well realize an advantage over their competitors, and investors that put their money into such firms reap returns that systematically outperform the stock market.

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