Foreign experience№ 1 July 2018
Facing the customer
The conventional theory is that the success of a business depends on its ability to effectively combine resources, labour and capital to produce goods. However, in the second half of the 20th century, certain corporations that followed this mantra sank without a trace. Why? Because they neglected their customers’ interests.
Eastman Kodak is a textbook case of how a successful business can lose its way. Once upon a time, it controlled 90% of the American market for photographic film. In 1975, it designed the world’s first digital camera but, instead of pushing it hard on the market, managers buried it, believing that Eastman Kodak was in the business of making high-quality film, not helping customers share fleeting impressions. It realised its mistake too late. In 2012, Eastman Kodak went bankrupt after 133 years in business. Its customers had migrated to producers who did not ignore their new interests.
Steven J. Sasson, project manager for Eastman Kodak, presents a prototype of a digital camera designed in 1975
The need for dialogue with customers was first highlighted over 60 years ago. In 1954, Peter Drucker, a professor at New York University’s Graduate School of Business, wrote in The Practice of Management that every corporation was more than a collection of resources aimed at generating profit in a competitive environment. It was also a social institution that enabled employees to fully discover their talents and better themselves. The aim of a business was to "create a customer", said Drucker, thus calling into question the traditional management approach that placed optimising the production of a particular product above all else.
In 1960, Theodore Levitt, a professor at Harvard Business School, published an article entitled "Market myopia" in the authoritative Harvard Business Review. It began with a paradoxical example: "The railroads did not stop growing because the need for passenger and freight transportation declined. The railroads are in trouble today, not because that need was filled by others (cars, trucks airplanes and even telephones), but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transport business…. They were product oriented instead of customer oriented." Following Drucker, Levitt wrote that: "The entire corporation must be viewed as a customer-creating and customer-satisfying organism," and: "The goal of Management is not the production of goods but, rather, the creation of value for the consumer."
Further evidence of revolutionary change came with the creation of the first mass-scale tools for systematic interaction with customers.
The Rolodex card catalogue appeared in stores in 1956. It was designed for managers to record contact details and other useful information about customers. In the late 1980s, at the height of their popularity, Rolodex catalogues containing thousands of cards were on sale. Such gigantic catalogues could still be found on the work desks of senior executives even at the start of the 21st century. "They became a way for managers to show off their status and achievements," explains Joel Podolny, Dean of the Yale School of Management.
Products and services
The consumer market was the first to get wise to the huge benefits of customer awareness. Procter & Gamble made just one brand of washing powder for 40 years. Then in the space of five years it suddenly brought out four new ones. This is a good example of how US retail mushroomed in the second half of the 1980s, when the number of new product names grew by 80% each year.
Number of new consumer product names in the USA, 1,000s/year
Source: New Product News
Despite substantial changes in management approaches, in the early 1990s most sales professionals were still using the "call, sell, move on to the next one" method of customer relations. The method was condemned in a 1991 article in the Harvard Business Review by marketing guru Regis McKenna, who stressed the importance of building long-term relationships with customers: "Marketing is not a new ad campaign or this month’s promotion. Marketing has to be all-pervasive, part of everyone’s job description, from the receptionists to the board of directors. Its job is neither to fool the customer nor to falsify the company’s image. It is to integrate the customer into the design of the product," McKenna wrote.
Changes in the market led Procter & Gamble to significantly expand its product range from the late 1980s
For traditional industry, that meant speeding up the development of service departments, which became mainstream in the early 21st century as margins and sales growth stagnated. According to Accenture, the purchase price of equipment is only 10–20% of the customer’s total spend over the life of the equipment. Profit margins are 30–50% on selling spare parts and more than 50% on service, but less than 10% on producing and selling the actual equipment. These estimates are consistent with the results of surveys by AMR Research, which found that service departments provide 40–50% of the profits and 25% of the revenue of manufacturing companies.
A matter of scale
Customer relationship management (CRM) systems, which automate marketing, sales and after-sales service, are crucial for the transition to the new management reality. The first prototypes appeared about 25 years ago, but CRM penetration remains quite low, even in the US, because of its complexity and high costs of implementation. A 2016 study supported by Microsoft found that only 41% of enterprises had implemented or were implementing a CRM system.
Typically, industrial companies concentrate on a small number of large buyers that they supply directly. Consequently, revenue growth largely depends on whether they can increase sales to the same customers. In large corporations with several divisions, one customer is dealt with by several managers handling different products. The sales process is not always under centralised control. That is, of course, a bad thing.
"With 40 independent product lines," said a manager at Honeywell Aerospace, "we kept finding that different sales executives were talking to the same customer not just from week to week, but literally on the same day. Managers simply had no sight of what their colleagues were doing." By introducing a CRM system, Honeywell was able to coordinate the actions of its sales managers, mobile service teams, product managers and contact centre. Now every user of the system can see what Honeywell products customers are using, which spares and repairs they have ordered and whether any new products or services could be offered. In just a year, thanks to CRM, the after-sales revenue doubled and customer satisfaction increased by 38%.
In just a year, thanks to CRM, the after-sales revenue doubled and customer satisfaction increased by 38%
Today most companies understand the need for customer focus, even though many have not felt able to transform their business to achieve it. True customer focus goes beyond slogans and the attempt to replicate successful practices. It is a profound reconfiguration of the entire business at every stage: a complex task requiring the commitment of all employees.
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