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.

A merican businesses have long believed in

II. the importance of value added. The
more a producer adds value to a product or
service, the more distinctive that product or
service becomes to the customer. This in turn
can lead to higher prices and, presumably,
higher margins and greater profits. One significant and unresolved issue exists, however:
Who defines the value added?
In most organizations, the producers assume they know what the consumer will value
and therefore buy. Unfortunately, the corporate past provides too many examples in which
those assumptions were far from the mark. The
Ford Edsel and McDonald's McLean Burger
are notorious cases in point. But there are more
generaland more seriousexamples. For a
time the entire Anterican auto industry seemed
atriskwhen manufacturers failed to respond to
the growing desire of their customers for smaller, more fuel-efficient cars. The result: Foreign
manufacturers seriously eroded their market
share. Still more striking is the near total loss of
the domestic consumer electronics market to
the Japanese because American producers
failed to meet emerging customer needs.
Even casual observers of business appre-

LEONARD D. GOODSTEIN

ciate that it is the customer who decides if

there is value added or not. The emerging concept of customer value is the first attempt to seriously understand the notion of customer-defined value added and how to use this concept
to strategic advantage. We define customer
value as we understand the concept and propose an approach to its measurement.

CUSTOMER VALUE
By customer value, we mean the emotional
bond established between a customer and a
producer after the customer has used a salient
product or service produced by that supplier
and found the product to provide an added
value. Such a resulting emotional bond leads
the customer to buy repeatedly or, better yet,
exclusively from that supplier, to recommend
that supplier to friends and family, and to
withstand the blandishments of other
providers. This is a stricter definition than that
of Richard Cross and Janet Smith who define
bonding simply as "the process of building
customer relationships that withstand the rigors of today's fragmented, over-commercial63

on providing exemplary customer service;

bonding will take care of itself.
Federal Express (FedEx) has as its mission
having a completely satisfied customer at the end

Howard E. Butz, Jr. is the director of total quality for AAI Corporation, a defense
contractor in Hunt Valley, Maryland. His
background includes managing MIS and major defense programs. He received his B.E.S.
in electrical engineering from John's Hopkins
University and his M.S. in administration
from George Washington University. He is
the founder of the Maryland based TQM Directors Network and co-founder of TQM/100,
a strategic benchmarking alliance of
aerospace and defense contractors. His current work is in the areas of qualify, process
reengineering, and customer-value based
strategic planning. His publications include
"Strategic Planning: the Missing Link in
TQM" in Quality Progress (May 1995) and
"Managing for Customer Value: Integrating
Quality and Productivity Strategies fo
Achieve Sustained Business Success" (with
T.C. Tuffle and W.D. Leach). Mr. Butz is a
frequent speaker on the subjects of TQM and
strategic planning. He serves on fhe board
of direcfors for the Mid-Atlantic Planning Association and the Baltimore County Chamber
of Commerce.

66

of each transaction. We believe that the company's outstanding and continued .success is a direct result of the commitment of rank-and-file
FedEx employees to make this concept a reality.
This commitment is also supported by the various FedEx systems and processes. For example,
its tracking system enables employees to answer customers' queries and its performance
appraisal system rewards customer focus.
As total quality management (TQM) affects more and more organizations, it becomes
harder for individual companies to stand out
from the packto create customer bonding.
One unforeseen consequence of the quality
revolution has been to reduce more products
and services to the commodity level. To counteract this leveling effect, companies bend
over backward to differentiate themselves by
providing customer value. The development
of frequent flyer programs in the airline industry is an attempt at such differentiation.
American Airlines pioneered these programs,
but all U.S. carriers quickly followed. International carriers finally, and reluctantly, joined
as well. The current programs target business
travelers who fly frequently. For those who fly
a specified total of miles annually, they provide special status"AAdvantage Gold,"
"Delta Medallion," and so on. This special status not only provides bonus miles, but (more
important for many travelers) allows them to
upgrade to a first-class seat for a minimum
payment. Once a traveler achieves this special
status, customer bonding has occurred.
Another illustration is from Cathay Pacific Airways, whose top management determined that many travelers were avoiding
Hong Kong because of lengthy delays at immigration. Rather than assuming that this was
a problem they could not solve, Cathay's senior staff asked the Hong Kong government
how to avoid these immigration delays. After
lengthy negotiations, the airline agreed to
make an annual grant-in-aid to the government to hire more immigration inspectors
but these reinforcements would service pri-

marily the Cathay Pacific gates. The reduced

waiting period increased customer value and
thus strengthened customer bonding. This example suggests how the application of the notion of seamless scii>ice produced a reduction in
customer delay, an increase in net customer
value, and greater customer bonding.
The Chalone Wine Group, the Californiabased producer of Chalone premium wines,
has developed a unique approach to customer
bonding. Anyone who owns 100 or more
shares of this company is invited to an annual
celebration party where they sample the new
releases and feast on gourmet delicacies. More
important, these stockholders are the only
people who can purchase difficult-to-obtain
cases of Chalone wines directly from the winery. Although the company's stock has never
paid a dividend, this strategy has produced
over 10,000 shareholders who are strongly
bonded to the company. Of course, other
vineyards have followed with their own approaches to customer bonding, primarily
through winery-sponsored "clubs" that offer
"member" discounts, access to limited production wines, and newsletters.
It should be apparent from this discussion
that customer bonding is not easy to achieve
or retain. It requires a focused strategy and
hard work! Successful companies now seem
more than willing to go to elaborate lengths to
find unique strategies to achieve customer
bonding. Such bonding provides a significant
strategic advantage for the supplier, assuring
repeat sales and rendering that customer virtually impervious to the competition.

Leonard D. Goodstein. a consulting psychologist located in Washington. D.C, specializes in strategic planning and management, as well as organizational and
executive development. After an academic
career of over 30 years, he served as President of University Associatesan international publisherand as CEO of the American Psychological Association, He has
publistied widely, including several prior articles in Organizational Dyriamics. His most
recent book is Applied Strategic Plannmg:
How to Develop Plans ttiat Really Work, publistied in 1993 by McGraw-Hill. Goodsfein
also serves as a visiting faculty member at
Georgetown University.

LEVELS OF CUSTOMER VALUE

The notion of levels of customer value was introduced by Noriaka Kano. We feel that is useful to differentiate three levels of customer
value; (1) the expected level; (2) the desired
level; and (3) the unanticipated level.
Expected Value
The expected or basic level is the level that is
normal or modal to that business or industry.
67

At this level, the company provides those

goods and services that customers have come
to expect.
Domestic airlines are one example. They
provide reasonably priced more-or-Iess ontime travel service between most American
cities. There is nothing particularly memorable
about their service and not much to distinguish one from another. Each attempt to add
customer value is quickly copied by the competition. Thus, there is little in the way of customer bonding (except for the committed frequent flyers). The occasional traveler regards
airline travel as a commodity, selecting a carrier based on price and convenience (^f schedule.
Southwest Airlines broke that mold by
encouraging its cabin attendants to be innovative in their pre- and in-flight announcements and engage passengers in less formal
ways. These changes were intended to make
flying Southwest a different, more pleasant
experience. The fact that it also is consistently
the low-cost airline with the best on-time performance adds additional net customer value.
Airport newsstands are another example.
Typically, expected customer value at these
newsstands consists of overpriced merchandise sold by under-motivated employees. The
W. H. Smith Group, pic, a British news vendor, has made significant inroads on its competition by providing a wider range of products at downtown prices and with a clear
sense of customer value. They are obviously
attempting 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 desired level. These are features that add value
for the customer but simply are not expected
because of company or industry standards. It
does not require sophisticated market research lo detect that postal customers want
clean and attractive post offices, friendly and
attentive desk clerks, and their mail delivered
on time. Unfortunately, many customers
have learned not to expect these features
from the U. S. Postal Ser\'ice. They have bonded, however, with competitors that met their
68

needs, especially FedEx. An understanding of

what customers truly care about provides the
organization with an opportunity to meet
those desires. The degree to which the organization can find ways of increasing customer
value enables it to distinguish itself from its
competitors and develop customer bonding.
The rise of ftO-minute photo finishing
shops is an example of how an industry has
been transformed by meeting the needs for a
quick turnaround for personal photos. Similarly, Domino's "pizza in 30 minutes" also
meets many Americans' needs for quick service, although perhaps not for gourmet food.
It is important to note that in these instances
what was originally the desired level has become the expected level. As we have described earlier, the integration of TQM into
organizations has leveled the playing field
and directly produced these rising customer
expectafions. We believe that, as this trend of
rising expectations accelerates over the next
few years, the desired level of customer value
will become the baseline required to survive.
Once an organization establishes a desired level of customer value, failure to maintain that level can be dangerous. The Intel
Corporation provides a recent example. Intel
had invested an enormous amount of time,
energy, and money to develop market awareness of its products by its "Intel Inside" campaign. It is obvious that the campaign was intended to develop customer bonding in the
highly competitive personal computer market and it had been largely successful. When
it was revealed, however, in the autumn of
1994 that Intel s Pentium chip had a processing flaw, Intel's initial response was to dismiss
the matter as "a minor technical problem,"
one that would not affect most of its customers.
The company attempted to control damage by offering replacements only to those
users who performed complex mathematical
computations, initially insisting that purchasers demonstrate their need for a replacement chip. The outrage of customers took on
a life of its own, requiring Intel to purchase
full-page advertisements apologizing for its
behavior and offering both replacement chips

Internal Customers

All of our examples have been about

consumer products. This does not mean,
however, that customer value is important
only in the direct consumer marketplace; everything we have said applies equally well to
those of us who have internal customers.
RelaHonships between internal producers and their customers are often troubled.
The internal customers face the requirement
of using the company's legal staff, print
shop, and other services. This has led, of
course, to high levels of usagebut usage
that is experienced as a set of chains, not an
emotional bonding. These internal providers
are all too often seen as overpriced, unresponsive producers of .shoddy services and
goodsones that do not provide net cusand technical assistance in their installation.
The still-unanswered question, of course, is
how this incident will affect customers' longterm bonding with Intel.
Unanticipated Value
The third and ultimate level of customer value is the unanticipated or unexpected level.
Here the organization finds ways to add value that is beyond the customer's expectations
or even desires, at least on a conscious level.
This can include unusually prompt service,
greater willingness to find a way of resolving
a customer's problems, additional services at
no extra charge, or anything else that unexpectedly meets customer needs.
The Seattle-based Nordstrom's department stores have provided such unanticipated
customer value so often that accounts of their
service have become legendary. An example
from our own experience: A Nordstrom
salesclerk stopped a customer and asked if the
shoes that she was wearing had been bought
there. When the customer said yes, the clerk
insisted on replacing them on the spot as "they
had not worn as well as they should." The
good will resulting from the many times that
we have repeated this tale covers the expense

tomer value. Cross-charges, especially when

these charges are noncompetitive with the
external marketplace, heighten these negative views. Such dissatisfaction fuels the
growing trend toward outsourcing.
Internal providers can prosper only
when they approach their customers with
the desire to provide the same level of increased net value as their external competitors. This should be relatively easy. Given
their closeness in both background and geography, internal providers should know
their customers, understand their problems,
and be able to help these customers solve
these problems quickly, economically, and
better than anyone else. When this is
achieved, the threat of outsourcing lessens.
of the pair of shoes by an enormous factor.
These unanticipated features are those that
produce strong customer bonding.
There is another way of thinking about
unanticipated levels of customer satisfaction.
Customers have many needs that are well below their threshold of awarenesslatent
needs. Who knew that we needed VCRs before they were commercially available? How
many of us knew we needed the ubiquitous
FAX machine 10 years ago? Were we aware
that we needed on-line computer services
such as CompuServe or America Online before they appeared? Or cellular telephones?
How many of us think that we need the video
telephones now on the horizon? Knowing the
answers to these questions would allow us to
increase customer value.
The development of the disposable diaper
provides a good case study of meeting latent
needs. In the late 1950s, there was no stated
need for disposable diapers because they did
not exist. But Procter & Gamble had regularly
leamed from its ongoing market research that
parents of infants strongly disliked dealing
with soiled diapers. P&G recognized that this
unhappiness might provide a marketing opportunity. The problem was turned over to
the research and development; the result is a
69

EXHIBIT 2
CHANGING TO A CUSTOMIIK-VALUB DRIVEN ORGANIZATION

Not only
(Customer Satisfaction
Attitude's
Attribuies
Customer/Supplier Boundaries
(Competition
Quality
Market Research
liargalning

$4 billion annual business, a direct result of

finding a solution that reduced a source of dissatisfaction, that met a latent need .
Another example of finding new ways of
providing unanticipated levels tif customer
service is found in the partnership that
Goodyear Tire has managed to develop over
time with one of its industrial customers, truck
manufacturer Navistar. By demonstrating its
understanding of this customer's problems,
Goodyear was able to take over the operation
of the tire warehouse in the Navistar plant.
Goodyear's expertise in managing tire inventories enabled the ctimpany to reduce Navistar's tire inventory by 75 percent with considerable financial savings to Navistar. In
addition, Goodyear's advanced knciwledge of
truck orders that initially specified competitors' tires enabled it to induce many of Navistar's truck customers to switch to the Goodyear
brand. While the obvious result has been a significant increase in Goodyear's percentage of
Navistar's business, a more relevant outcome
has been the increase in Navistar's bonding
with Goodyear, producing a far more difficult
environment for Goodyear's competitors.
Those firms that genuinely listen to their
customers and understand their problems are
those that will find solutions for those problems. In so doing, they provide customer value and develop bonding. The moral of these
stories should be clear. To reach the unanticipated level of customer value, we need to find
new and different ways of providing already
70

But also
Customer Value
Behaviors
(Consequences
Problem Solutions
Strategic Alliances
Best Net Customer Value
(Customer Understanding
Customer Bonding

established goods and services to our customers and develop products and services
that fill our customers' latent needs {or create
such needs). But even this may not suffice
we must have both the courage and the marketing skill to develop the market for these innovative products and serviceswhich can
become a bet-your-company gamble.
AT&T's response to the cellular telephone
market provides a recent example of what can
occur when that foresight and courage are
lacking. In 1984 AT&T's strategists estimated
the total market for cellular telephones by 1995
at less than one million unitsa niche market
that they chose to avoid. By the end of 1994,
however, there were actually over 2X} million
units in sen ice. To compensate for this colossal error and enter this critically important
market, late in 1994 AT&T purchased McCaw
Cellular Communications for $12 billion^a
costly price for a failure of courage.
As can be seen from our discussion,
adopting the imperative of customer value as
a driving force requires many changes in approach to customers, suppliers, markets, and
strategy development. These changes are listed in Exhibit 2.

STEPS IN CUSTOMER
UNDERSTANDING
With the foregoing definition of customer value clearly in mind, we can turn our attention

lo its measurement. Becau.se of the complexity of this process and the general lack of
awareness and knowledge that we generally
have encountered in its application, we have
termed this process "Customer Understanding." There are five major steps in this customer understanding process: (1) customer
identification; (2) planning the data collection; (3) collecting the data; (4) measurement;
and (5) implementation.
The approach outlined in these steps is
quite different from the typical market research approach that has served as the basis
for most of our current understanding of customers and their needs.
Step 1. Customer Identification
The starting point is to clearly idenfify the
customer, including everyone who affects the
"buy decision" in our definition of "customer." This is not as straightforward as it firsl
may seem, especially when other businesses
are the customers, because, in such cases, the
decision-making process is typically complex.
We often find procurement agents, contracting officers, multiple layers of management,
and even boards of directors involved in the
process.
Nearly all businesses can immediately
point to their primary customers. In our experience, however, other strategically important people in the decision-making process
are often overlooked. For example, a defense
contractor must consider not only the procurement agency or the contracfing agency as
the customer but also the research laboratories that developed the specifications, the end
user{s), and any number of sponsors in the
government agency and in Congress. Because
many of these will value various aspects of
the product differentially, a complete understanding of these several customer components and what each values is necessary to
land contracts successfully.
Consider tme further example, a manufacturer of hand tools with two product
linesone 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 involved in the buying decision. The end user is
far more important to the nationally branded
line than to the private label. A customer who
is bonded to a nationally branded product
who sees that product as having high customer valuewill continue to shop for that
product, even if it requires additional effort.
For the privately labeled product, however,
the values of the chain's hand-tool buyer will
probably be more important in making purchasing decisions. In both cases, however, the
views of the end user are important. The
question here, as always, is one of relative importance.
Today, decisions made by only one individual are quite rare. We all must recognize
that anyone who can exert infltiencepositive or negativeon the decision to buy must
be included as a customer. Initially the influence of some of these participants in the decision-making process may not be known.
Many current management strategiesempowerment, employee involvement, and selfdirected work teamswill expand this pool
of decision makers and their influence. As our
knowledge of the customer understanding
process evolves, it is important to be on the
looktmt for these yet-unknown influences
and begin to study them systematically.
This list of customers must then be put in
priority order based on the degree of infiuence each has on the "buy decision." Developing that priority list requires input from all
those in the business who regularly deal with
the customers; thus, arriving at a priority list
may be more difficult than initially assumed.
The needs of each customer must be identified. Then a relative weight should be assigned to the importance of that need in each
customer's decision to buy. At the very least,
we need to identify the key decision makers,
those who can derail any decision, and make
certain that we meet their needs.
Step 2. Planning Data Collection
Conducting a complete customer understanding process is both time-consuming and
expensive. It can also disrupt the often fragile
71

EXHIBIT 3

A 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?
>X^.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 the

supplier. By simply inquiring about how well
we are serving our customer, we are implicitly raising the customer's expectations about
our service. When asked, customers often will
express some of their needs and expect a posifive response to this expression.
There must be explicit support for this
process in the highest levels of the organization. This support requires an understanding
of the pnxressits costs, including the risks,
on the one hand, and its benefits, on the other. More important, there must also be a commitment to using the results of this analysis in
developing the strategic plan of the organization. We recommend against even beginning
this process without this "legitimization."
Developing customer understanding invariably involves actually visiting customers
in their usual place of business. It is not possible to develop an adequate understanding of
the customers and their needs without such
visits. Careful planning must precede any visit. Just playing golf with the customer, buying
him or her a meal, or asking him or her to
complete a satisfacfion quesfionnaire will not
72

lead to the kind of customer understanding

that provides strategic direction and longterm success.
One question that frequently arises in
planning customer visits is at what level the
visit should be conducted. Though there
clearly needs to be dialogue at the most senior
levels of management, there are significant
advantages to broader interacfions as weil.
Dul'ont recently reorganized in an effort to
become closer to its customerto increase its
net customer value. As part of this process,
DuPont has begun to send operators from its
nylon spinning mills to visit those factories
where DuPont nylon is transformed into
swimsuits and brassieresand talk to the operators there about the quality problems they
experience in using DuPont nylon.
One planning question is whether the
customer will even want to participate in such
a process. How will participafion benefit the
customer? One possible answer is that the
customer will be helping the supplier position
itseU to meet both present and emerging customer needs. Another is that there will be
fewer problems during the course of ordinary

business between customers and suppliers. It

is important to have ready answers for customers when they ask why they should participate in a process that initially appears to
have advantages only for the supplier. The
answer{s) offered should be tailored to the
supplier's understanding of this customer
and what would be appealing as a benefit to
offset the costs involved in entertaining such
a visit.
Each customer/supplier interacfion is
unique. The goal of customer visits is to understand this unique interacfion in two ways.
The first goal is to determine how the customer decides today's "best value"; the second, to begin the process of discovering how
to provide unanticipated value in the future.
The former addresses the current compefifive
environment and how to increase market
share. The latter leads to strategies for creating new customer relafions in the future.
We must begin the planning process by
collecting and analyzing whatever data we already have about the customer. This in-house
review should focus on understanding the
customer's core values. This may mean studying the customer's annual reports and other
relevant documents, the customer's mission
statement, and the like. We need to understand the customer's corporate goals, culture,
and "driving forces," if you will. This understanding will give the planning team insight,
a starting point for understanding the customer's perspective.
Next, we need to plan the data collecfion.
We need to decide exactly what quesfions to
ask during our visit with the customer. Besides any quesfions that have emerged from
the in-house review, we need to understand
how the customer uses our product (preferably by direct observafion). Then we need to
determine how we can increase the value of
that product to that customer, how the customer measures success, and what factors that
might change the customer's use of our product. The focus of the visit should be on discovering the fundamental needs of the customer
and how the product is actually used by this
customer and not on product features.
A data collecHon checklist should be pre-

pared before every visit. Such a checklist

should help focus discussion on issues of customer value. Because each customer relationship is unique, each checklist will be unique. A
sample checklist is provided in Exhibit 3. The
actual quesfions asked of the customer, of
course, will be less formal and should appear
more spontaneous. For example, to explore
product use, ask the customer, "How do you
use our...?" or "Can you show me how you instaU our...?" Never ask the vague, "How do you
like our new ...?" It is important to understand
the current customer/product interacfion as
well as the customer's more general problems
and goals as both can lead to ideas for creating
increased net customer value in the future.
Step 3. Collecting the Data
Typically, many people are involved in making the decision to buy and use products or
services. To fully understand how to increase
customer value, it is essential to include each as
a source of data.
One issue that must be addressed is
which customers to include in an analysis.
Clearly, current "bonded" customers will provide important information. But so will former customersthose that have been lost
over the years for one reason or another.
These former customers can provide additional data that gives several different perspectives. Also important are compefitors'
customersthose who are implicitly stafing
that they do not think that you can meet their
needs. Talking candidly to these customers is
important, especially since their opinion is too
often discounted. "They only care about
price" or "They really aren't interested in
quality" are frequent comments. But if we listen, and thus hear more substanfive reasons,
we can often learn a good bit about how we
have failed to meet the needs of certain elements of the marketplace.
The data-collection checklist serves to steer
the data collection. If the checklist has been
carefully and thoughtfully prepared beforehand, the actual collecfion process should be
straightforward. Collecting data in this openended fashion is quite different from a typical
73

customer survey. The topics on the checklist

guide the discussion with the customer. The
customer's responses require follow-up questions and interpretafion to develop a full understanding of customer value. A checklist is
only a guide to keep the discussion focused on
the customer's fundamental needs.
What are we really trying to learn from
these data? Simply, we want to know what
our product should do from the customer's
point of view. What are the attributes of a
product that meet the customer's needsthat
provide highest net value to the customer?
The answers to this question are multifaceted.
They should include not only specific performance characteristics such as reliability, ease
of use, and the like, but also such aspects as
price, delivery, and service. Getting such information from a customer is not an easy task,
not even from a willing one.
We are not suggesting that this process
will enable the customer to design the product for you, nor quickly give you a list of attributes. Rather, it will provide important data
to those who design and produce products
that meet customer needs. Those who can design and produce such products will be the
successful ones.
Black & Decker provides an example of a
producer that listens to its customers. Several
years ago, the company's data showed an erosion of its industrial power tool business to foreign compefitors such as Makita and Ryobi.
What their customers were telling them was
that they needed to distinguish their industrial line from the entry-point line sold by the
mass retailers. By listening carefully. Black &
Decker realized that it could not meet this customer need without abandoning the cherished
Black & Decker label. The company did recognize, however, that these industrial customers
were still bonded to its then-dormant DeWalt
brand name. Therefore, they introduced an
enhanced DeWalt line of industrial-quality
power tools to this market. This move was
phenomenally successful, growing from zero
to over $250 million in less than three years.
This example provides an illustration of both
the power of listening to your customer (and
using that informafion) and how important
74

bonding can be as a driver of buying decisions.

Data collection requires skills and sophistication in interviewing, skills that many persons do not have. There also is a tendency for
customers to sugarcoat their answer in their
direct contacts with a supplier. Selecting the
right persons to conduct these customer visits
is critical to the success of this process. We recommend that senior level people be used,
perhaps accompanied by a consultant who is
familiar with the company and who possesses outstanding listening and interpretative
skills. This is clearly not a task to be delegated
to traditionally oriented market researchers.
In asking these questions, we must be
careful to recognize that customers tend to
give socially acceptable answers to many questions. For example, McDonald's developed the
McLean Burger because its market research reported that customers wanted a "healthy"
foodthe socially acceptable response. When
confronted by the choice between the new
healthy product and the tradifional Big Mac,
however, the customers' true preference
quickly emerged. One way to avoid such false
leads is by asking customers comparative quesfions. For example, under what circumstances
would they feel that they would choose Product A over Product B or Product C. What kind
of price difference would lead the customer to
change that choice? The interviewer must remember that the purpose of this interview is to
gather informafion on the customer's values,
not to change them.
Also, companies must understand that
getting useful data from the customer requires both in-depth quesfioning and interpretation of what is obtained. One of our
companies is a manufacturer of automated
weather observing equipment. This equipment automatically and confinually collects
weather data, e.g., temperature, dew point,
wind velocity, etc. Pilots can then access this
information by radio in order to plan their
landing. These pilots are the company's enduser customers, although they are not the
purchasers (the FAA or airport management
makes the buy decision). The needs of the
end-user customer are difficult to obtain. It is
only when they are asked about how they

would prefer to have this vital information

displayed that their previous unarticulated
needs emerge. What they are reporting they
want is a single visual display that tells them
whether it is safe to land at the airport in
question, or if a landing should be attempted
at all. Once the manufacturer understands
these needs, it can focus clearly on what product enhancements will lead to a groundsweli
of support among pilotssupport that eventually will enhance the company's chances of
maintaining and increasing its market share.
But this represents a great deal of hard work.
Step 4. Measurement
Nothing is so crifical to organizational success
as increasing the net value that we provide to
the customer. Thus, measuring these increases in net customer value provides a critical success indicator of organization vitality. There are
two elements to consider in any measurement of customer valueinifial selection
(short-term) and bonding (long-term). Selection as the customer's supplier depends on
how well we provide current customer value;
it can be measured by market share, sales, servicing orders, and so on. Bonding refers to the
depth of our relationship with the customer
and the customer's future selection behavior.
It is useful to think of five ever-increasing
levels 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 and
commitment. At the preferential level, there is
little trust or ongoing confidence; the customer is often seeking a supplier in which to
invest trust. At the favoritism level, there is a
continuing albeit modest level of trust and
confidence. When trust and confidence have
been earned over time, customers ordinarily
become committed.

At the fourth level, people recommend

products or services to others based on their
confidence that the value they received is not
unique to their experience, but rather that
their experience is representafive of the net
customer value provided by that supplier and
that supplier's product(s).
While all of us would clearly prefer to be
at the fifth level of bonding, that is typically
impossible. Indeed, it is rare to find this level
of bonding these days, given the nature of
most marketplaces. What is important, however, is to (a) discover the current level of
bonding and then (b) develop strategies for
increasing it, or, at the very least, maintaining
the current level.
The current focus on building strategic alliances between industrial customers and
their suppliers clearly reflects a generalized
increasing desire by customers for a higher
level of bonding. Suppliers who are not prepared to enter such bonded relationships are
obviously at risk.
Several of these levels of bonding require
strong efforts to retain customers. There are,
however, dangers inherent in naively focusing on customer retention. Such a focus can
overlook how much of its total budget for our
product or service that customer is spending
with us. We may be retaining customers over
a long period but they may be spending most
of their budget elsewhere. In one study of the
retail industry, those customers retained the
longest were the least profitable. These longterm customers had learned how to shop the
stores for sales and bargains, picking the least
profitable mix of merchandise. Similar examples can be found in the industrial marketplace. Therefore, an important piece of information to obtain during this customer
understanding process is how much of the total budget the customer spends with you as
compared to the competition. This is clearly
the most significant tneasure of bonding that
can be obtained.
It is typically necessary to use external resources to evaluate the level of customer
bonding. Customers will rarely give accurate
data about their level of bonding to their suppliers. It is far too confrontational for most
75

managers. Some indicators of bonding such

as referrals or repeat orders (a measure of
commitment) may be readily apparent, but
also may reveal an incomplete picture of the
level of bonding.
Step 5. Implementation
The payoff for customer understanding is in its
application to strategy development and implementation. Once the aistomer understanding prtKess is complete, at least lor the time being, then the organi/afion's strategic planning
team needs to be convened to receive, digest,
and apply the findings of this analysis. Without such an implementafion step there is no
reason to even begin the customer understanding process. One reason that such implementation often fails is that the customer understanding process reveals truths that the
organizafion cannot or will not face.
Understanding customer value is equally
important in helping organizations avoid
strategic mistakes. Consider the case of a defense contractor with a long history of customer satisfacfion in developing ammunition.
During a study of ways to reduce cost, the
company made plans to eliminate the special
shop that produced the prototypes for ammunifion tests. This special facility had much
higher costs than the main shop, and by moving the prototype work to the main shop, the
contractor would see a significant cost reduction. However, the ability of the prototype
shop to make changes overnight and thus not
interrupt a scheduled test for a customer was
a significant (though unstated) aspect of customer decision making. Had the defense contractor implemented this apparently rafional
decision, its competitive advantage would
have been lost.
Another example of the danger in making decisions without understanding customer value conies from a small company in
the rotary printing business. Its biggest customer is one of the world's largest consumer
product companiesand one with a highly
bureaucratic structure. There was great difficulty getting internal agreement on any new
adverfising campaigns. Markefing, sales.
76

product line managers, legal, etc. would battle

over details. Once the rotary printer understood what was happening, it was able to
force these factions to meet and resolve issues
so deadlines were met. Before developing this
customer understanding, the supplier was totally unaware that such an intervention could
provide a strategic advantage. Initially, it did
not have systems in place to protect or enhance this competency. But a customer value
analysis helped recfify this.
Achieving customer understanding, however, is not enough. Success requires actions
based on that understanding. And often those
actions involve changes in basic management
processes, changes that are often difficult for
management to consider. For example. National Car Rental Systems had to change its
performance rating process for its telephone
reservationists. Instead of rating agents on the
fime spent on each call, they were evaluated
on the number of reservations actually made.
Such reservations, of course, allowed National the opportunity to provide customer value
and thus to succeed in the marketplace.
One way to think about customer understanding in the context of strategic planning
is to regard it as one way of conducting the
usual SWOT analysis. That is, the customer
understanding analysis can provide an organizafion with a unique view of its Strengths,
Weaknesses, Opportunifies, and Threats, all
from the customer's point of view.
The customer understanding process
provides critical information for segmenting
markets. It typically reveals that there are
customers with significantly different needs.
Different product features may be required
or some attribute such as just-in-time delivery or training in product use may be differentially important. The customer understanding process should provide data on
such issues, allowing for intelligent decisions
to be made that will enhance customer value.

SUMMARY AND CONCLUSIONS

Building customer valueestablishing an
emofional bondbetween a customer and a

supplier is best regarded as an issue of managing and fulfilling customer expectafions

and of building trust. The process of customer
understanding is thus a way of examining the
nature and extent of the trust established between the two parties. A high level of trust between the customer and the supplier is experienced by both customer and supplier as an
emofional bond.
The customer understanding process
provides a conceptual framework for converting raw data about transactions between
the customer and supplier into information
a framework for making the data meaningful
and useful. There are two important kinds of
information that the process should yield.
First, what are the customer's present needs
and how well are we meeting them? Second,

what are the customer's emerging needs and

how can we position ourselves to meet these?
Maintaining and solidifying these current
customer values and develciping tactics for
meeting these unanticipated emerging needs
provides the basis for either developing or
modifying the company's strategic plan. It is
this application that makes the customer understanding analysis pay off.

Ifyou wish to obtain reprints

of this or other articles in
iZATiON.M DYSAMics, please
refer to the reprint instructions on
80 or cull (HOO) (ni-2i(>4.

SELECTED BIBLIOGRAPHY

Readers wanfing a more in-depth discussion

of customer value should see Bradley T. Gale,
Managing Customer Value (New York: Free
Press, 1994); Michael Stiles and Gregory
Bounds (eds.). Competing Globally Through
Customer Value (Westport, CT: Quorum
Books, 1991); and Kari Albrecht, Northbound
Train (New York: AMACOM, 1994). Cross
and Smith provide a discussion of customer
bonding from a markefing perspective in Customer Bo)uiin'^ (Lincolnvvood, IL: NIC Business Books, 1995). Christopher Fay provides a
good discussion of the importance of differentiating what customers say from what they
do in "Royalties from Loyalties," lournal of
Business Stratesi^ies, Vol. 15,1994. The financial

advantage of managing customer retention is

described in Frederick Reichold, "LoyaltyBased Management," Han>ard Business Reznew,

March-April 1993.
The concept of levels of customer value is
based on the work of Kano, Seraku, Takahashi, and Tsuji, in "Attractive Quality and
Must-Be Quality," Quality, Vol. 14, No. 2. For
a thorough presentation of the entire strategic
planning process of which understanding
customer value and measuring customer
bonding are a fundamental part, see Leonard
Goodstein, Timothy Nolan, and William
Pfeiffer, Applied Strategic Plamiin;^: How to Develop a Plan That Really Works (New York: Mc-

Graw-Hill, 1993).
77

ORGANIZATION WATCH
Editor's Note: We itwitcd renders to respond to Todd lick's commentary.
"Accelerating Organizational Change" (Summer J995) with additional ifisights into
how change can be managed. Here is a sampling of the responsea.

Readers' Forum
NEW PERSONNEL AS CHANGE
CATALYSTS
While employed with a well-know firm in the
consumer foods industry, ! was called upon
by a divisional general manager to advise on
improving the culture and operating effectiveness of his urtit. The consumer food products industry was changing rapidly. The firm's
chairman wanted the division to be more flexible, fast, and innovative. And he wanted this
change to occur as quickjy as possible.
The company had a long history of paternalistic leadership. Those who "didn't rock
the boat" and who showed up to do "the
same work over and over" could expect lifetime employment and a nice watch after 30
years. Employees resisted change and many
held back on innovative ideas. Obviously,
there was little sense of urgency. This was not
the employees' fault. They had been conditioned to act that way.
We proceeded with a highly participative
change effort, following all of the usual prescriptions. Even so, real change was slow. It
became increasingly clear that the effort was
being impeded by some well-placed managers
who had been feigning support. This group
then 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 since
then, lead me to conclude that change rarely
occurs fast unless there is a change-oriented
78

team of leaders in place. In many companies

that's not the caseand therefore the only
real way to accelerate change is through the
assessment, development, and selection of
new leaderspeople who are less threatened
by tlie change and have the least to lose.
The food industry division has made significant strides since the change effort was
redirected. The general manager has retired,
but he left the division in a much healthier
and robust state.
Robert Cenek
Executive Assistant, Organization DeiKlopment
Montana Pozoer Cotnpany/Entech Division
Butte, Moitana

TO MAINTAIN CHANGE
MOMENTUM, MINIMIZE
REGRESSION TO THE MEAN
To sustain its commitment to continuous improvement, the Farmington, Connecticut,
public school system engages a committee of
community experts in an annual review of a
content area. In evaluating a science program,
for example, the committee included a physicist, a medical researcher, and a DNA biologist, as well as selected staff and citizens.
These evaluations result in recommendations
for important curriculum changes.
The changes, however, have not always
been sustained over time. Consider one such
program.
In the mid 1970s, we developed an exem-

plary writing program based, in part, on the

work of Donald Murray, a Pulitzer Prize winning author. Children learned to write by
writingwriting leads, searching for specifics,
finding an audience, and learning to "show
rather than tell." We taught the theory and
pedagogy of the program in summer teacher
institutes using students and video feedback.
Classrooms became writing laboratories. After
a year in the program, eighth graders were
writing as well as beginning high school juniors. We reported the results to the research
community, and many schools in the region
came to observe.
Six years later, however, the program existed only in the minds of a few of its original
supporters. The program's demise supported
an intuitive proposition that I have heid for
many years:
Every high-quality program will
regress toward the mean over time. As program complexity increases, regression accelerates.
In other words, a simple textbook change
"sticks to the organizational ribs" much
longer than a complex writing program. A
post-mortem showed inadequate attention as
well as administrator and teacher turnover as
the primary causes for its loss.
We responded with six principles: recruit,
recruit, recruit and induct, induct, induct. Our
new teacher application procedure collected
information tin pedagogical skills in programs
important to us. Demonstration teaching became a requirement. Credit was also given to
candidates for "breath of experiences." The
fact, for example, that a candidate had cycled
across the country became an asset. We found
pathways to colleges and universities that
equipped candidates with skills in harmony
with our goals. Induction of these new teachers and principals became more directed. Our
message was clear: "Our programs are the
strength of our systemthey have resulted in
high-performing students. We wilJ train you
and support your learning of these programs.
You will be given a great deal of latitude to experiment and innovate, but it will be within
program parameters."

This "purposing of the organization" became the first priority, and it has helped us accelerate change by minimizing regression toward the mean.
William H. Streich
Educational Consultant
Farmington, Connecticut

PAY AS CHANGE CATALYST

Although Todd Jick makes a number of insightful points about accelerating change, he
does not touch on the power ot" an organization's pay system as a change catalyst. Indeed,
until recently, most writers on the subject of
change have ignored this ingredient.
Because pay is a powerful communicator
of values, companies have commonly viewed
pay as a support system. However, this is
changing. Recent research by the American
Compensation Associafion dixruments the increased use of pay to lead, rather than support,
change.
Recognition and reward systems can aid
change by emphasizing two elements:
1. Developmentencouraging people to
acquire the competencies (behaviors, skills,
knowledge) required to support new company directions, and
2. Resultsincentives for converting development into meaningful outcomes.
Various forms of skill or competency pay
are now commonly used to encourage development. And pay-for-performance plans, often involving variable pay or lump sum
awards as an alternative to base pay increases,
support results. A number of major companies,
including Monsanto, General Electric, Xerox,
General Mills, Solectron, Hewlett-Packard, and
Frito-Lay use competency pay, variable pay, or
both as tools to support new initiatives.
Pat Zingheim and Jay Schuster
Schuster-Zingheim and Associates, Inc.
Los Angeles, CA
Responses to Organizational Dynamics articles
should lie sent to the editor at the address given in
the masthead, faxed to us at (212) 903-8168. or
sent via e-mail to orgdynam@amanet.org
79