The Balanced Scorecard: Translating Strategy Into Action (11 page)
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Authors: Robert S. Kaplan,David P. Norton
Tags: #Non-Fiction, #Business
In general, existing and potential customers are not homogeneous. They have different preferences and value the attributes of the product or service differently. A strategy formulation process, using in-depth market research, should reveal the different market or customer segments, and their preferences along dimensions like price, quality, functionality, image, reputation, relationship, and service. The company’s strategy can then be defined by those customer and market segments that it chooses to target. The Balanced Scorecard, as a description of a company’s strategy, should identify the customer objectives in each targeted segment.
Some managers object to choosing targeted customer segments; they have never seen a customer they didn’t like, and want to be able to satisfy all customers’ preferences. But this approach runs the risk of doing nothing well for anybody. The essence of strategy is not just choosing what to do; it also requires choosing what not to do.
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In building its Balanced Scorecard, Rockwater managers interviewed many of its current and potential customers. They found that some customers wanted to continue business as usual. These customers developed internally all the specifications for their bids, put the detailed bidding document out to tender, and chose, from among all qualified suppliers, the one submitting the lowest bid. As one of these customers said during an interview:
We don’t have the resources or time for doing anything fancy with our suppliers. Our business has become ruthlessly competitive, with
price and margin reductions in recent years, and the need for us to cut costs wherever we can. We can’t afford to choose anyone but the lowest-price supplier.
Historically, Rockwater competed by attempting to be the selected low-price bidder for such customers.
But the interviews also revealed that several large and important customers, Chevron, BP, and Amerada Hess, for example, were looking for more than low price from their most valued supplier of undersea construction services. They said:
We have to cut costs wherever we can. But we are looking to our suppliers to help us in this goal. If it’s cheaper and more effective for them to take over some of our engineering functions, we should let them do that, and reduce our internal engineering staffs accordingly. Also, our comparative advantage is finding oil and gas reserves, refining them, and bringing them to the market. We don’t have any special capabilities in undersea construction. We want suppliers that can suggest new ways of doing business, and that can develop improved technologies for this task. Our best suppliers of engineering services will anticipate our needs, and suggest creative ways to meet these needs through new technologies, new project management approaches, and new financing methods.
These companies acknowledged that rapidly changing technology and an increasingly competitive marketplace for their final products had motivated them to look to their suppliers for innovative ways to lower their costs. While price would still be a factor, an ability to offer innovative and more cost-effective approaches would be a strong influence on supplier selection. Rockwater, although wanting to retain some business with its price-sensitive customers, chose a strategy to increase its market share with value-seeking customers. Consequently, its core customer measures of market share, and customer retention, acquisition, and satisfaction focused on customers where it had established value-adding relationships. To communicate that strategy and evaluate its success, Rockwater chose to measure the percentage of its revenue generated from value-added customer relationships.
Similarly, Metro Bank had competed, historically, by offering low-price, efficient, and high-quality service to all of its retail banking customers. A
squeeze on operating profits and margins, and changes in technology and competitive conditions led the bank to a strategic review. Metro concluded that it did not want to attract business just on the basis of being the lowest-priced provider of commodity-like transaction services. It wanted to target customers who would be attracted by knowledgeable financial advisers providing a broad range of financial products and services, in defect-free transactions, and who would expect a reasonable, but not necessarily the lowest, price for those transactions.
As another example of market segmentation, Pioneer Petroleum, a major U.S. refiner and retail marketer of gasoline and automobile lubricants, began the development of its customer strategy with a market research program. The findings identified five customer segments.
1. Road Warriors: 16% of buyers
Higher-income middle-aged men who drive 25,000–50,000 miles a year… buy premium gasoline with a credit card… purchase sandwiches and drinks from the convenience store… will sometimes wash their cars at the carwash.
2. True Blues: 16% of buyers
Usually men and women with moderate to high incomes who are loyal to a brand and sometimes to a particular station… frequently buy premium gasoline and pay in cash.
3. Generation F3: 27% of buyers
Fuel, Food, and Fast: Upwardly mobile men and women—half under 25 years of age—who are constantly on the go… drive a lot and snack heavily from the convenience store.
4. Homebodies: 21% of buyers
Usually housewives who shuttle their children around during the day and use whatever gasoline station is based in town or along their route of travel.
5. Price Shoppers: 20% of buyers
Generally aren’t loyal to either a brand or a particular station, and rarely buy the premium line… frequently on tight budgets.
Pioneer concluded that oil companies had been fighting over the Price Shoppers for years. Pioneer’s executives now realized that these customers
numbered only 20% of all gasoline buyers, and were the 20% with the lowest profit margins. Pioneer shifted its focus to the most profitable 59% of gasoline buyers (Road Warriors, True Blues, and Generation F3), with specific value propositions designed to attract and retain business from these three segments.
Once a business has identified and targeted its market segments, it can address the objectives and measures for its targeted segments. We have found that companies generally select two sets of measures for their customer perspective. The first set represents generic measures that virtually all companies want to use. Because these measures, such as customer satisfaction, market share, and customer retention, appear in so many balanced scorecards, we refer to them as the
core measurement group
. The second set of measures represents the performance drivers—differentiators—of the customer outcomes. They answer the question, What must the company deliver to its customers to achieve high degrees of satisfaction, retention, acquisition, and, eventually, market share? The performance-driver measures capture the value propositions that the company will attempt to deliver to its targeted customer and market segments.
The core measurement group of customer outcomes is generic across all kinds of organizations. The core measurement group includes measures of:
- Market share
- Customer retention
- Customer acquisition
- Customer satisfaction
- Customer profitability
These core measures can be grouped in a causal chain of relationships (see Figure 4-1).
ARKET AND
A
CCOUNT
S
HARE
Measuring market share is straightforward once the targeted customer group or market segment has been specified. Industry groups, trade associations, government statistics, and other public sources can often provide estimates of the total market size. Rockwater’s market-share measure was the percentage of business it received from Tier 1 customers, those with whom it had long-term partnering relationships. Such a measure illustrates how the Balanced Scorecard should be used to motivate and monitor a business unit’s strategy. Using only financial measures, Rockwater may have been able, in the short run, to achieve sales growth, profitability, and return-on-capital targets by increasing business that it won purely on competitive pricing. In this case, however, the measure of market share with Tier 1 customers would signal that Rockwater was not implementing its strategy effectively. It was not increasing its share of business based on value-adding relationships with customers. The measure of market share with targeted customers would be
balancing
the pure financial signals to indicate that an immediate review of the strategy implementation was likely required.
Figure 4-1
The Customer Perspective—Core Measures
USTOMER
R
ETENTION
Clearly, a desirable way for maintaining or increasing market share in targeted customer segments is to start by retaining existing customers in those segments. The insights from research on the service profit chain has demonstrated the importance of customer retention.
2
Companies that can readily identify all of their customers—for example, industrial companies, distributors and wholesalers, newspaper and magazine publishers, computer on-line service companies, banks, credit card companies, and long-distance telephone suppliers—can readily measure customer retention from period to period. Beyond just keeping customers, many companies will want to measure customer loyalty by the percentage growth of business with existing customers.
USTOMER
A
CQUISITION
C
USTOMER
S
ATISFACTION
Both customer retention and customer acquisition are driven by meeting customers’ needs. Customer satisfaction measures provide feedback on how well the company is doing. The importance of customer satisfaction probably cannot be overemphasized. Recent research has indicated that just scoring adequately on customer satisfaction is not sufficient for achieving high degrees of loyalty, retention, and profitability. Only when customers rate their buying experience as completely or extremely satisfied can a company count on their repeat purchasing behavior.
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Some companies are fortunate to have customers that voluntarily supply ratings to all their suppliers. For example, Hewlett-Packard provides ratings and rankings of vendors in various supplier categories. Ford gives recognition and awards to its most valued suppliers. The treasurer’s offices of several multinational companies give report cards to all banks with whom they have relationships, providing detailed feedback on how well each bank is performing in supplying capital, financial services, and financial advice. And part of Rockwater’s relationship with Tier 1 customers consists of receiving monthly feedback along performance dimensions specified by the customer in advance as being critical for its particular project.
Companies, however, cannot count on having all their targeted customers proactively supplying feedback on performance. Many companies, including
British Airways, Hewlett-Packard, Xerox, Procter & Gamble, Motorola, PepsiCo, Boeing, and 3M, conduct systematic customer satisfaction surveys. Writing a customer survey may seem simple, but getting valid responses from a high percentage of customers usually requires specialized expertise. Three techniques can be generally employed: mail surveys, telephone interviews, and personal interviews. These techniques range in cost from low to high, but response rates and valuable insights also range from low to high across them. Customer satisfaction surveys have now become one of the most active areas for market research firms, with current billings of nearly $200 million and annual growth of 25%. This specialized service can mobilize expertise in psychology, market research, statistics, and interviewing techniques, as well as considerable numbers of personnel and the computing power capable of providing comprehensive indicators of customer satisfaction.
USTOMER
P
ROFITABILITY
Succeeding in the first four core customer measures of share, retention, acquisition, and satisfaction, however, does not guarantee that a company has profitable customers. Obviously, one way to have extremely satisfied customers (and angry competitors) is to sell products and services at very low prices. Since customer satisfaction and high market share are themselves only a means to achieving higher financial returns, companies will probably wish to measure not only the extent of business they do with customers, but also the profitability of this business, particularly in targeted customer segments. Activity-based cost systems permit companies to measure individual and aggregate customer profitability.
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Companies should want more than satisfied and happy customers; they should want profitable customers. A financial measure, like customer profitability, helps keep customer-focused organizations from becoming customer-obsessed. Not all customer demands can be satisfied in ways that are profitable to an organization. Particularly difficult or demanding services may require that the unit either decline the business or else seek price increases that will compensate it for the resources that must be deployed to satisfy that customer’s demand. Or, if the customer or the nature of the demands is particularly important to the organization, and repricing is not a viable option, the business unit still receives a signal from the ABC system about unprofitable relationships. Such a signal enables it to see where key processes that deliver the product or
service to the customer can be reengineered or redesigned so that customers’ demands can be met and the company can still be profitable.
The customer profitability measure may reveal that certain targeted customers are unprofitable. This is particularly likely to occur with newly acquired customers, where the considerable acquisition effort has yet to be offset from the margins earned by selling products and services to the customers. In these cases, lifetime profitability becomes the basis for retaining or discouraging currently unprofitable customers. Newly acquired customers, even if currently unprofitable, are still valuable because of their growth potential. But unprofitable customers that have been with the company for many years will likely require explicit action (or other rationales, like credibility and learning opportunities) to turn them into assets.
Figure 4-2 presents a simple way to combine considerations of targeted market segments and customer profitability.
Customers in the two main diagonal cells in Figure 4-2 are easy to handle. A company certainly wants to retain its profitable customers in targeted segments, and should have little future interest in unprofitable customers in untargeted segments. The customers in the two off-diagonal cells create more interesting managerial situations. Unprofitable customers in targeted segments (the upper righthand cell) represent opportunities to transform them into profitable customers. As discussed, newly acquired customers may require little action other than watching to see whether increased business in the future makes them profitable. Longer-standing customers that are unprofitable may require repricing of services or products that they use extensively, or developing improved ways of producing and delivering these products and services. Profitable customers in untargeted segments (the lower lefthand cell) may certainly be retained, but need to be monitored to assess that new demands for services or features, or changes in the volume and mix of products and services they purchase do not cause them to become unprofitable. By using both market segment and profitability measures to view customers, managers get valuable feedback on the effectiveness of their market segmentation strategies.
Figure 4-2
Targeted Segments and Customer Profitability