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WINTER 2000
Intelligence Generation
and Superior Customer Value
Stanley F. Slater
University of Washington, Bothell
John C. Narver
University of Washington, Seattle
121
122
WINTER 2000
Intelligence Generated
Through Experimentation
Experimentation means trying ideas about means for
creating superior customer value that are outside of the
organizations normal routines, evaluating the intelligence
generated from those experiments, and striving for consensus on the meaning of the results. Experimentation is
essential to the development of successful new products,
particularly in dynamic environments where customers
have difficulty articulating fundamental needs or understanding the benefits of a new technology or new product
(Hamel and Prahalad 1994; Lynn, Morone, and Paulson
1996). In this type of situation, traditional market research
may be of little benefit (Slater and Narver 1998).
A willingness to experiment is a manifestation of entrepreneurial values that include innovativeness, risk taking,
and competitive aggressiveness (Lumpkin and Dess
1996). Experimentation is a high-risk activity, though,
particularly when product innovations are rapidly copied
by competitors (Ghemawat 1986; Williams 1992). To
minimize the risk and maximize learning, successful innovators frequently work intensively with lead customers to
understand their latent needs (Von Hippel 1986), undertake low-cost market experiments (Garvin 1993; Hamel
and Prahalad 1991), and share knowledge through crossfunctional teaming (Lynn 1998) to leverage development
capabilities across the corporation (Stalk, Evans, and
Shulman 1992).
Hypothesis 3: Experimentation-based intelligencegeneration practices are associated with new product success.
Intelligence Generated
From Repetitive Experience
Intelligence generation from experience has been discussed for more than 50 years, ever since it was observed
that manufacturing costs declined at a relatively stable rate
with every doubling of production volume in the aircraft
industry. This phenomenon was termed the experience
curve or the learning curve. It has since been observed in
many other industry environments (Alberts 1989). However, the benefits of experience are not the result of some
natural law. These benefits are realized only when there is
a conscious and sustained effort to understand the nature
of the process and to identify opportunities for improvement. The benefits may be the result of improved
productivity from more efficient use of people or equipment, of lower scrap or rework rates from improved
processes, or of lower investments in working capital from
improved inventory control.
From a customer value perspective, a commitment to
generating intelligence from experience may uncover opportunities for improving the quality of customer relationships. For example, the most painful but potentially most
enlightening experience is that of losing a customer or
even losing a portion of a customers business. Long-time
customers tend to produce more revenue for the business
and are more profitable because of lower selling expenses.
The value of a loyal customer base is well accepted, so it is
very important that customer defections are recognized
and the reasons for them understood. Root-cause analysis
is a technique for identifying fundamental problems instead of their symptoms (Reichheld 1996). This experiential process enables the organization to take appropriate
corrective action to prevent additional customer defections. In this way, a continuous improvement philosophy
can pay off in building strong customer relationships as
well as in improving production processes. In a turbulent
environment with short product life cycles, experience is
likely to have a greater influence on customer relationships
than on product cost (Moore 1995).
Hypothesis 4a: Experience-based intelligencegeneration practices are associated with product
quality.
Hypothesis 4b: Experience-based intelligencegeneration practices are associated with customer
satisfaction.
THE STUDY
We selected the electronics industry as the setting for
this exploratory study. The electronics industry is characterized by short product life cycles, rapid technological
change, and intense rivalry (Williams 1992). A list of the
largest 1,000 electronics firms by number of employees
was purchased, and a questionnaire was mailed either to
the president or general manager of each firm. This list
included firms such as IBM, Texas Instruments, Intel, and
Hewlett-Packard. After eliminating duplicates and
accounting for undeliverable addresses, the sampling
frame consisted of 955 firms. Sixty-six usable questionnaires were returned for a response rate of 7 percent. A
follow-up with a small number of nonrespondents showed
reasons for noncompliance, including lack of time, corporate policy against participating in studies, and distrust of
the research objectives.
While this response rate might raise concerns about
nonresponse bias, the diversity of the sample as described
in Table 1 and the fact that there are no significant
123
TABLE 1
Sample Characteristics
Characteristic
Percentage
Revenues
Minimum
Maximum
Median
Strategy
Prospectors
Analyzers
Defenders
Reactors
Reported return on investment
Minimum
Maximum
Mean
$U.S.
3 million
10 billion
30 million
32
24
33
11
5
50
16.3
124
TABLE 2
Ordinary Least Squares Regression
ResultsStandardized Regression
Coefficient / (SE ) (N = 66)
Sources of
Customer Value
Performance
Indicators
.373*
(.187)
.496***
(.187)
.166
(.150)
.027
(.160)
.115
(.071)
.003
(.109)
.137**
.097
(.209)
.084
(.204)
.147
(.166)
.426**
(.170)
.095
(.076)
.029
(.121)
.085*
.156
.411**
(.170)
(.205)
.109
.122
(.170)
(.205)
.245*
.117
(.136)
(.164)
.005
.038
(.145)
(.175)
.370*** .363***
(.065)
(.078)
.002
.182
(.100)
(.120)
.160**
.300***
WINTER 2000
125
126
WINTER 2000
ACKNOWLEDGMENTS
We gratefully acknowledge the support of the Marketing Science Institute and the helpful comments of
G. Tomas M. Hult, Gary S. Lynn, and James M. Sinkula.
CONCLUSION
It is clear that intelligence is one of a businesss most
valuable assets. It is also true that, like other assets, the
value of a given stock of intelligence depreciates over
time. This is the result of market dynamics and/or the intelligence disseminating throughout an industry so that it no
longer provides a competitive advantage. The challenge is
to continuously generate new intelligence about customer
needs and how best to satisfy them. The present study suggests that different intelligence-generation capabilities
contribute to customer value creation in different ways.
Managers must commit themselves and their organizations to the creation and maintenance of these capabilities.
APPENDIX
Intelligence-Generation Style Measures
Market-focused intelligence generation: = .81
Benchmarks key processes for improving customer satisfaction.
Tracks and analyzes competitor actions.
Allocates resources to identifying and understanding new
market opportunities.
Attempts to develop new ways of looking at customers and
their needs.
Systematically collects information about customer needs.
Intelligence generated through collaboration: = .76
Sends employees to seminars or short courses to bring back
new ideas to the organization.
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