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Building a customer-focused culture in organisations: Developing 7Cs model

Article  in  International Journal of Business Excellence · January 2018

DOI: 10.1504/IJBEX.2018.094705

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 Building a Customer-focused Culture in Organizations: Developing 7Cs
Model
Pankaj M. Madhani

1 Introduction
Customers are crucial to any business as without customers, there is no sales; without sales, there
is no revenue and profits. In the current scenario of highly competitive market, developing a strong
relationship with customers is vital in achieving the goals of both the customers and the
organization.

“There is only one boss, the customer. And he can fire everybody in the company from the
chairman on down, simply by spending his money somewhere else” – Sam Walton.

Slogans such as “The customer comes first” or “The customer is king” are quite common in
business world. These slogans are used to emphasize the role of the customer to the stakeholders
such as owners and employees of a service firm (Olsen et al., 2014). To be successfully focused
on customers, organizations must ensure a high level of consensus and cohesiveness around the
belief that its existence relies on being responsive to the needs of its customers. For true success,
the organization has to ensure superior customer experiences which add continuous value for
customers. Instead of a goal of maximizing performance measured in terms of financial metrics,
the goal of the organization should be to add value to and delight the customer, as financial success
follows continuous innovation to provide unique value to customers (Denning, 2016). Customer
focus has a positive impact on new product performance and the firms’ performance (Nickell et
al., 2013). Sun and Kim (2013) also reported that customer focus can significantly influence the
firms’ financial performance.

The practice of customer focus has been identified as pivotal for any organization seeking to reach
a level of sustainable performance (Mokhtar, 2013). Sustainable performance refers to an
expectation that an organization is able to react rapidly and efficiently when faced with emerging
customer-related issues. This is an important factor, given the dynamic nature of customer
expectations (Mukerjee, 2013). Hence, there is lot of attention on ‘customer-focus’. Customer
focus is described as: “… the set of beliefs that put the customers’ interest first, while not excluding
those of all other stakeholders such as owners, managers, and employees, in order to develop a
long-term profitable enterprise” (Deshpande et al.,1993). Customer-focus is also defined as
organizations’ concerns with their customers’ needs, wants, and expectations (past, present, and
future); and their strong commitment to understand and satisfy them in a proactive manner for
long-term growth (Bartley et al., 2007).

_____________________________________________________________________________

Madhani, P. M. (2018). "Building a Customer-focused Culture in Organizations: Developing 7Cs

Model", International Journal of Business Excellence, Vol. 16, No. 2, pp. 199-232.

1
The ultimate objective of customer focus is fulfilling customer expectation (Tajeddini et al., 2013).
Organizations can truly embrace customer focus only if they entrench it as a culture throughout
their organization (Kennedy et al., 2002).Organizational culture is defined as:“… a pattern of
shared basic assumptions that the group learned as it solved its problems of external adaptation
and internal integration, that has worked well enough to be considered valid and therefore to be
taught to new members as the correct way to perceive, think and feel in relation to those problems”
(Schein, 1999). After studying over 1,000 organizations, researchers have found that
organizational culture impacts business performance two to four times as much as individual
talent. Culture is center stage for business success and when an organization creates the right
culture, it turns external promises into internal employee engagement and supportive actions
(Ulrich and Brockbank, 2016).

Organizational culture affects employee perceptions as well as behaviors in the workplace and
hence it contributes to the success or failure of an organization. Understanding culture is important
because, it is a set of powerful, latent and often subconsciously operating forces. If these forces
are not surfaced and understood, they may undermine any attempt to direct an organization’s
efforts and behavior towards achieving its strategies and goals. Organizational culture determines
the norms in the organizations that dictate how members of organizations should think and behave.
Recognizing significance of organizational culture, even Chartered Institute of Auditors have
prepared documentation to help auditors monitor culture (Chartered Institute of Internal Auditors,
2014).

An effective customer-focused culture in organizations facilitates successful product and service

delivery and builds enduring relationships and loyal customers base (Martin, 1992; Macaulay and
Clark, 1998). Without such customer-focused culture, organizations should not expect survival,
let alone success, in the long-term. Despite the acknowledged importance of ‘customer-focus’,
little attention has been paid to the description and analysis of a customer-focused culture by both
academics and practitioners. This research works in this direction to underscore significance of
customer-focused culture in organizations and provides supporting frameworks to emphasize its
various attributes and develops the 7Cs model for building customer-focused culture.

2 Literature Review
Today, business organizations are struggling to survive in a highly competitive business world.
They are looking for ways to be more creative, innovative and competitive. There are different
factors that affect the performance of the firms. One of the factors that have been suggested to
influence firms ’performance is the organizational culture (Fekete and Bocskei, 2011), provided
that they are able to adapt to its environment (relevant to its industry and business conditions)
(Kim et al., 2004). The strong link between an organization’s culture and its performance has been
widely recognized by both practitioners (Basch, 2002; Peters and Waterman, 1982) and academics
(Kotter and Heskett, 1992).

Peters and Waterman (1982) contended that organizational culture plays a crucial role in
determining the effectiveness of the organizations. Oparanma (2010) asserted that organizational
culture stimulates or engenders many other activities that bring about corporate success and also
found that organizational culture is an important variable to be considered when organizational
performance in consideration. Theoretical arguments support the idea that organizational culture

2
is related to organizational performance (Ahmed, 1998; Cameron and Quinn, 2006; Saffold, 1988;
Zheng et al., 2010). There are also empirical evidence regarding organization culture-performance
relationship (Duke II and Edet, 2012; Marcoulides and Heck, 1993; Ogbonna and Haris, 2000).

A number of researchers have shown that a company’s culture has a close link to its effectiveness
(Denison, 1990; Ouchi, 1981). In today’s competitive business environment, customer satisfaction
is an increasingly important component of an effective organization (Berry and Parasuraman,
1992) and has been recognized as an important part of corporate strategy (Fornell et al., 2006).
Customer satisfaction has been a key driver of firms’ long-term profitability and market value
(Gruca and Rego, 2005). A Study found that organizational culture relates significantly and
positively to customer satisfaction (Gillespie et al., 2008). Staying close to one's customer can
result in timely market information, joint product development activities, and intense brand
loyalties, leading to better financial performance (Peters and Waterman, 1982). There is strong
relationship between customer-focus and overall profitability (Appiah-Adu and Singh, 1998;
Agarwal et al., 2003). Researchers also referred ‘customer-focus’ as synonymous to ‘customer
orientation and ‘market orientation’ (Bartley et al., 2007).

Olsen et al., (2014) found a strong relationship between customer orientation and customer
satisfaction. They developed and empirically tested a model to explain the elements that constitute
customer orientation. Accordingly, customer orientation consists of a process that includes three
phases: strategy, measurement and analysis and finally implementation. Here, implementation has
the strongest influence on customer satisfaction which in turn influences financial results. Their
study, a mix of both quantitative and qualitative research, was based on a cross-sectional survey
of 320 service firms and a multiple case study of 20 organizational units at a large service firm in
the European telecom industry.

Salter and Jelavic (2017) compared the five dominant perspectives of market orientation (decision-
making perspective; market intelligence perspective; culturally based behavioral perspective;
strategic focus perspective and customer orientation perspective) to illustrate the core areas of
focus for an organization to consider when implementing a market orientation culture. Based on a
study of participants from a US-based firm operating in the hospitality industry, researchers
empirically found that market orientation, as a culture positively impacts the service climate that
develops in the firm by providing boundary-spanning employees with control, and hiring
employees that possess flexibility as a personality trait (Morgan et al., 2014). Jogaratnam (2017),
studied independent restaurants in the US and based on 171 responses (with effective response rate
of 17% from sample of 1000 restaurateurs), found that market orientation as well as innovative
and supportive cultural types have an independent effect on performance. Among these restaurant
businesses, the manager's strategic ability to shape and mold organizational culture and market
orientation may determine their capacity to generate sustainable competitive advantages and
enhance firm performance.

The extent to which the business firm is able to satisfy its customers is an indication of its general
health and its prospects for the future; it has a direct long-term impact on the future performance
of the firm. The purpose of the firm is to create and serve customers and creating a satisfied
customer is the only justifiable definition of business purpose (Drucker, 1954). A research study
found that customer satisfaction makes it costly for a competitor to takeaway another firm’s

3
customers due to increased loyalty, reduced price elasticity, insulation of current customers from
competitive efforts, lower costs of future transactions, reduced failure costs, lower costs of
attracting new customers, and enhanced reputation for the firm (Fornell,1992). The importance of
customer loyalty as a means to achieve long-term competitive advantages in the context of
competitive global markets has been emphasized by Aksoy (2013).

Levitt (1960) also contended that business definition should be based on customer needs instead
of specific offerings employed to meet those needs. With ever-escalating customer expectations,
companies have to offer additional values to make an ever lasting impression in the minds of
customers (Gurney, 1999), and thus the delivery of satisfaction as the confirmation of expectations
is considered as a minimum threshold whereby greater emphasis has shifted to delight in an attempt
to exceed expectations (Yeung et al., 2002). Customer delight provides a distinct advantage to the
company that does it first and does it well (Chandler, 1989) and thus creates a desire for further
pleasant performances in the future (Oliver et al., 1997). Firms can create a culture of delighting
customers by hiring the right employees who can be trusted to act independently and ethically
without direct management involvement. Along with training, employees are also empowered with
the freedom to make decisions and act independently to delight a customer (Barnes et al., 2013).

In order for a company to achieve continuous above average performance, it must create a
sustainable superior value for its customers (Porter, 1985). Hence, companies must attempt to go
beyond just meeting customer expectations, in order to enjoy proportionately greater gains (Yeung
et al., 2002). As such delighted customers buy more, complain less, spread positive word-of-mouth
(Gurney, 1999), and ensure a loyal customer base who repeat purchases (Rust and Oliver, 2000).
Loyal customers are sustainable revenue contributors (Berezan et al., 2013). Lee et al.,(2001)
define loyalty both as an attitude(brand preferences, commitment, intention-to-buy) and a behavior
(hard-core loyalty, repeat purchase probability) that continue in an exchange relationship based on
past experiences (Fay, 1998; Guseman, 1981; Kendrick, 1998) and future expectations (Lee and
Cunningham, 2001). Customer loyalty is also very sensitive to perceived switching costs (de Matos
et al., 2013). Loyalty affects customers’ behavioral outcomes, such as repurchase intentions,
increased share of wallet, word of mouth and lowered acquisition costs; ultimately, the loyalty of
the customer should lead to the profitability of the company (Gandomi and Zolfaghari, 2013).

In highly competitive business environments, firms tend to become more sensitive and responsive
to the changing needs of customers (Lusch and Laczniack, 1987). Today customers are better
organized, are well informed, and are on the whole, more demanding (Ruekert, 1992). Owing to
this transformation, many firms have instituted deliberate efforts to cultivate and uphold a
customer orientation within the organization (Appiah-Adu and Singh, 1998). The benefits of
customer focused practices have been confirmed in various types of firms, such as retail
(Chotekorakul and Nelson, 2013), services (Alam, 2013; Dadfar et al., 2013), hospitality and
tourism (Sun and Kim, 2013).

Rindfleisch and Moorman (2003) defined customer orientation as the set of behaviors and beliefs
that place a priority on customer interests and continuously create superior customer value. Hence,
customer orientation emphasizes that a focus on customers should be central to the operations of
organizations (Webster, 1988). Customer orientation is described as a philosophy and behavior
directed towards determining and understanding the needs of the target customers and adapting

4
the selling organization’s response in order to satisfy those needs better than the competitors,
thereby creating a competitive advantage (Marquardt, 1989; Saxe and Weitz, 1982). Pekovic et
al., (2016) offered a more detailed perspective on how and why customer orientation affects firm
performance. Their study was based on a sample of 3,720 French firms with 20 or more employees
and found that that investing in customer orientation when the market is growing is an effective
way to enhance business performance. The essence of customer orientation is to accurately
determine and satisfy customer needs in order to create value in long-term relationships (Cross et
al., 2007). Its fundamental thrust remains the goal of putting customers at the center of strategic
focus (McGee and Spiro, 1988; Felton, 1959). Customer orientation involves cultural attitudes
which are concerned with developing and enhancing value to customers (Appiah-Adu and Singh,
1998).

In a customer oriented culture an organization’s commitment to service quality and customer

satisfaction is reflected through the shared system of beliefs, values, attitudes, and norms of
behavior (Hales, 1994). A customer oriented culture is necessary for the development of
empowered behavior of employees during the delivery of service, since it is “the ideas, beliefs and
values of the firm [that] influence employees to act in customer oriented ways” (Bowen and Basch,
1992). The employees are empowered and given opportunities to engage with customers to
develop a deep understanding of what customers truly value. Customer oriented organizations
focus on the delivery of value to ensure that the customer actually gets the desired value.
Companies which adopt a customer orientation perspective are more likely to provide quality,
contribute to customer satisfaction, and attain organizational goals more efficiently and effectively
than competitors (Cano et al., 2004). In a quantitative study of B2B marketing firms in the
chemical industry, researchers found that customer-oriented culture strengthens customer
relationships with customers while helping them to assert themselves better in the challenging
market environment (Lostakova and Stejskalova, 2014).

There is an evidence of positive relationship between customer orientation and customer

satisfaction (Dunlap et al., 1988). Salespeople who use a customer oriented selling approach forego
short-term results (i.e. sales) in lieu of securing long-term rewards such as customer satisfaction,
trust and loyalty. Schwepker and Good (2004) suggests a linkage between customer orientation
and customer trust. Customer trust reflects the belief that the firm is reliable in product or service
offering and will behave, such that “the long-term interests of the consumers will be served”
(Martínez and Rodríguez del Bosque, 2013). A customer oriented firm is more likely to deliver
exceptional service quality and create satisfied customers (Hartline et al., 2000). Employees’
motivation to serve customers in a customer oriented way impacts customer satisfaction and
retention most strongly as validated in the study conducted by Hennig-Thurau (2004), which
concluded that the impact of customer oriented employees on customer satisfaction is quite strong.

To deliver superior customer value company-wide, a customer oriented culture needs to be

established within the company, which is reflected in customer oriented employees, a developed
infrastructure and a leadership committed to support a service culture (Davidow and Uttal, 1989).
Thus, customer orientation is an organizational and individual commitment to stay in touch with
customers and to continue perceiving their changing needs over time (Bowen et al., 1989; Conduit
and Mavondo, 2001). A high level of customer orientation reflects a high level of concern for the
customers’ long-term needs (Cross et al., 2007). Saxe and Weitz (1982) assert that customer

5
orientation is a learned behavior that can be influenced by environmental factors, an adaptation
that evolves over time.

Customer orientation has been reported to have a positive impact on performance at the company
level (Narver and Slater, 1990; Singh and Ranchhod, 2004). It is critical to business profitability
(Donaldson, 1993), a necessary antecedent of competitive advantage (Ganesan, 1994; Williamson,
1991) and a hallmark of successful business (Hall, 1992). Deshpande et al., (1993) in their
empirical investigation into the customer orientation-performance relationship among Japanese
firms conclude that customer orientation is positively associated with business performance.
Further, Balakrishnan (1996) and Pelham and Wilson (1996) also reported a positive link between
customer orientation and business performance.

Through superior customer value and resulting increased sales volume, a customer-focused
organization can reap benefits from economies of scale, business volume, and the further scope
for expansion. Efficiencies involved in attracting and retaining customers positively affect
marketing costs and increased sales output viz-a-viz firm’s other operating costs (Narver et al.,
1999). Furthermore, loyal customers speak highly about the company and its product/services, are
less sensitive to price, provide “word-of-mouth” and act as referrals to promote the
products/services of the company (Morgan and Hunt, 1994). Customer-focused businesses attach
due significance to the long-term profits generated through sustainable customer loyalty, because
on average a business loses approximately 20 percent of its customers every year (Kotler, 2003)and
may minimizes customer defections by handling interactions with its target market most skillfully,
efficiently and effectively. Furthermore, through “word of mouth” these loyal customers attract
other prospective customers as well (Reichheld, 1993).

A customer’s trust consists of trust in the sales process and trust in the organization, which in turn
influences their loyalty. Since customer loyalty is considered to be the complement of trust (Josep
and Velilla, 2003) the degree of customer loyalty is an important consideration for organizations.
Customer loyalty has been recognized as an important source of sustained competitive edge in
terms of customer retention, repurchase, and long-term customer relationships (Rust et al.,
2000).Customer loyalty and repurchase decisions are highly regarded by the organization as they
determine organization’s profitability and growth (Palmatier et al.,2006). Organizations can
achieve customer loyalty by increasing the degree of customer satisfaction (Fawzi and Bright,
2013).

In today’s competitive business environment, customer satisfaction is an increasingly important

component of an effective organization (Fornell et al., 2006) and hence every organization aims
to become “customer focused”. Achieving customer focus is difficult and often unsuccessful. In a
Temkin report, “The State of Customer Experience Management,” only 16% of firms with $500
million or more in revenue classified their culture as customer-centric (Temkin, 2015).Therefore,
it would be a high priority for organizations to focus on how to build customer-focused culture
and sustain it. Organizations that have been successful at being “customer focused” have built
customer-focused culture and institutionalized practices that foster such approach. This research
explores various dimensions of a customer-focused culture and presents conceptual as well as
empirical frameworks for implementing such initiatives.

6
3 Customer-focused Culture: Enhancing Competitive Advantages
The major distinguishing feature in highly successful firms and their most important competitive
advantage is their organizational culture. In fact it is hard to name a single highly successful firm
that does not have a unique, readily identifiable organizational culture. Organizational culture is
comprised of fundamental principles and beliefs that are shared by members of an organization
and is key driver in enhancing performance of the organization. It is also an explanatory variable
that distinguishes one organization from another. Organizational culture is the driver of business
performance and success.

To be successfully focused on customers, organizations must ensure a high level of consensus and
cohesiveness around the belief that its existence relies on being responsive to the needs of its
customers. Thus, it is essential to ensure alignment of this effort throughout every aspect of
organizational life. Customer-focused culture exhibits cultural attitudes which are concerned with
developing and enhancing value to customers. Achievement of such attitude is impossible if the
employees of an organization do not perceive themselves as being there to serve customers, or
recognize that the only reason for their being employed is to help the organization create value for
customers. Customer-focused culture as an organizational variable shapes the direction of
organizations and builds competitive advantages.

Creating a customer focused culture involves achieving two complementary objectives: market
orientation and strategic capability. Market orientation, as defined by Narver and Slater (1990),
provides organizational commitment to the core values such as customer insight, competitor
awareness, and collaborative approach while strategic capability develops the requisite style,
strategy and structure to implement the core values. Customer focus is the organizational culture
that most effectively and efficiently creates the necessary behaviors for the creation of greater
value for buyers and, thus, continuous superior performance for the business. As shown in matrix
of Figure 1, organizations with customer-focused culture has higher customer trust, loyalty and
retention rate compared to organizations with traditional culture.

Low Strategic Capability High

High High
Customer-
focused Culture

(High retention)
Customer

Customer
Loyalty
Trust

7
 Traditional
Culture

(Low retention)

Low Low
Low High
Market Orientation

Figure 1: Customer-focused Culture: A Conceptual Framework

(Source: Matrix Developed by Author)

Traditional culture represents low degree of market orientation and strategic capability in
organization while customer-focused culture is characterized by high degree of market orientation
and strategic capability in the organization (Figure 1).

Strong customer-focused culture can have a major impact on the success of the business due to its
pervasive influence throughout the organization on a constant and sustainable basis. The
framework as displayed in Figure 2 shows how the foundation of a strong customer-focused
culture leads to superior customer value creation and business performance and ultimately
generates competitive advantages. These competitive advantages are derived from high degree of
market orientation and strategic capability in the organization (Figure 2).

Competitive
Advantages

Business
Performance

8
 Customer
Value Creation

Customer-focused Culture

Market Strategic
Orientation Capability

Figure 2: Customer-focused Culture: Enhancing Competitive Advantages

(Source: Framework Developed by Author)

The difference between a customer-focused culture and other types of organizational cultures is
the degree to which an entire organization focuses its attention on:

1. Understanding its customers;

2. Building the necessary skills, resources and infrastructure to create value for customers;
3. Promoting and nurturing the belief among all level of employees that the ultimate purpose
of the business is to create superior customer value, profitably.

4 Customer-focused Culture: Convergence of Market Orientation and Strategic

Capability
Customer-focused culture is essentially an informal organizational culture, a shared mindset
assuming that value creation for customers is the key driver of business performance. The
effectiveness of organizations is more closely associated with the type (the specific kind of culture
that is reflected in the organization) and the strength (the power of the culture), of that culture
(Madhani, 2014a). Particular types of cultures form as certain values, assumptions, and priorities
become dominant when an organization addresses challenges and adjust to changes. These
dominant cultures help the organization remain consistent and stable as well as adaptable and
flexible in dealing with the rapidly changing environment. Culture can affect organizational
performance if, its strength is “strong” (wide consensus, deeply internalized and socialized) and
appropriate to its environment (relevant to business conditions). Strong culture has a strong sense
of mission and long-term vision and is adaptable to internal change.

In the current scenario of complex and dynamic environment, the key challenge for an organization
lies in the implementation of strategy, as opposed to the formulation of it. Hence, customer-focused
culture also requires strategic capability in addition to market orientation. The key to successful
implementation resides in the ability of strategic organizational drivers (CEO’s leadership, criteria
for decision making & compensation strategy) to guide and manage employee behaviors on a
collective basis. The interdependent nature of market orientation and strategic capability
necessitates that these functions work well together so that organizations can deliver superior
customer value. When organizations focus primarily on only one or the other of these two
objectives, it leads to the unsurprising result of no enduring cultural change. As shown in Figure
3, market orientation reflects and reinforces customer-focused culture while strength of the culture

9
is exhibited by strategic capability as it influences and impacts degree of market orientation. High
degree of market orientation and strategic capability developed by organizations build strong
customer-focused culture (Figure 3).

Influence and Impact

Strength of
Culture

Strong
Market Customer- Strategic
focused Capability
Orientation Culture

Customer-focused
Culture

Reflect and Reinforce

Figure 3: Customer-focused Culture: Complementary Relationship of Market

Orientation and Strategic Capability

(Source: Model developed by author)

The customer-focused organization takes great efforts in preparing for its customers by developing
suitable capabilities along with market orientation. They sense emerging customer needs and
develop the strategic capability to fulfill the needs. In this scenario, employees have a shared
understanding of how they should respond to any given situation in an expected, uniform manner,
i.e. a customer-focused fashion. As a result, organizations are expected to perform better as a whole
(Mallak et al., 2003).
The strength with which the cultural values are held among employees is taken to be a predictor
of future organizational performance, usually financial (Lee and Yu, 2004). Customer-focused
culture is market oriented and is reinforced by strategic capability of organizations. Organizations
may significantly differ in the extent to which they exhibit traits associated with market orientation.
The degree of market orientation is manifest in the form of strategic capability developed by
organizations. Through strategic capability, top management strengthens the customer-focused
culture by implementing customer centric approach at all levels. For example, CEO leadership

10
takes an active role in developing and communicating a vision for the organization. Strategic
capability also includes implementing broad and long-term policies when reviewing and making
decisions; and involves criteria for decision making and compensation strategy. The convergence
of market orientation and strategic capability in building customer-focused culture is shown in 7Cs
model developed in the next section.

5 Building a Customer-focused Culture: Developing 7Cs Model

Organizations have long strived to figure out how to achieve a sustainable competitive advantage
in dynamic environments. Customer-focused culture helps organization in enhancing overall
performance and building competitive advantages. Customer-focused culture is composed of
market orientation (customer-focus, competitor-orientation and cross-functional collaboration as
defined by Narver and Slater (1990)) executed with strategic capability (such as CEO leadership,
criteria for decision making and compensation strategy) aimed at maintaining a high level of firm
performance, by effectively and efficiently executing actions required to provide superior
customer value. In short, customer-focused culture requires seven building blocks such as
customer insight, competitor awareness, collaborative approach, criteria for decision making,
compensation strategy, CEO leadership and customer value creation i.e. 7Cs as shown in 7Cs
Model (Figure 4). Here, customer-focused culture is the dependent variable while all 7Cs are the
independent variables. All these elements of the 7Cs Model of customer-focused culture are
explained below:

Customer
Insight

Collaborative
Competit Approach
or
Awarenes
s 11
 Customer
Value

Criteria Compensation
for Strategy
Decisions

CEO
Leadership

Figure 4: 7Cs Model for Developing a Customer-focused Culture

(Source: Model Developed by Author)

5.1 Customer Insight

The preferences of customers change over time and it is essential for organizations to keep
engaging with customers to ascertain the ‘‘value’’ they are seeking. A customer oriented
organization needs to keep up with the changing needs of customers and adapt its offerings to suit
the contemporary needs of customers. Customer oriented behavior can be defined as “the ability
to identify, evaluate, understand, and meet customer needs” (Reychav and Weisberg, 2009). The
employees are empowered and given opportunities to engage with customers to develop a deep
understanding of what customers truly value. Empowerment give employees more control over
job-related situations and decisions, which allows them to have more flexibility and responsibility
with respect to various customers’ needs (Kim et al., 2004). Customer-focused culture pay extra
attention to target customers to develop strong customer insight, as it helps firms to understand a
customer’s entire value chain, not only as it was in the past or is at present, but also in the future.
It involves the ability to learn and anticipate market trends faster than the competition.
Organizations like GE, IBM, and DuPont closely follow trends in the environment and interpret
the upcoming needs of their customers (Mukerjee, 2013).

Illustration
5.1.1 Toyota
To develop a strong customer-focused culture and deliver better customer value, Toyota’s
Scion Division studied its target market i.e. Gen Y (born after 1985) thoroughly. It is
predicted that Gen Y consumers, will dwarf the market size of Gen X by 2020. Toyota got
insights of Gen Y and found that they want different things than its traditional Gen X
customers. Gen Y is characterized by their dislike for price haggle and preference for the
internet and after-sales customization of their cars. Hence, Scion adopted sales and
marketing strategies such as a fixed price, cool Internet ads, and basic trim levels of their
vehicles with a wide selection of aftermarket accessories (Brown et al., 2008).

12
5.2 Competitor Awareness
To provide better customer value, firms need to analyze external environment and take short-term
as well as long-term of view of competitors. This means that firms understand the short-term
strengths and weaknesses, and long-term capabilities and strategies of both current and potential
competitors. Competitor orientation involves responding rapidly to competitors' actions. It also
helps in enhancing customer value proposition as customers are efficiently and effectively
acquired, developed, serviced, and retained. As a customer facing department, sales people collect
valuable customer as well as competitor related information and pass it onto marketing who in turn
use the information to create customized products and programs, and thus increase value for
customers. Marketing rely on sales for information on key customers, intelligence on competitors,
and ideas for new products. Likewise, product development gets input from marketing for
responding to customer needs and improving product and services by doing competitive analysis.

Illustration
5.2.1 Blockbuster
When firms do not scan emerging market trend and fail to recognize shifting needs and
priorities of customers, it negatively impacts customer value. Blockbuster, the movie rental
company, completely failed to grasp the changing market scenario and customer
requirements. The shift was prompted by its competitor Netflix that offered an online
movie rental subscription service to an increasingly online consumer. Blockbuster took no
substantive actions to address this new competitive offering, technology capability and
shift in its customers’ needs and preferences. As a result, customers shifted to the online
offerings of Netflix as they found more value there and subsequently, Blockbuster’s brick
and mortar business suffered huge losses, reaching $1.2 billion in 2004 (Brown et al., 2008)
and thus lost competitive advantage in the market place.

5.3 Collaborative Approach

The main function of collaborative approach in customer-focused culture is to create and enhance
value for customers. It spans internal departments as well as external partners to solve customer
issues and includes a cross-functional approach as well as a collaborative value network. Cross-
functional collaboration involves networks created between individuals and teams inside the
business while collaborative value network includes interactions between individuals and teams
inside as well as outside the business. The firm’s strategic direction and the intelligence gathered
by firms, i.e. customer insights and competitor activities is extracted and shared with all functions,
and across the firms. This enables firms to achieve coordinated leverage of all the resources and
capabilities available within the organization as well as shared across the organizations.

In order to ensure effective collaboration, members of functional areas are encouraged to clearly
define mutual objectives and associated performance measures and link their performance and
reward systems with decision synchronization, information sharing, and incentive alignment.
Incentive alignment refers to the process of sharing costs, risks, and benefits among the
participating members. Incentive alignment, promotes appropriate performance metrics, and
constitutes a key feature for successful collaboration required for building customer-focused
culture.

Illustrations

13
5.3.1 IBM
IBM has launched a number of initiatives for its customers under the ‘‘smarter planet’’
initiative. The research undertaken by a network of 3,000 global researchers helps IBM to
ensure that its innovations result in solving problems customers face. The scope of research
at IBM also helps in creating more opportunities for collaborative problem solving. The
capabilities of IBM research services include: business transformation, emerging
technologies, information mining and management, systems architecture and engineering,
business optimization and analytics, and risk and compliance (see
www.research.ibm.com). IBM’s solutions also span a broad range of industries and have
been deployed under diverse environments. All these tasks require immense capabilities of
collaborative working with abroad range of partners, including governments,
environmentalists, policy makers and bureaucrats, scientists, computer specialists, etc.
Therefore, organizations intending to be customer oriented need to possess the ability to
collaborate across geographical boundaries, inter-departmental boundaries, inter-
organizational boundaries, and a wide variety of domain specialists (Mukerjee, 2013).

5.3.2 Nissan
In 1999, Nissan was on the verge of total collapse due to consistent losses and $22 billion
debt. In March 1999, Carlos Ghosn, the new COO initiated an aggressive program of
culture-change that completely turned Nissan around. Ghosn established nine cross-
functional teams of ten managers each, empowered these teams with access to all company
information, and tasked them each with the improvement of a major function (such as
manufacturing, marketing, and business development etc.) and had them report directly to
the executive committee. The combined cross-functional information, insight, capabilities
and collaboration of these teams led to the development of the “Nissan Revival Plan” and
one of the greatest turnarounds in corporate history (Ghosn, 2002).

5.3.3 Apple
The development of the iPod by Apple offers an example of a combination of cross-
functional teams and collaborative value networks in creating a customer-focused culture.
In early 2001, Apple established a cross-functional team charged with developing an
improved and high-value portable media player. To speed the product development process
the team relied on outside and procured as many parts as possible. The basic hardware
blueprint even came from outside Apple, from a Silicon Valley start-up called Portal
Player. Apple’s design group collaborated closely with manufacturers and engineers,
constantly tweaking and refining the design. As a result of this collaborative approach, the
iPod was introduced in less than a year and propelled Apple to record success and profits
for the next six years as it transformed the industry (Brown et al., 2008).

5.4 Criteria for Decision-Making

In this highly competitive and dynamic world, to attain a successful position in the market, the
customers have to be satisfied and delighted with the service provided by the company. To produce
that result, service organizations and providers should work hand in hand to enhance their
customers' satisfaction and build customer trust and loyalty. In this context the most powerful tool
to achieve this is recruiting right set of employees, and training and empowering them (Lovelock
and Wirtz, 2010). Empowerment is defined as “the involvement of employee in the decision

14
making process” (Del Val and Lloyd, 2003). Empowered employees can be more responsible and
make quick decisions to serve their customers in a better way (Gazzoli et al., 2013). Organizations
with a strong customer-focused culture have a longer-term perspective on profitability goals and
business decisions supported by customer centric decision criteria as described below:

1. Develop decision-making criteria that facilitate long term value building decisions while
satisfying short term requirements.
2. Review strategic management processes to ensure that there is a requirement for analysis,
evidence and strategies related to long term profitability building through creation of
superior customer value.

Illustrations
As explained below Johnson& Johnson and Toyota, provides examples of strong customer-
focused culture driven by long-term criteria for decision making.

5.4.1 Johnson & Johnson

During the 1982 Tylenol tampering in the Chicago area, Johnson & Johnson (J & J) took
its responsibility to the consumer, outlined in its credo, seriously. It immediately recalled
31 million bottles of extra strength Tylenol, worth more than $100 million, from all retail
stores in the United States (Madhani, 2015).The reason J & J reacted so quickly and in such
a positive manner to the crisis stems from the company’s mission statement. According to
the company’s credo developed in 1943, the company‘s responsibilities were to the
consumers and medical professionals using its products, employees, the communities
where its people work and live, and its stockholders.

5.4.2 Toyota
According to the Wall Street Journal, in mid-2006 Scion was on track to beat its 150,000
car sales goal by 25,000 cars. Instead of taking advantage of that trend Toyota held
production to limit sales to the 150,000 car target. Toyota could have captured short-term
profits by producing and selling an additional 25,000 cars. However, a careful analysis of
specific customer preferences (e.g. uniqueness and scarcity) and competitive strategies
yielded a decision that will maximize long-term profitability by limiting short-term
availability of its product (Chon, 2006).

5.5 Compensation Strategy

Compensation strategy if not designed properly, encourages various functional areas to pursue
their own objectives instead of corporate-wide goals. Differences in reward structures between
functional areas may cause serious co-ordination problems, lead to inter-functional conflict and
hinders collaboration. Most firms’ incentives system frequently discourages and sometimes even
obstructs the collaboration and communication between various functions and thus hinders
building of customer-focused culture. The compensation strategy comes under broader category
of “Competence” which extends to the whole employment lifecycle of recruiting, selecting,
deploying, assessing, developing and, yes, rewarding of employees. Firms’ incentives and reward
system, if designed effectively facilitate information sharing and collaboration which ultimately
leads to higher responsiveness.

15
Information sharing is required to signal to the organizational members that rewards are available,
timely, equitable, and performance-contingent. The compensation and reward plan express values
and norms to which members of the organization must conform and specifies the contributions
expected from them as well as the reward individuals can expect to receive as a result of their
performance. Effective compensation strategy plays a key role in building customer-focused
culture. It is very difficult to inculcate customer-focused culture in absence of supporting
compensation strategy. Compensation strategies have a substantial impact on customer-oriented
behaviors of employees. IBM and Xerox also have incorporated customer satisfaction ratings into
their compensation strategy (Sager et al., 1994). Hence, effective compensation strategy helps in
building customer-focused culture. With properly designed compensation system, organizations
can not only assess if the employee is performing to sales goal but also how the goal is being
attained.

As explained in following illustrations, it is very difficult to inculcate customer-focused culture in

absence of supporting compensation strategy.

Illustrations
5.5.1 Staples
Staples, the large US office retailer, rewarded salespeople for selling add-ons as part of an
incentive system called “Market Basket.” According to this outcome based incentive
scheme, each time a Staple employee sells a computer, one must sell about $200 worth of
other stuff to meet this target. Such target based reward policy resulted in short term
orientation of salespeople leading to customer dissatisfaction, loss of customer trust and
loyalty, thereby severely affecting customer retention as well as Staples’ reputation.
(Madhani, 2016).

5.5.2 Sears
The case of Sears’ automotive center service advisors, who routinely added contrived
repairs to customers’ bills, is a good example of how incentive systems affect sales
behavior, hampers customer value and hinders building customer-focused culture (Babin
et al.,2000). Sears paid the employees of its automotive repair division a straight
commission on the parts and services they sold to customers and the commission was tied
to the sales goal. In 1992, automotive service advisors were accused of overcharging auto
repair customers in order to earn higher commissions. Their incentive system was geared
to the number of automobile repairs completed each month, regardless of customer
demand. In this situation, automotive service sales people had to find their own way to
generate sufficient business to earn commission, and they did so by performing
unnecessary repairs. With increased customer dissatisfaction, Sears’ CEO denied any
intent to deceive customers, but acknowledged the need to improve the commission-based
compensation system of their automotive service salespeople (Paine, 1994).

It was found by Sears that its automotive service advisers, acting under a commission sales
plan, were selling parts and services that customers did not need. That behavior harmed
both the customer and company in the long run. Sears was charged for fraud, making false
and misleading statements and willful departure from accepted trade practices. Incentive

16
 compensation inflicted great harm on the reputation and integrity of Sears. In the wake of
the scandal, Sears had to modify the compensation system and abolish commissions and
sales goals, and make customer satisfaction its number one priority (Ganzel, 1998).The
purpose was to better achieve a quality balance between motivating employees to sell and
motivating them to provide high customer service. Though customers were the first victims
of such short-term behavior of employees, Sears’ reputation was irreparably damaged.
Sears’ total cost to settle pending lawsuits was huge, that is, about $60 million (Madhani,
2014b).

5.6 CEO Leadership

A key role of CEO or top management (i.e. C-suite executives) is to create the culture and
environment of the organization. It is important for top management to implement programs which
encourage departments to achieve mutual goals collectively, to foster mutual understanding, to
work informally together, and to share the same vision, ideas, and resources (Kahn, 1996). For
example, it is emphasized that “…the only thing of real importance that leaders do is to create
and manage culture” (Schein, 1985). The organization’s top management team is a critical
resource for its success because of the significant influence it has on the organization’s strategic
decisions and their implementation. Instilling a culture at General Electric, for example, was given
a high priority by its former CEO, Jack Welch. Culture is invariably set at the top and transmitted
down the ranks and reflects the values, beliefs, and actions of their senior leaders.

The role of a creative leader is not to have all the ideas; it’s to create a culture where everyone can
have ideas and feel that they’re valued (Sir Ken Robinson).An organization’s vision and values
need to inspire employees to be customer-focused. In this regard, Tesco’s vision, “for Tesco to be
most highly valued by the customers we serve” is worth noting. Also, Tesco’s core purpose: “to
create value for customers to earn their life time loyalty” guides its employees suitably. CEO
leadership helps organizations in building a strong customer-focused culture as described below:

1. Senior managers act as role models in creating value for customers.

2. Top management emphasizes building customer-focused skills, competencies, and
behaviors through training programs relevant to different functional areas and levels in the
organization.
3. With effective compensation strategy, top management incorporates recognition and
reward systems into the organization that encourage customer-focused culture.

Illustrations
5.6.1 Zappos
Zappos is a great example of a company that acknowledges the importance of explicitly
defining core values. Zappos has 10 easy-to-understand values, including “deliver WOW
through service” and “build open and honest relationships with communication.” Having
these values defined and actively integrated into daily processes has made Zappos
legendary for its unique customer-focused culture. Tony Hsieh, the CEO of Zappos, was
determined to build Zappos with the belief that if you get the culture right, most everything
else will fall into place (Warrick et al., 2016).

17
5.6.2 Telstra
During 2006 and2007 Telstra, the Australian-based telecommunications and media
company implemented its learning and change management programs and embedded its
market culture, across the customer-facing functions of the organization. At the start of its
transformation from an internally focused company, the newly appointed Telstra CEO Sol
Trujillo, appointed a new leadership team committed to developing superior value for
customers. In this way, Telstra has built a strong customer-focused culture and exhibited
superior performance (Brown et al., 2008).

5.7 Customer Value

Customer-focused culture can be defined as a form of organizational culture where employees are
committed to continuously create superior customer value. The responsibility of every one should
be determined in the sense of creating and offering value to the customers and all processes within
the company must be subordinated to enabling and offering maximum customer value (Vranesevic
et al., 2002). As market dynamics change, customer value propositions delivered by firms must be
tweaked and modified. Through strategic capability, firms build the ability to adapt rapidly to
customers’ manifest and latent needs, which may translate into a superior customer value. The
customer is at the center of the 7Cs model (Figure 4). Firms can foster such customer-focused
culture by implementing customer centric strategies and action plans as described below:

1. Customer-focused culture has to be reflected in the mission statement of a firm to ensure

that culture is externally oriented with a particular emphasis on creating superior customer
value.
2. Develop an internal strategy for building a strong market culture across the strategic
business units (SBUs).
3. Make certain that every employees understands, believes and implements a “customer
first” culture,
4. Develop performance based reward system focused on customer value creation.
5. Include both financial and non-financial rewards in compensation strategy to build
customer-focused culture.

Illustrations
5.7.1 The Taj Group of Hotels
Customer-focused organizations take great efforts in tracking trends and preparing for its
customers by developing suitable strategic capabilities. Their employees are empowered
and given opportunities to engage with customers to develop a deep understanding of what
customers truly value. The Taj group's value-driven recruitment, training and recognition-
as-reward systems have together created an environment of extraordinary customer value
in their hotel business (Deshpande and Raina, 2011).

5.7.2 P&G
P&G launched its Connect + Develop programme, which involves conducting 20,000
studies involving five million consumers across 100 countries every year (Brown and Scott,
2011). This kind of customer engagement has helped P&G in understanding what

18
 customers truly value and has enabled it to enhance its revenues and profits, especially in
the fast growing emerging economies.

5.7.3 Merck
The overriding value at Merck & Co. is “the patient is always first”. This reflection of
strong customer-focused culture is consistent with founder George Merck’s original
philosophy of: “We try hard to remember that medicine is for the patient. It is not for the
profits. The profits follow, and we have to remember that they have never failed to appear”
(Zemke and Schaaf, 1989).

5.7.4 Toyota
Some of Toyota’s successful value creation can be attributed to a strong customer-focused
culture that gives top priority to customers as well as the market channel i.e. auto dealers.
There is an adage at Toyota that says “First the customer, then the dealer, then Toyota”
(Brown et al., 2008). In this way, Toyota has a key priority for superior customer value
creation.

6 Research Methodology
7Cs model of customer-focused culture formulated in this paper is analyzed further to understand
the various dimensions of customer-focused culture. A two stage methodological approach is
developed in this research for identifying, analyzing, and measuring drivers of customer-focused
culture in organizations. In the first stage, the research focuses on development of a theoretical
framework for emphasizing impact of customer-focused culture in enhancing enterprise value. The
framework underscore show customer retention and customer expansion in terms of cross-selling
and up-selling enhance firm performance. The second stage involves the design of a framework
for empirically estimating the overall benefits envisaged on customer-focused culture in
organizations by analyzing length, depth and breadth of customer relationship.

6.1 Customer-focused Culture: Development of a Conceptual Framework

Strong customer-focused culture as explained by 7Cs model addresses the degree to which the
customer’s values and beliefs are embedded within the organization and in its various actions and
activities, so that every decision within the organization tends to begin and end with the customer.
As the customer base forms an integral part of an organization’s overall value, valuing customers
makes it possible to value the organization as well as the impact of customer-focused culture in
such a valuation. The value of a customer is measured through concept of customer lifetime value
(CLV). The framework shown in Figure 5, illustrates how the customer-focused culture inculcate
market orientation to build customer satisfaction, trust, loyalty, and ultimately higher customer
retention and consequently influence organization performance in terms of increased CLV and
enterprise value.

ENTERPRISE VALUE (CE)

CLV
HIGHER MARGIN HIGHER SALES

CUSTOMER CUSTOMER CUSTOMER

ACQUISITION RETENTION EXPANSION 19
 CUSTOMER TRUST AND LOYALTY

CUSTOMER SATISFACTION

LONG TERM CUSTOMER RELATIONSHIP

STRATEGIC CAPABILITY

MARKET ORIENTATION

CUSTOMER CENTRIC ACTIONS

CUSTOMER-FOCUSED CULTURE

7Cs AS BUILDING BLOCKS

DEPLOYMENT OF 7Cs MODEL

Figure 5: Customer-focused Culture: Enhancing Performance

(Source: Model developed by author)

As shown in Figure 5, customer-focused culture of an organization impacts and influences the

firm’s valuation measured in terms of CLV and Customer Equity (CE).The CLV is an appropriate
metric to assess the overall value of a firm since the long-term value of customers is a more stable
and relevant metric of firm value than a financial metric like market capitalization. The Valuation
of the organization can be depicted in the form of CE as it is a good proxy of overall organizational
value.

The lifetime value of a customer for an organization is the net revenue obtained from that customer
over the life time of transactions with that customer minus the cost of attracting, selling, and
servicing the customer taking into account the time value of money (Jain and Singh, 2002). CLV
provides the present value of a customer relationship over the lifetime with an organization, and
is calculated based on a number of sales transactions with customers (Kumar and Rajan, 2009).The
CLV of a customer represents the amount the customer will contribute to the bottom line of the
organization over the span of the business relationship with them (Kumar and Shah, 2009).

20
Customer-focused culture influences market orientation and strategic capability which in turn
affects customer acquisition, customer retention, customer expansion, and ultimately impact CLV,
CE or valuation of the firm. Customer retention (caused by increased customer satisfaction, trust
and loyalty), customer expansion (caused by cross-selling and up-selling) and customer acquisition
(acquisition cost decreased while acquisition rate increased) are directly related to CLV. If an
organization is able to build deep, committed, and meaningful relationships with their customers
through a strong customer-focused culture, it will keep the customer’s relationship with the
organization for a longer period of time, enhance their loyalty and such committed customers will
generate higher CLV for the organization. As CLV is positively influenced by the customer-
focused culture of the organization, the empirical framework developed below helps in calculating
CLV.

6.2 Customer-focused Culture: Development of an Empirical Framework

One of the most effective ways to boost CLV is to increase customer satisfaction as it enhances
customer trust, loyalty and ultimately customer retention rate. A study conducted by Deloitte
Consulting found that companies which recognize the importance of understanding CLV are 60%
more profitable than firms that do not consider CLV (Kale, 2004). Research has found that a 5%
increase in customer retention can increase customer lifetime profits by 25% to 95%. The same
study also found that it costs six to seven times more to gain a new customer than to keep an
existing one (Reichheld and Teal, 2001).

A positive link between customer satisfaction and usage has been documented in prior research
(Bolton and Lemon, 1999). Research on a meta-analysis of purchase intentions studies found that
satisfied customers are more loyal (Szymanski and Henard, 2001). Committed customers have an
emotional attachment with an organization. Customers become committed if the organization takes
care of the following factors: understanding the needs and wants of existing and new customers;
building loyalty with them so that they make repeat purchases; and creating of a long-term
relationship between the organization and its customers to maximizing customer retention and
ultimately leading to higher CLV (Thakur and Summey, 2010). The CLV of a customer represents
the amount the customer will contribute to the bottom line of the organization over the span of the
business relationship with them (Kumar, and Shah, 2009). Prior research supported a positive
effect of commitment on customer retention (Verhoef, 2003). There is a positive relationship
between commitment and customer loyalty. Commitment positively influences customer purchase
intentions or behavioral loyalty (Garbarino and Johnson, 1999).

According to Bolton et al., (2004), the relationship performance between organizations and its
loyal customers have three dimensions: length, depth and breadth as explained below:

(1) Length or duration of customer relationship corresponds to customer retention (or

defection), defined as the probability that a customer continues (or ends) the relationship
with the organization.
(2) Depth of a relationship is reflected in the frequency of product usage over time. It is also
reflected in the customers’ decisions to upgrade and purchase premium (higher margin)
products instead of low-cost variants (up-selling). It refers to the deepening of the
customer’s relationship with the organization through increased usage or upgrading.

21
 (3) Breadth of a relationship is reflected in cross-selling that is, the number of additional
(different) products purchased from an organization over time. Hence, breadth refers to the
expansion of the customer relationship with the organization.

Customer-focused Culture
Depth

Customer
Trust
Customer
Retention Customer-
lifetime value
Breadth

Customer
Loyalty

Length

Figure 6: Customer-focused Culture: Three Dimensions

(Source: Framework developed by author)

As shown in the framework of Figure 6, customer-focused culture significantly impact various

attributes of customer lifetime value such as customer trust, customer loyalty and customer
retention measured along three dimensions (i.e. length, depth and breadth).As all these attributes
are positively influenced by customer-focused culture, these dimensions of length, depth and
breadth should be formulated empirically to estimate CLV of a customer-focused culture, by
assigning the underlying behaviors into the equation (Verhoef, 2004).

Equation given below represents CLV framework.

𝑛
P (retention) it ∗ (Product ijt ∗ Usage ijt ∗ Margin jt )
CLV = ∑
(1 + d)t
𝑡=0

Where
P(retention)it = The probability of continuation of the relationship for customer i at time t
= (length of the relationship)

Product ijt: The purchase of product j by customer i at time t (breadth)

Usage ijt: The usage of product j by customer i at time t (depth)

22
 Margin jt: The contribution margin for product j per usage or volume entity on time t

d: Discount rate

n: Number of periods

CLV of New Customer = Present contribution + Future contribution

𝑁

𝐶𝐿𝑉 = ∑(𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 − 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑐𝑜𝑠𝑡)

𝑡=1
(𝐹𝑢𝑡𝑢𝑟𝑒 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 − 𝐹𝑢𝑡𝑢𝑟𝑒 𝑐𝑜𝑠𝑡)
+
(1 + d)𝑡

As CLV is the sum of cumulated cash flows-discounted using the weighted average cost of capital
(WACC) of a customer over his or her entire lifetime with the organization, its mathematical
expression is given below:
𝑛
(pt −ct) ∗ rt
CLV = ∑ − AC
(1 + d)t
𝑡=0

𝑛
mt ∗ rt
CLV = ∑ − AC
(1 + d)t
𝑡=0

Where,

n: Total number of anticipated periods,

d: Discount rate,

mt: Gross margin in period t,

pt: Price paid by a consumer at time t,

ct: Direct cost of servicing the customer at time t,

rt: Retention rate in period t,

AC: Acquisition cost, and

t: Time horizon for estimating CLV

If gross margins (m = p – c) and retention rates are constant over time and an infinite time horizon
by assuming an infinite economic life (n → ∞), then CLV formulas given above in simplifies to
the following expressions (Gupta and Lehmann, 2005).

23
 ∞
(pt − ct ) ∗ rt
CLV = ∑ − AC
(1 + d)t
𝑡=0

CLV focus on the Net Present Value (NPV) of a customer generated over the lifetime of that
customer and is influenced by retention rate, lifetime revenue of customer as well as profit margin.

Customer Equity (CE) defined as the total of the CLV (Customer Lifetime Value) of all the
organization’s current and potential customers (Rust et al., 2004).

CE = ∑ CLV

CE seeks to assess the value of not only a firm’s current customer base, but also its potential or
future customer base as well and represents the entire operating cash flow of a firm. This is because
operating assets provide cash flows only, if they are used to create products and services that are
purchased by customers (Hogan et al., 2002). Consequently, CE and all cash flows generated from
non-operating assets yield the overall value of a firm. The CLV represents such a profound
supplier-oriented understanding of customer value. A supplier-oriented point of view for customer
value is defined as the customer’s economic value to the company, a definition, which differs from
the frequently employed demand-oriented definition of customer value as the company’s or its
products’ value for the customer (Staat et al., 2002). Hence, CE is reflection of true value of
customer base. As customer-focused culture enhances CLV and CE, a detailed methodology for
CLV and CE calculation is given below.

Illustration
Initially sales organization XYZ was characterized by traditional (sales oriented) culture.
However, after change in the top management team, it has transitioned from the traditional culture
to a customer-focused culture (i.e. market oriented culture) by deploying 7Cs model developed
earlier. Customer-focused culture in the organization has resulted in higher customer trust, loyalty
and retention of customers. High customer retention enhances CLV as well as profitability and
boost enterprise value. Detailed calculation for organization XYZ for both types of culture is given
below in Table 1.
Table 1: Customer-focused Culture in Organization: Impact on Enterprise Value

Year (n) (n >= 0)

Calculation Steps (Organization XYZ)
0 1 2 3 4 5 6 7
(1) Customer acquisition cost
($) 30 30 30 30 30 30 30 30
(2) Average order size ($) 50 50 50 50 50 50 50 50
(3) No. of purchase/year 2 2 2 2 2 2 2 2
(4) Gross margin (%) 25 25 25 25 25 25 25 25
(5) Margin on each purchase =
(2) x (4) ($) 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5

24
(6) Discount rate (%) 10 10 10 10 10 10 10 10
(A) Sales-oriented Culture [retention rate ‘r’= 40%] in Organization XYZ (Initial Stage)
(7) Major focus Sales orientation
(8) Retention rate across years =
(r)n (%) 100 40 16 6.40 2.56 1.02 0.41 0.16
(9) Expected profit/customer =
[ [(3) x (5)] x (8)] ($) 25 10 4 1.6 0.64 0.25 0.10 0.04
(10) NPV of profit/ customer =
[(9)/((1+(6))n] ($) 25 9.09 3.31 1.20 0.44 0.16 0.06 0.02
(11) CLV = Cumulative profit /
customer (net of acquisition
cost) ($) -5 4.09 7.4 8.6 9.04 9.2 9.26 9.28
(12) CLV of new customer ($) 9.28
(13) Number of customers 25,000
(14) Value of firm (in terms of CE) 232,000
= (12) x (13) ($)
(B) Customer-focused Culture [retention rate ‘r’= 75%] in Organization XYZ (Final Stage)
(15) Major focus Market orientation
(16) Retention rate across years =
(r)n (%) 100 75 56.25 42.19 31.64 23.73 17.80 13.35
(17) Expected profit/customer =
[ [(3) x (5)] x (16)] ($) 25 18.75 14.06 10.55 7.91 5.93 4.45 3.34
(18) NPV of profit/ customer =
[(17)/((1+(6))n] ($) 25 17.05 11.62 7.93 5.40 3.68 2.51 1.71
(19) CLV = Cumulative profit /
customer (net of acquisition
cost) ($) -5 12.05 23.67 31.6 37 40.68 43.19 44.9
(20) CLV of new customer ($) 44.9
(21) Number of customers 25,000
(22) Value of firm (in terms of CE) 1,122,500
= (20) x (21) ($)
(23) Increase in firm value with
customer-focused culture = 890,500
(22) - (14) ($)
(24) Increase in firm value with
customer-focused culture = 384%
(23)/ (14) (%)

25
 (Source: Calculated by author)

Analysis and Discussion

Sales-oriented culture of the organization has resulted in low customer retention rate (40%), due
to low level of customer satisfaction, trust and loyalty. Hence, it has resulted into low value of
CLV and CE (i.e. $9.28 and $ 232,000 respectively) for organization XYZ (Table 1-(A)).
However, with building of customer-focused culture, organization XYZ has increased customer
retention rate (75%) with resultant improvement of CLV and CE (i.e. $44.9 and $1,122,500
respectively) as calculated in Table 1-(B). With customer-focused culture, organization XYZ has
increased firm valuation by 384%. It is evident form calculation of Table 1, that customer-focused
culture significantly increases CLV and enterprise value of sales organization XYZ

7 Conclusion
In this era of increased competition, high rate of change and complexity in the environment,
inculcating as well as strengthening customer-focused culture in the organizations is essential for
sustainable competitive advantages. This research has emphasized significance of market
orientation as well as strategic capability in inculcating customer-focused culture. To build
customer-focused culture, organizations need to deploy market orientation executed with strategic
capability. The research has also developed 7Cs model to facilitate building of customer-focused
culture in organizations. A strong customer-focused culture exhibits high ratings on all 7Cs:
customer insight, competitor awareness, collaborative approach, CEO leadership, compensation
strategy, criteria for decisions and a deep organizational commitment and contribution of all
functions to creation of superior customer value, profitably. The 7Cs model developed in this
research is an actionable model for building a strong customer-focused culture. Significant steps
can be taken in each of the 7Cs to strengthen an organization’s customer-focused culture, which
in turn positively influence CLV and enterprise value.

7.1 Managerial Implications

Customer-focused culture has positive impact on customer experiences. Prior research has shown
that customer experiences have a significant impact on future spending in both transactional as
well as relationship-oriented businesses. In transactional businesses, customers who had the best
customer experience scores spent 2.4 times more per year than those who had the worst customer
experience scores. Customers with an experience score of 9 (on a scale of 1 to 10) spent 90% more
than customers who had poor experience scores. However, customers with an experience score of
10 spent 140% more than customers who had a poor experience (Kriss, 2014). A high degree of
customer-focused culture in an organization leads to improvements in customer satisfaction, sales,
market share, profitability and return on assets, compared with other organizations that are not as
highly customer oriented (Slater and Narver, 1994). As shown in illustration of Table 1, customer-
focused culture enhances firm performance.

In 2016, Temkin Group rated 294 organizations across 20 industries and found many examples of
businesses that have gained market share, top-line growth and increased customer loyalty even
through the worst of times. Looking more closely at some of these companies (viz. USAA, Zappos,
Yum! Brands) it’s easy to see that they built a true customer-focused culture
(http://temkinratings.com). A full half of Fortune1000 companies today spend more than $5million

26
per year on customer research (American Marketing Association). This fact emphasizes that
customer-focus is very important. In one study, companies attaining top customer loyalty ratings
had a three-year annual operating income growth rate that was 682 percent higher than companies
scoring low in customer loyalty (Loyalty Report: Online Retail, Walker Information Inc.).
Businesses ranked high on service by customers have experienced profitability 12 times that of
low-rated counterparts (PIMS (Profit Impact of Market Strategy) database, The Strategic Planning
Institute). A typical $1 billion business could add $40 million in profit by increasing its customer-
facing capabilities by 10 percent (Dull et al., 2003).

The concept of inimitability in the resource based view (RBV) focuses on the degree to which
resources of the organization are very hard to copy or imitate. Inimitability is one of the most
important 'qualities of desirable resources' (Boxall and Purcell, 2003). Successful customer-
focused culture may in fact be very difficult to imitate due to their many interlocking elements
built up over a period of time. Competitors cannot duplicate all these elements in a piecemeal
fashion as they are casually ambiguous. It is extremely difficult for an outside competitor to
pinpoint what the valuable resource really is. This is because the cultural impact on performance
could be due to a wide range of social interactions among organizational members.

7.2 Limitations and Directions for Future Research

As with any study, it would be remiss if one did not point out some limitations of the current
research. First, the 7Cs of customer-focused culture are used as the foundation of this research.
Future research should investigate actual behaviors of each of 7Cs as well as assess the most
significant one among all 7Cs. Second, this research did not empirically evaluate 7Cs model from
the customer’s point of view. It would certainly be a worthwhile project to compare how customers
and organizations view7Cs model. Finally, future research should empirically test 7Cs model with
actual organizational level data as the present research has developed a conceptual framework for
7Cs model.

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