CUSTOMER FOCUS

CHAPTER 3

INEN 4315 Industrial Management

Berna Eren Tokgoz, PhD
Department of Industrial Engineering
Importance of Customers

• “Without customers, you don’t have a business.”

- Don Peppers and Martha Rogers, “Customers Don’t Grow on Trees,” Fast Company
magazine, July 2005

• Many world-class organizations such as Ritz-Carlton Hotel, Disney,

and Toyota’s Lexus division were build on the notion of satisfying
the customer (meeting and exceeding customer expectations).
• “If the customer is satisfied with the whole experience with the
product, then you have a quality product”
• Key phrase is “whole experience”.
Satisfying Customers
• To meet or exceed customer expectations,
organizations must fully understand all product and
service attributes that contribute to customer
value and lead to satisfaction and loyalty.
• Meeting specifications, reducing defects and errors, and
resolving complaints.
• Designing new products that truly delight the customer
• Responding rapidly to changing consumer and market
demands
• Developing new ways of enhancing customer
relationships
Customer Focus in ISO 9000
Management Responsibility Section:
• “Top management shall ensure that customer requirements are
determined and are met with the aim of enhancing customer
satisfaction.”
Product Realization Section:
• The standards require that the organization determine customer
requirements, including delivery and post-delivery activities, and any
requirements not stated by the customer but necessary for specified or
intended use.
• The organization must establish procedures for communicating with
customers about product information and other inquiries, and for
obtaining feedback, including complaints.
Measurement, Analysis, and Improvement Section:
• The standards require that the organization monitor customer perceptions
as to whether the organization has met customer requirements; that is,
customer satisfaction.
Key Customer-Focused Practices for
Performance Excellence (1 of 2)
• Identify the most important customer groups and markets, considering
competitors and other potential customers, and segment the
customer base to better meet differing needs.
• Understand both near-term and longer-term customer needs and
expectations (the “voice of the customer”) and employ systematic
processes for listening and learning from customers, potential
customers, and customers of competitors to obtain actionable
information about products and customer support.
• Understand the linkages between the voice of the customer and
design, production, and delivery processes; and use voice-of-the-
customer information to identify and innovate product offerings and
customer support processes to meet and exceed customer
requirements and expectations, to expand relationships, and to
identify and attract new customers and markets.
Key Customer-Focused Practices for
Performance Excellence (2 of 2)
• Create an organizational culture and support framework
that allows customers to easily contact an organization to
conduct business, receive a consistently positive customer
experience, provide feedback, obtain assistance, receive
prompt resolution of their concerns, and facilitate
improvement.
• Manage customer relationships that build loyalty, enhance
satisfaction and engagement, and lead to the acquisition of
new customers.
• Measure customer satisfaction, engagement, and
dissatisfaction; compare the results relative to competitors
and industry benchmarks; and use the information to
evaluate and improve organizational processes.
Quality Profile: Park Place Lexus
• Client-relationship management database that tracks all
aspects of the PPL-Client interaction and provides the
resulting information to members (employees)
• Empowers members to resolve client complaints on the
spot by allowing them to spend up to $250 to resolve a
complaint, or up to $2,000 by committee.
• A focus on personal and organizational learning motivates
members, which then results in exceptional understanding
of client’s needs and the ability to deliver service to meet
those needs.
• The highest client satisfaction rate in the nation.
Quality Profile: K&N Management
• Developer for Rudy’s Country Store & Bar-B-Q and the
creator of Mighty Fine Burgers, Fries and Shakes.
• Vision “to become world famous by delighting one guest at
a time.”
• Builds and maintains a focus on “guest delight,” relying on
innovation and technology to create product offerings that
meet or exceed guest requirements.
• All leaders carry a personal digital assistant (PDA) that
alerts them of guest comments and complaints and daily
performance results.
Customer Satisfaction
• …“the result of delivering a product or service that meets customer
requirements.”
• Avis has two strategies: buy large volume of corporate business with extremely low rates or
improve customer satisfaction levels
• Avis created a marketing department with a full range of research and analysis.

• Customer satisfaction drives profitability. The typical company gets

65% of its business from existing customers, and it costs five times
more to find a new customer than to keep an existing one happy.
• Although, satisfaction is important, companies must avoid to create
dissatisfied customers. Dissatisfy customers tell at least twice as many
as friends about bad experiences than they tell about good ones.
• Companies must try to develop loyal customers.
• Satisfaction is an attitude, loyalty is a behavior.
• Loyal customers spend more, are willing to pay higher prices, refer new client, and are less
costly to do business.
• Average lifetime value of a loyal customer of Cadillac dealership was over $300,000, providing a
clear mandate for developing customer loyalty.
Customer Engagement
• .. customers’ investment in or commitment to a
brand and product offerings.
• Customer engagement is an important outcome
of a customer-focused culture and the
organization’s listening, learning, and
performance-excellence strategy.
• Characteristics:
• customer retention and loyalty,
• customers’ willingness to make an effort to do
business with the organization, and
• customers’ willingness to actively advocate for and
recommend the brand and product offerings.
American Customer Satisfaction Index
(ACSI)
• Measures customer satisfaction at a national level.
• One of the goals of the ACSI is to raise the public’s perception and understanding of quality.
• Introduced in 1994 by University of Michigan and the American Society for Quality.
• Based on results of telephone interviews conducted in a national sample of 46,000
consumers who recently bought or used a company’s product or service.
• This index creates a baseline against which customer satisfaction levels can be tracked over
time.
• Researchers can answer: Are customer satisfaction and evaluations improving or declining for the
nation’s output of goods and service? Are they improving or declining for particular organizations,
sectors of industry, or specific industries?
• This index quantifies the value that customers place on products, and thus drives quality
improvement.
• Initial results showed that public administration and government services scored relatively
low. Recent years, retail, finance and e-commerce sectors improved relatively in terms of
customer satisfaction.
• Web site: www.theacsi.org
ACSI Model of Customer Satisfaction
• Customer satisfaction
can be determined by
customer expectations,
perceived quality, and
perceived value.
• Customer satisfaction is
link to customer loyalty,
which has an impact on
profitability.
• ACSI model is used to
compute four levels of
indexes:
• A national customer
satisfaction index
• Indexes for seven
industrial sectors
• 40 specific industries
• 203 organizations
and agencies within
those industries.
Identifying Customers
• Consumers - those people who ultimately purchase and use a
company’s products.
• Internal customers - the recipient of another’s output (which
could be a product, service or information)
• Internal costumers could be other departments or processes within the organization or
individual workers such as manufacturing is a customer of purchasing, a nursing unit is
a customer of the hospital laundry.
• Individual workers receive inputs from others and produce outputs for other internal
customers such as the order taker who passes along others to the kitchen staff or an
radiologic technologist who must meet a physician’s timely request.

• External customers - those who fall between the organization

and the consumer, but are not part of the organization.
• External costumers have needs and expectations different from consumers
• A manufacturer of a consumer products that distributes to retail stores such as
Walmart and grocery stores. The retail stores are external customers of the
manufacturer.
Customer Segmentation
A company usually cannot satisfy all customers with the same products or services.
Customers generally have different requirements and expectations. Therefore,
organizations that segment customers into natural groups, and customize the products and
services are better able to respond to customer’s needs.
• Demographics: Demographic segmentation is based on variables such as:
• Age, gender, ethnicity, occupation, income, and family-status.
• Geography: Geographic segmentation is based on regional variables such as:
• Region (international, national, regional, state, county, city…), climate, population
density (rural, urban, suburban), and population growth rates
• Psychographic: This segmentation is based on variables such as:
• Values, attitudes, and lifestyles.
• Behavioral: This segmentation is based on variables such as:
• Usage rate, price sensitivity, brand loyalty, and benefits sought.
• Volumes
• “Vital few” and “useful many”
• Profit potential
Customer Segmentation- Examples
• Motorola (Commercial Government, and Industrial
Solutions Sector) segments its customer by world
region and by sales distribution channel.
• Ritz-Carlton Hotel ranks potential and current
customer by volume, geography and profit.
• Royal Bank of Canada identified a key customer
segment “snowbirds”
• Juran suggested classifying customers into two main
groups the “ vital few” and “ useful many”.
• Another way of segmenting customers with an eye
toward business results is by profitability.
Net Present Value of the Customer (NPVC)
• …the total profits (revenues associated with a customer minus
expenses needed to serve a customer) discounted over time.
• Profit potential can be measured by the NPVC, often used to segment
customers.

• The profits at auto dealer can be come from the sale of a car and
the profit from service visit.
• Frequent fliers represent high NPVC customers to an airline. By
segmenting them according to their frequency, an airline can
determine the net value of offering increasing levels of benefits to
fliers at higher frequency levels as a means of retaining current
customers or inviting potential customers.
• Firms can also use NPVC to eliminate customers with low or
negative values that represent a financial liability. The Fleet
Financial Group dropped its basic savings account interest rate,
hoping to lose customers who had only savings accounts.
Value of Segmentation
• Segmentation helps organization to align its internal
processes according to the most important customer
expectations or their impact on shareholder value.
• For example, Fidelity Investments realized that some
customers who were doing limited business with Fidelity
were using costly resources of service representatives too
frequently.
• They began teaching those customers how to use the
company’s lowest cost channels: website and phone lines.
They can still talk to representative, but the phone system
identifies their call and put them into longer queues.
• Fidelity was willing to lose some of these customers, but
most of them stayed and most switched to lower-cost
channels.
Understanding Customer Needs
• One of the world’s leading design firms, Ideo, which
designed Apple’s first mouse, standup toothpaste tubes,
and many other innovative products, does not begin its
design as a cool drawings.
• It begins with a deep understanding of the people.
• Organizations first need to understand the drivers of the
customer satisfaction.
• One of the best example of understanding customer needs
and using this information effectively is Frank Perdue’s
chicken business.
• Customer’s key purchase criteria: a yellow bird, high meat-to-bone ratio,
freshness, availability, and brand image.
• They also determined the relative importance of each criterion, and how
well the company and its competitors were meeting each one.
• Systematically, Perdue improved its products accordingly and gain market
share even though their chicken were premium-priced.
Key Product Quality Dimensions
• Performance – primary operating characteristics (For an automobile,
acceleration, braking distance, steering, and handling).
• Features – “bells and whistles”. (Power options, a CD player, Ipod connections,
satellite radio, and antilock brakes).
• Reliability – probability of operating for specific time and conditions of use (A
car’s ability to start on cold days and frequency of failures are reliability
factors).
• Conformance – degree to which characteristics match standards (A car’s fit and
finish and freedom from noise can reflect this dimension).
• Durability- amount of use before deterioration or replacement ( A car’s
corrosion resistance and the long wear of upholstery fabric).
• Serviceability – speed, courtesy, and competence of repair (Access to spare
parts, the number of miles between major maintenance services, and the
expense of service).
• Aesthetics – look, feel, sound, taste, smell (A car’s color, instrument panel
design, control placement, and “feel of the road”).
Example of Quality Dimensions
Key Dimensions of Service Quality
Today’s customers pay more attention to service issues than to the physical goods.
 One study shows that customers are five times more likely to switch because of perceived service
problems than for price concerns or product quality issues.
 The average company loses as many as 35 percent of its customers each year, and that about two-
thirds of these are lost because of poor customer service.
Research has identified five principal dimensions that contribute to customer perception of
quality:
• Reliability – ability to provide what was promised such as responding in the promised time,
following customer instructions, providing error-free invoices and statements and making
repairs correctly the first time.
• Assurance – knowledge and courtesy of employees and ability to convey trust such as the
ability to answer questions, monitoring credit card transactions to avoid fraud, being polite
and pleasant during customer transactions.
• Tangibles – physical facilities and appearance of personnel such as attractive facilities,
appropriately dressed employees, and well designed forms that are easy to read and
interpret.
• Empathy – degree of caring and individual attention such as willingness to schedule
deliveries at the customer’s convenience, explaining technical things smoothly.
• Responsiveness – willingness to help customers and provide prompt service such as acting
quickly to resolve problems, promptly crediting returned merchandise, and rapidly replacing
defective products.
Example 3.1. Classifying Customer Needs
on Dimensions of Service Quality

• Reliability
• Tangibles
• Assurance
• Empathy
• Assurance
• Responsiveness
Example 3.1. Classifying Customer Needs
on Dimensions of Service Quality

• Tangibles
• Assurance
• Reliability
• Tangibles
• Assurance
Kano Model of Customer Requirements (1)

Noriaki Kano (a Japanese Professor) suggested segmenting customer requirements

into three groups:
• Dissatisfiers (“must haves”): expected requirements that cause dissatisfaction if
not present. In an automobile, a radio, heater, and basic safety features are
expected, they are not stated by customers but assumed as given.
• Satisfiers (“wants”): expressed requirements that customers expressly say they
want. Many car buyers want a sunroof, satellite radio, or navigation system.
These are not expected features but fulfilling them creates satisfaction.
• Exciters/delighters (“never thought of”): unexpected features such as separate
rear-seat video controls that allow children to watch DVD movies, or wi-fi
capabilities in a car.
• Innovations are not exciters/delighters for long. When customers become familiar with
them, exciters/delighters become satisfiers over time. For example, navigation
systems in the cars.
Kano Model of Customer Requirements (2)
• Providing dissatisfiers and satisfiers is often considered the
minimum required to stay in business. These requirements
can be identified from surveys, complaints, and interviews
and routine market search.
• Success of Ford F-150 design.
• To be truly competitive, organizations must surprise and
delight customers by going beyond basic requirements.
• Hospitals are offering different services in patient care that are designed to
change traditions.
• Traditional market research is not enough for
exciters/delighters.
• Ford minivan and Chrysler minivan
Voice of the Customer
• …customer requirements, as expressed in the customer’s
own terms. The vice president of marketing at Whirlpool
stated that “ The consumer speaks in codes”.
• Whirlpool's research showed that consumers wanted clean
refrigerators which could be interpreted to mean that they
wanted easy-to-clean refrigerators. After analyzing more data,
the company understand that costumers actually wanted a
refrigerator that looked clean. So, they have a model to hide
fingerprints.
• Organizations use a variety of methods, or “listening
posts,” to collect information about customer needs and
expectations, their importance, and customer
satisfaction with the company’s performance on these
measures.
 Customer Listening Posts
• Comment cards and formal surveys: Measuring customer satisfaction, hotels and
restaurants can use this method.
• Focus groups: A focus group is a panel of individuals. Interview style. Example
Crayola: focus group: young children.
• Direct customer contact: Black and Decker’s example.
• Field intelligence: Any employee who comes in direct with customers, such as
salesperson, repair technicians, telephone operators, and receptionists, can obtain
useful information simply by engaging in conversation and listening the customers.
The effectiveness of this method depends on a culture that encourages open
communication with superiors. Another approach employees simply observe
customer behavior.
• Complaints could be key source of customer information.
• Internet and social media monitoring: by monitoring the conversation on
discussion groups and blogs, managers can gain a lot of information. The cost of
monitoring is minimal.
Example: Customer Listening Posts at
Nestlé Purina PetCare Company

Consumer refers to the pet owners

Customer refers to the retailers.

Some companies are using unconventional methods:

• Texas Instruments created a simulated classroom to understand how mathematics teachers use
calculators.
• A manager at Levi Strauss used to talk with teens who were lined up to buy rock concert tickets.
• The president of Chick-fil-A and other corporate employees, spend at least one day each year behind the
counter.
Analyzing Voice of the Customer Data
One useful tool for organizing large volumes of information efficiently and identifying
natural patterns or groupings in the information is the Affinity Diagram.

Affinity diagram
Example 3.2 Creating Affinity Diagram
for Customer Needs
Example 3.2 – Affinity Diagram

Modern methods of business analytics, such as text mining and text analytics can automate
the process of capturing and analyzing huge amounts of textual data. JetBlue Airways!
Gap Model – Linking the VOC to Internal
Processes
• Actual quality is the outcome of the production
process and what is delivered to the customer.
• Customers will assess quality and develop perceptions
(perceived quality) by comparing their expectations
(expected quality) with what they receive (actually
quality)
• If expected quality is higher than the actual quality,
then the customer will be dissatisfy.
PERCEIVED QUALITY is a
comparison of ACTUAL
QUALITY to EXPECTED
QUALITY

In order to success,
• internal communication among organizational functions is important.
• Communicate with customer. Be careful, customers may not use the
product correctly or may have unreasonable expectations.
• Great way of linking VOC to service delivery processes is through
empowered employees (Trader Joe’s)
Building a Customer-Focused
Organization
• Creating a customer-focused organization takes hard and discipline. It
must be built on good policies, good people, and good processes.
• A good example – Deer Valley Ski Resort.
• From its facilities, services, and processes, and the interaction between employees and
guests, it is designed to focus on the customer.
• Deer Valley Ski Resort is consistently rated as the best ski resort in North America by ski
enthusiast magazine.

• Customer-focused organizations focus on four key processes:

1. Making sincere commitments to customers
2. Ensuring quality customer contact
3. Selecting and developing customer contact employees
4. Managing complaints and service recovery
Customer Commitments
• Organizations that truly believe in the quality of
their products make sincere commitments to their
customers.
• A customer commitment might be as simple as
guaranteeing that your call or e-mail will be
returned promptly.
• Many commitments take the form of explicit
guaranties and warranties.
• L.L. Bean: “Everything we sell is backed by a 100
percent unconditional guarantee.”
Customer Contact and Interaction:
Moments of Truth
• Customer satisfaction or dissatisfaction takes place
during moments of truth—every interaction between a
customer and the organization.
• Example (airline)
• Making a reservation
• Purchasing tickets
• Checking baggage
• Boarding a flight
• Ordering a beverage
• Requests a magazine
• Deplanes
• Picks up baggage
Customer Contact Requirements
• Customer-focused organizations make it easy for customers
to conduct business (Southwest airlines recognizes the
power of costumer focus).
• Proctor & Gamble was the first company to install a toll-
free number for its products in 1974.
• Today, e-mail and website access are the media of choice
for many costumers.
• …measurable performance levels or expectations that
define the quality of customer contact with an
organization.
• Technical: response time (answering the telephone
within two rings or shipping orders the same day)
• Behavioral requirements (using a customer’s name
whenever possible)
Example: Customer Contact Requirements

St. Luke’s Hospital of Kansas City

Selecting and developing customer
contact employees
• Customer-contact employees are particularly important
in creating customer satisfaction as they often are the
only means by which a customer interacts with an
organization.
• Businesses must carefully select customer contact
employees, train them well, and empower them to meet
and exceed customer expectations.
• Some skills are necessary, strong problem-solving, stress
tolerance, patience, attention to detail.
• Fairmort Hotels created an orientation program to help new
employees understand what it feels like to be a guest.
Service Recovery and Complaint
Management
• The average company never hears from 96% of its unhappy
customers. Dissatisfied individual and business customers
tend not to complain. For every complaint received, the
company has 26 more customers with problems, six of
whom have problems that are serious.
• Of the customers who make a complaint, more than half
will again do business with that organization if their
complaint is resolved. If the customer feels that the
complaint was resolved quickly, the figure jumps to 95%.
• Customers who remain unsatisfied after complaining result
in substantial amounts of negative word of mouth.
Complaint Resolution

• Acknowledge that a customer had a problem

(“We’re sorry you had a problem”)
• Express empathy for the inconvenience that the
customer encountered; willingly accepting the
complaint (“Thanks for letting us know about it”)
• Describe corrective action concisely and clearly
(“Here’s what we’re going to do about it”)
• Appeal to the customer for continued loyalty
(“We’d appreciate you giving us another
chance”).
Example: Complaint Management
Process at Cargill Corn Milling
Manage Customer Relationships
• Excellent organizations foster close relationships with customers that lead to
high levels of satisfaction and loyalty.
• Lexus and Bank of Montreal’s Private services group
• Customer relationships can be fostered through strategic partnerships and
alliances and using technology to facilitate better communication with
customers and linkages to internal operations.
• Customer-supplier partnerships - long-term relationships characterized by teamwork
and mutual confidence.
• Benefits of such partnerships include access to technology or distribution channels not
available internally, shared risks in new investments and production development,
improved products through better communications.
• FedEx and Jostens formed a strategic partnership that they took advantage of each
other’s strengths.
• Customer-focused technology
• Technology can greatly enhance an organization’s ability to leverage customer-
related information and provide improved customer service.
• Customer relationship management (CRM) software, which typically includes market
segmentation and analysis, customer service and relationship building, effective
complaint resolution, cross-selling goods and services, order processing, and field
service.
Measuring Customer Satisfaction and
Engagement
• Customer feedback is vital to a business. Through feedback, a company learns how
satisfied its customers are with its products and services and sometimes about
competitors’ product and services.
• Customer satisfaction measures may include product attributes such as product quality,
product performance, usability, and maintainability; service attributes such as attitude,
service time, on-time delivery, accountability and technical support; image attributes
such as reliability and price; and overall satisfaction measures.
• Costumer satisfaction and engagement measurement allows an organization to do
followings:
1. Discover customer perceptions of how well the organization is doing in meeting
customer needs, and compare performance relative to competitors.
2. Identify causes of dissatisfaction and failed expectations as well as drivers of
delight to understand the reasons why customers are loyal or not loyal to the company.
3. Identify internal work process that drive satisfaction and loyalty and discover
areas for improvement in the design and delivery of products and services, as well as for
training and coaching of employees.
4. Track trends to determine whether changes actually result in improvements.
Designing Satisfaction Surveys
• Identify purpose – who will make decisions using the
survey results?
• Identify the customer
• Determine who should conduct the survey (internal, third
party, etc.)
• Select the appropriate survey instrument (written,
telephone, face-to-face, etc.)
• Design questions and response scales to achieve
actionable results:
• responses are tied directly to key business processes, so that what needs
to be improved is clear; and information can be translated into
cost/revenue implications to support the setting of improvement
priorities.
Likert Scales Used for Customer
Satisfaction Measurement
 Analyzing Feedback Performance-
Importance Analysis
Performance
Low High

High Vulnerable Strengths

Importance
Low Who cares? Overkill
Why Customer Satisfaction Efforts Fail
• Poor measurement schemes: lack adequate sample sizes or
randomizations, need of appropriate understanding of statistical
concepts.
• Failure to identify appropriate quality dimensions: Many issues
company thinks important but customer thinks it is not.
• Failure to weight dimensions appropriately: Organization can find
the correct issue but weight it wrong. So, put too much effort on
the unimportant issue for customers.
• Lack of comparison with leading competitors: Competitors might
improve much faster than an organizations realizes.
• Failure to measure potential and former customers.
• Confusing loyalty with satisfaction: Customer retention and loyalty
provide an indication of the organization’s future; satisfaction only
relates to the present.
Measuring Customer Loyalty

• Overall satisfaction
• Likelihood of a first-time purchaser to repurchase
• Likelihood to recommend
• Likelihood to continue purchasing the same products
or services
• Likelihood to purchase different products or services
• Likelihood to increase frequency of purchasing
• Likelihood to switch to a different provider
Net Promoter Score (NPS)
• Developed by (and is a registered trademark of) Fred
Reichheld, Bain & Company, and Satmetrix
• “What is the likelihood that you would recommend us?”
evaluated on a scale from 0 to 10.
• Promoters: scores of 9 or 10 are usually associated with loyal
customers who will typically be repeat customers (“promoters”).
They are less price-sensitive and are more profitable.
• Passives: scores of 7 or 8 are associated with customers who are
satisfied but may switch to competitors
• Detractors: scores of 6 or below represent unhappy customers
who may spread negative comments. They are more price-
sensitive and are less profitable.
• NPS is the percentage of promoters minus the percentage of
detractors.
Calculating the Net Promoter Score
• A sample of 300 customers who responded to the
question “What is the likelihood that you would
recommend us?” resulted in following:
Score Frequenc
y
10 63 • Total # of promoters : 63+82= 145
9 82 • Total # of detractors: 21+12+6+7+3+0+1 = 50
8 64 • As percentage of the total 48.3 % promoters,
7 41 16.7 % detractors
6 21 • Net promoter score is: 48.3-16.7= 31.6%
5 12 • Successful companies such as Trader Joe’s,
4 6 Costco, and Apple may have NPS score 70-90% but
3 7 scores over 50 percent are good.
2 3
1 0
0 1
Customer Perceived Value (CPV)
• An alternative to traditional customer
satisfaction measurement that focuses more on
customer loyalty than on satisfaction is CPV.
• CPV measures how customers assess benefits—
such as product performance, ease of use, or
time savings—against costs, such as purchase
price, installation cost or time, and so on, in
making purchase decisions.
Example 3.5 Assessing Competitive
Performance

Attribute Relative Restaurant A Restaurant B Relative

Importance Performance
Menu Variety 30% 8 10 -2
Food quality 20% 7 4 3
Atmosphere 10% 8 8 0
Value 40% 7 6 1

Restaurant A has a weighted value of 7.4 while

restaurant B has a weighted value of 7.0