Professor Claes Fornell Addresses Detroit Economic Club
ACSI research indicates focus should be on consumers, not competitors.
ANN ARBOR, Mich.—Although customer satisfaction is on the rise, companies must focus more on consumers than on competitors, according to a University of Michigan business professor.
Speaking at the Detroit Economic Club's economic outlook meeting last week, Claes Fornell of the Stephen M. Ross School of Business said that advances in information technology, such as the Internet, and increasing globalization have made consumers very powerful.
"Buyers are becoming more powerful because of the information available to them and because they have more purchase alternatives," said Fornell, professor of marketing and director of the American Customer Satisfaction Index (ACSI). "The implication is extremely important for business—assets of production aren't what they used to be. By themselves, they don't tell us much about the future anymore. Unless supported by other types of assets, they're not as valuable either."
For a manufacturing state like Michigan, he said, this might be disturbing, but it is also critical that we deal with it.
"After all, we live in a marketplace where the combined market value of General Motors, DaimlerChrysler and Ford is only a fraction of the value of Google alone," he said. "No wonder then that the relationship between assets on the balance sheet—basically assets of production—and future income is getting weaker and weaker."
Fornell said the most critical economic asset for a company, especially when buyers are powerful, is not recorded on a balance sheet—the health and strength of the company's relationship with its customers.
"As buyers become empowered, sellers have no choice but to adapt," he said. "Focusing on competition has its place, of course, but with buyer power on the rise, it's probably necessary to pay more attention to the customer—and deal with competition as a by-product of that effort. Too often it's the other way around."
According to Fornell, companies can always increase customer satisfaction by reducing prices. For example, Detroit automakers improved their customer satisfaction ratings by offering discounted prices on many of their vehicles this year. But the domestic car industry still continues to lag behind imports in customer satisfaction. In fact, the gap has widened.
"Price discounting, at an average of $3,500 per car, led to a higher level of customer satisfaction for General Motors, Ford and DaimlerChrysler," he said. "For Toyota, Honda, BMW and Hyundai, that was not the case. Here, satisfaction increased because of product appeal.
"This is important because higher levels of customer satisfaction usually move the demand curve upwards, making room for price increases and better margins. But if the satisfaction improvements come from price incentives, the opposite is true and pricing power is lost."
Fornell concluded his talk with sage advice: Invest in companies that treat their customers well or make sure that your company does—one or the other, or both.
"Our research shows that such companies tend not only to have higher cash flow growth, but better cash flow stability as well—key factors for rising share prices," he said. "This, of course, is what free-market capitalism is supposed to do—align the flow and power of capital with buyer satisfaction for a better and stronger economy."
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