AN INVESTIGATION IN THE PROCESS GAP BETWEEN
‘CUSTOMER RELATION MANAGEMENT’ AND ‘SUPPLY CHAIN MANAGEMENT’

CUSTOMER CENTRIC BUSINESS MODELS,
TWO STEPS BEYOND CUSTOMER RELATION MANAGEMENT

by

THOMAS ROLF

Fachhochschule Ludwigshafen (Germany), MBA International Management Consulting
University of Lincoln (UK), Faculty of Business and Management

December 2003

I confirm that I have written the dissertation entitled „Customer centric business models, two steps beyond Customer Relation Management, an investigation in the process gap between ‘Customer Relation Management’ and ‘Supply Chain Management’“ independently and without any unauthorised assistance. All publications employed in the writing of this dissertation have been cited accordingly as sources and noted in the bibliography.

Manila, 13th December 2004

Thomas Rolf

Acknowledgements

First of all the author would like to express his appreciation of his family for their heroic support. This includes:

• Uta, the author’s wife, who unshakably ignored all associated changes of the author’s mood and furthermore gallantly pretended to be interested in the author’s work when it was a necessity.
• Niclas and Carl, the author’s two sons, who politely did not destroy all of the notes and data which the author carelessly left in the open workroom and who despite of that cheered him up on every single day.
• Edgar, the author’s brother, who was forced to proof-read and edit the dissertation.
• The author’s parents who made it all possible.

Secondly the colleagues of the MBA Program were a great help at all times. The value of a well-run alumni network can not be overestimated.

Abstract

The submitted dissertation critically discusses business models in the context of customer dimensions under uncertain market conditions.

The following questions summarise the fields of investigation:

• How do business models adapt to rapidly changing and buyer driven markets?
• What are the next two steps after Customer Relationship Management?
• Can the gap in the process chain between ‘Customer Relation Management’ and ‘Supply Chain Management’ be bridged and how?
• How can a method be developed in order to measure the current customer orientation of a company and to compare companies among each other?
• Are customer oriented companies more profitable?

As a deductive research approach is used, beneath a small number of inductive elements, an investigation in both secondary and primary data is imperative. Subsequently a critical review of related literature along with a supporting inquiry is part of the dissertation.

The scope of the work includes background information, the discussion of future business models as well as an empiric impression of ‘customer orientation’ in German small and medium sized enterprises.

The most significant conclusions can be recapitulated as follows:

• Simple customer orientation can lead to less innovation, furthermore to unprofitable business and in the worst case to the elimination of a company.
• Customer oriented strategy is about building processes that are able to react to any environmental or economical modification as fast as possible
• The evolution of Customer Relation Management will lead to new customer driven and pulled business models, including innovative measurement methods like ‘Return on Customer’
• The gap between Customer Relation Management and Supply Chain Management will in all probability be bridged, new concepts (e.g. Customer Chain Management) will represent this task
• A ‘balanced’ Customer Centric Index, developed as a benchmark instrument as part of the dissertation, shows that only a third of the examined companies can be interpreted as ‘customer oriented’, on the other hand ‘Sales & Marketing’ is regarded as the initial and most influencing process.
• A statistical connection between ‘being customer oriented’ and ‘profit’ could not be proved
• As a surprising and unintentional result the survey revealed that focusing on a small market (niche) is, at least for SME, a more profitable business.

Eventually the dissertation leaves behind additional questions that could not be answered in this investigation, especially regarding correlations between success factors (market share/margin) and the customer driven dimensions of companies.

Table of Contents
Acknowledgements ...  3
Abstract  ... 4

Table of Contents ... 6
List of Abbreviations  ... 9
List of Figures  ... 11
List of Tables  ... 12

1 Introduction ... 13
1.1 Introductory background  ... 13
1.2 Research question and aim of the dissertation  ... 14
1.3 Methodology  ... 17
1.3.1 Identify the broad area  ... 17
1.3.2 Select the topic ... 18
1.3.3 Decide the Approach  ... 19
1.3.4 Formulate the Plan ... 20
1.3.5 Collect the Information ... 20
1.3.6 Analyse the Data ... 21
1.3.7 Present Findings  ... 22
1.4 Limitations  ... 22
1.4.1 Time ... 23
1.4.2 Assumptions  ... 23
1.4.3 Secondary data ... 23
1.4.4 Primary data ... 23

2 Literature review ... 25
2.1 70ies and earlier: Black Fords  ... 25
2.2 80ies: In search of excellence  ... 26
2.3 90ies: Core competence  ... 27
2.4 Y2K: Cost cutting ... 28
2.5 Summary  ... 31

3 Step One: Customer Relation Management ... 32
3.1 From Marketing to CRM ... 32
3.2 Market conditions ... 34
3.3 Definitions ... 36
3.4 CRM sectors ... 38
3.4.1 Analytical CRM ... 41
3.4.2 Operational CRM  ... 44
3.4.3 Communicational CRM ... 45
3.5 Success factors & critique  ... 48
3.6 Summary  ... 53

4 Step Two: Customer centric business models ... 54
4.1 From CRM to CCBM ... 54
4.2 Crucial requirements  ... 56
4.2.1 Strategy ... 57
4.2.2 Business models  ... 60
4.2.3 Processes ... 65
4.3 Assumed consequences  ... 70
4.3.1 Organisational structure ... 70
4.3.2 Customer value vs. company value  ... 75
4.3.3 Return on investment ... 79
4.4 Success factors & critique  ... 83
4.5 Summary  ... 85

5 Step Three: Customer Chain Management ... 86
5.1 Supply Chain Processes  ... 86
5.2 From CCBM to CCM: An attempt to fill the gap  ... 88
5.3 Summary  ... 93

6 Survey 94
6.1 Introduction  ... 94
6.2 Results  ... 97
6.2.1 Core competence  ... 98
6.2.2 Initial processes  ... 98
6.2.3 Negotiating power  ... 99
6.2.4 Customer centric index  ... 101
6.2.5 Customer centric company cluster ... 105
6.2.6 Margin & market share ... 107
6.3 Summary  ... 110

7 Conclusion ... 112

8 Bibliography ... 115

9 Appendices ... 122
9.1 Appendix A – The survey  ... 122
9.1.1 Covering letter  ... 122
9.1.2 Questionnaire ... 123
9.2 Appendix B – Additional calculations  ... 126

List of Abbreviations
ACD Automatic Call Distribution
B2C Business to Consumer
BPR Business Process Reengineering
BSC Balanced Score Card
BTC Built to Customer
BTO Build to Order
CCBM Customer Centric Business Models
CCI Customer Centric Index
CCM Customer Chain Management
CIC Customer Interaction Centre
CIM Computer Integrated Manufacturing
COC Centres of Competence
CRM Customer Relation Management
CTI Computer Telephony Integration
ECR Efficient Consumer Response
EDI Electronic Data Interchange
ERP Enterprise Resource Planning
GDP Gross Domestic Product
HR Human Resources
HW Hardware
ICT Information and Telecommunication Technology
IDC International Data Corporation
IT Information Technology
IVR Interactive Voice Response
KAM Key Account Management
LoB Line of Business
MBA Master of Business Administration
NPV Net Present Value
PC Personal Computer
PPS Production Planning Systems
ROI Return on Investment
ROC Return on Customer
ROMI Return on Marketing Investment
SCM Supply Chain management
SME Small and Medium Enterprises
SW Software
TOC Theory of Constrains
TQM Total Quality Management
UMTS Universal Mobile Telecommunication System

List of Figures
Figure 1: A value chain  ... 14
Figure 2: Supply and production competence ... 15
Figure 3: CRM competence  ... 16
Figure 4: Customer and sales competence  ... 17
Figure 5: Survey of 18 management topics ... 29
Figure 6: Use of IT in CRM approaches  ... 34
Figure 7: CRM gap analyses  ... 40
Figure 8: Customer segment strategies I  ... 43
Figure 9: Customer barometer  ... 48
Figure 10: Main objectives of CRM ... 49
Figure 11: Barriers to implementation ... 51
Figure 12: CRM Success Indicators  ... 52
Figure 13: Loyalty levels ... 56
Figure 14: Generic strategies ... 57
Figure 15: Value propositions  ... 58
Figure 16: From hierarchy to customer centric organizations ... 71
Figure 17: Push organisation  ... 72
Figure 18: ’Best of breed’ organisation ... 74
Figure 19: Customer life time value  ... 76
Figure 20: Customer value - market capitalization  ... 77
Figure 21: Potential add-on value ... 79
Figure 22: Outsourcing models  ... 88
Figure 23: The movement of CRM and SCM  ... 89
Figure 24: Customer Chain Management topics  ... 90
Figure 25: Increasing amount of suppliers  ... 91
Figure 26: The ‘dispatching’ concept ... 92
Figure 27: Chief Customer Officer ... 92
Figure 28: Size of examined companies ... 96
Figure 29: Examined Sectors ... 96
Figure 30: Level the interviewed work in  ... 97
Figure 31: Work area of interviewees  ... 97
Figure 32: Tier model of influencing processes  ... 99
Figure 33: Negotiating power ... 100
Figure 34: Negotiating power in different sectors ... 101
Figure 35: Customer centric company profile I ... 102
Figure 36: Customer centric company profile II  ... 103
Figure 37: Customer Centric Index  ... 104
Figure 38: Cluster distribution ... 105
Figure 39: Cluster 1: The ‘non identifiable’ company  ... 105
Figure 40: Cluster 2: The ‘customer oriented’ company ... 106
Figure 41: Cluster 3: The ‘balanced’ company  ... 107
Figure 42: Cluster distribution (‘Market share’/‘Margin’ as continuous variables)  ... 109
Figure 43: ‘Market share’ within clusters ... 109
Figure 44: ‘Margin’ within clusters ... 110
Figure 45: Cluster 1 with ‘Market share’/‘Margin’ as continuous variables ... 127
Figure 46: Cluster 2 with ‘Market share’/‘Margin’ as continuous variables ... 128
Figure 47: Cluster 3 with ‘Market share’/‘Margin’ as continuous variables ... 128

List of Tables
Table 1: Marketing approaches ... 32
Table 2: From Marketing to CRM ... 33
Table 3: Customer segment strategies II ... 43
Table 4: Incentive plan linked to customer metrics  ... 74
Table 5: CCBM sales and cost effects  ... 81
Table 6: Duration of relationship - profitability  ... 81
Table 7: Duration - profitability strategy matrix ... 82
Table 8: Adjusted order of core competence processes ... 98
Table 9: Used abbreviation  ... 103
Table 10: Customer centric index  ... 104
Table 11: Correlations: Customer Centric vs. margin & market share ... 108
Table 12: correlations margin & market share  ... 110
Table 13: Core competence of interviewed companies  ... 126
Table 14: Initial processes  ... 126
Table 15: Customer centric average and range of customer centric dimensions ... 127

1 INTRODUCTION

“The problems might be always the same, the solutions are not” (Hammer 2002.19)

This chapter will introduce the reader to the research question in addition to providing him with an introductory background. It will outline the research methods along with why these methods have been chosen. Further-more the chapter will give definitions of often-used expressions as well as a guide to the subsequent structure.

1.1 Introductory background

In recent years there has been a dramatic change in how enterprises shape their business models. This is mainly driven by an economic situation that can be summarised by saturated markets, substitutable products plus services, fragmented along with hedonistic customer behaviour combined with decreasing customer loyalty as well as a decline in profits.

These tremendous challenges have already ruined several enterprises. An essential impact is supposed to lie in the relationship of enterprises with their customers. For a long period of time the ‘Shareholder Value’ has been the exclusive measurement of how to control and steer enterprises. Beyond it, recent discussions hint at a change in the strategic perspective. ‘Customer Value’ now emphasises a priority that might be set up in upcoming business models (see chapter 4.3.2).

‘Customer Relation Management’ (CRM) approaches are already in service. However CRM projects mainly driven through IT departments turn out to be too complex. Results are not clearly visible. The holistic CRM approach on the one hand therefore is regarded as being unsuccessful (Computerwoche 2002). On the other hand job descriptions like of ‘Chief Customer Officer’ demonstrate the necessity for companies to change in dealing with their customers. By common consent it is assumed that the most profitable companies will be the ones that most satisfy their customers in addition to committing them by performance plus services. Furthermore, a reliable relation management is expected to be a guarantor for future success. Consequently more and more companies are searching for new and innovative ways to manage their customers, or to be more specific, to be managed by their customers.

This of course requires a change in how to do business or in other words in how to change the business models. Classical value chains have been intensely influenced by modern information and communication technology. Nevertheless it must be considered that only an exhaustive, systematic and methodical change of business processes can positively influence a company′s relationship with their customers and consequently its results. In this context enterprises will be successful that do not only work profitably but which will also satisfy their customers by offering them the best performance (Kotler / Bliemel 1999).

Michael Hammer, who already initiated a remarkable revolution in business processes (Hammer 1993), now announces another tremendous upcoming change in how to manage companies in respect of business processes. He concludes that all processes within companies will not only have to focus on customer needs and wishes but also to build their entire business processes around them (Hammer 2002).

Having this as a background one might develop an academic research question as follows.

1.2 Research question and aim of the dissertation

The research question is based on examinations of influences of a customer centric approach to business models and processes. The following section will illuminate the development of the research question. The value chain model which was invented by Michael Porter in 1985 (Porter 1985) in this case seems to be an appropriate instrument for systemising processes. Regarding the technology department (see figure 1), which provides a company with IT infrastructure, one can state that Enterprise Resource Programs (ERP) already demanded tremendous changes within recent years. ERP are used to control and manage complex processes. In general the IT department is in charge of installing, customizing and running these systems. For specific tasks a lot of individual solutions are used in certain parts of the value chain. Regarding the research question the “Customer Relation Management” (CRM) and the “Supply Chain Management” (SCM) are of substantial interest. These terms roughly describe the company’s interfaces to their external relationships.

SCM deals with problems on the supply side of the value chain. In seller dominated push markets companies were characterised by a core competence in operations. Operations here will summarise the processes of production, logistics and distribution (see figure 2).

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