Customer Centric Business Models - Two Steps Beyond Customer Relation Management


Master's Thesis, 2003
128 Pages

Excerpt

Table of Contents

Acknowledgements

Abstract

List of Abbreviations

List of Figures

List of Tables

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

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

3 Step One: Customer Relation Management
3.1 From Marketing to CRM
3.2 Market conditions
3.3 Definitions
3.4 CRM sectors
3.4.1 Analytical CRM
3.4.2 Operational CRM
3.4.3 Communicational CRM
3.5 Success factors & critique
3.6 Summary

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

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

6 Survey
6.1 Introduction
6.2 Results
6.2.1 Core competence
6.2.2 Initial processes
6.2.3 Negotiating power
6.2.4 Customer centric index
6.2.5 Customer centric company cluster
6.2.6 Margin & market share
6.3 Summary

7 Conclusion

8 Bibliography

9 Appendices
9.1 Appendix A - The survey
9.1.1 Covering letter
9.1.2 Questionnaire
9.2 Appendix B - Additional calculations

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 ‘Sup- ply 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 en- vironmental 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.

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1: A value chain

Figure 2: Supply and production competence

Figure 3: CRM competence

Figure 4: Customer and sales competence

Figure 5: Survey of 18 management topics

Figure 6: Use of IT in CRM approaches

Figure 7: CRM gap analyses

Figure 8: Customer segment strategies I

Figure 9: Customer barometer

Figure 10: Main objectives of CRM

Figure 11: Barriers to implementation

Figure 12: CRM Success Indicators

Figure 13: Loyalty levels

Figure 14: Generic strategies

Figure 15: Value propositions

Figure 16: From hierarchy to customer centric organizations

Figure 17: Push organisation

Figure 18: ’Best of breed’ organisation

Figure 19: Customer life time value

Figure 20: Customer value - market capitalization

Figure 21: Potential add-on value

Figure 22: Outsourcing models

Figure 23: The movement of CRM and SCM

Figure 24: Customer Chain Management topics

Figure 25: Increasing amount of suppliers

Figure 26: The ‘dispatching’ concept

Figure 27: Chief Customer Officer

Figure 28: Size of examined companies

Figure 29: Examined Sectors

Figure 30: Level the interviewed work in

Figure 31: Work area of interviewees

Figure 32: Tier model of influencing processes

Figure 33: Negotiating power

Figure 34: Negotiating power in different sectors

Figure 35: Customer centric company profile I

Figure 36: Customer centric company profile II

Figure 37: Customer Centric Index

Figure 38: Cluster distribution

Figure 39: Cluster 1: The ‘non identifiable’ company

Figure 40: Cluster 2: The ‘customer oriented’ company

Figure 41: Cluster 3: The ‘balanced’ company

Figure 42: Cluster distribution (‘Market share’/‘Margin’ as continuous variables)

Figure 43: ‘Market share’ within clusters

Figure 44: ‘Margin’ within clusters

Figure 45: Cluster 1 with ‘Market share’/‘Margin’ as continuous variables

Figure 46: Cluster 2 with ‘Market share’/‘Margin’ as continuous variables

Figure 47: Cluster 3 with ‘Market share’/‘Margin’ as continuous variables

List of Tables

Table 1: Marketing approaches

Table 2: From Marketing to CRM

Table 3: Customer segment strategies II

Table 4: Incentive plan linked to customer metrics

Table 5: CCBM sales and cost effects

Table 6: Duration of relationship - profitability

Table 7: Duration - profitability strategy matrix

Table 8: Adjusted order of core competence processes

Table 9: Used abbreviation

Table 10: Customer centric index

Table 11: Correlations: Customer Centric vs. margin & market share

Table 12: correlations margin & market share

Table 13: Core competence of interviewed companies

Table 14: Initial processes

Table 15: Customer centric average and range of customer centric dimensions

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. ‘Cus- tomer 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 Cus- tomer Officer’ demonstrate the necessity for companies to change in dealing with their cus- tomers.

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.

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Figure 1: A value chain

Regarding the technology department (see figure 1), which provides a company with IT infra- structure, one can state that Enterprise Resource Programs (ERP) already demanded tremen- dous 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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Figure 2:

CRM on the other side is concentrated on the customer’s side (see figure 3). Customers can be other companies (“B”) as well as consumers (“C”). SCM and CRM generally speaking are connected naturally through business processes within the value chain.

illustration not visible in this excerpt

On the contrary to push markets in customer dominated pull markets the core competence of successful enterprises is located around the customer and sales processes (Hammer 2002). It can now be assumed that customer driven processes to a greater extent are influencing busi- ness processes. Therefore four different stages in the evolutionary progress are supposed:

1. In the first stage analytical CRM is used to identify and classify customers.

2. Customer relationships are measured in the second step

3. In customer dominated “pull” markets the core competence of companies increasingly is located around sales

4. Customer driven processes and business models finally are directly influencing all other business processes and finally even reverse the production processes into cus- tomer pulled business models.

At this point push business models are characterised by their production orientation while pull business models refer to customer processes.

As a conclusion this could even lead to a picture in which the whole systematic between sup- pliers, the company plus the clients and all embedded processes are mirrored including the part of the value chain in which a company possesses its core competence (see figure 4).

illustration not visible in this excerpt

Figure 4: Customer and sales competence

This assumption leads to the question how exactly CRM and SCM are connected under these changing circumstances. A hypothetical process gap is assumed to exist between CRM and SCM.

Consequently a critical investigation in the process gap between ‘ Customer Relation Man agement ’ and ‘ Supply Chain Management ’ was chosen to be the research question. The aim of this dissertation is to discuss the evolution of business processes in a customer associated context. That evolution at least can be illustrated in a range between the beginning of CRM and the upcoming consequences for SCM processes.

Accordingly the research question can also be highlighted as “ Customer Centric Business Models ” two stages or steps beyond “ Customer Relation Management ”.

1.3 Methodology

This chapter reports how the aim of the dissertation will be achieved. Furthermore it will por- tray the methods and approaches that were used. In order to give a clear picture of the embed- ded methodology this dissertation follows a structure highlighted by Gill / Johnson (1991.3).

1.3.1 Identify the broad area

The literature overview on relationships between companies and their customers due to market conditions in different periods given in chapter 2.5. demonstrates the wide range of possible business models.

A thrilling environment has recently forced most companies, especially in Germany but also in most countries of the world, to redesign their business models.

Two remarkable trends characterise the ongoing change process. On the one hand companies have to cut costs and on the other hand they have to construct customer oriented business models. How to combine both is certainly of vital interest, and furthermore is part of recent discussions (as cited in chapter 2.5). As an outcome this describes the broad area of interest of this dissertation.

1.3.2 Select the topic

Having identified the broad area, the development of the research question as described in chapter 1.2 illustrates customer centric business models as an evolutionary approach.

Due to the fact that this evolution includes different stages of customer oriented business models, the following supposed steps are defined:

- Step One: As a first step the installation of Customer Relation Management was the quantitative basis for further customer oriented progress
- Step Two: Secondly the development of customer centric business models is seen as a necessary step with the intention of combining customer needs with profit.
- Step Three: Finally a hypothetical Customer Chain Management (CCM) is supposed to connect Supply Chain Processes with customer centric business models.

This definition allows one to investigate business models reaching from marketing to CRM, from CRM to Customer Centric Business Models (CCBM) and finally from CCBM to Customer Chain Management (CCM).

The author’s interest here is on the one hand to compare this hypothetical evolutionary approach with Michael Hammer’s findings (Hammer 2002). On the other hand the hypothetical steps will be tested against current literature on that topic.

Discussing an approach that combines different disciplines of today’s enterprises is the topic of this dissertation. The selection of the topic consequently seemed to correspond best to the given title.

1.3.3 Decide the Approach

Considering that the formulation of the research question is partly based on hypothetical considerations, it is on the one hand clearly necessary to underline the theoretical concept with a wide range of literature.

On the other hand only a survey is able to confirm the results. The primary research is intended to investigate both quantitative as well as qualitative data. The survey in the best case is able to indicate a correlation between customer orientation and business performance. In particular this is a crucial point because no supporting secondary research data was available at the time. The entire methodology of the primary research is introduced in chapter 6. To sum up, a secondary as well as a primary research is selected.

Following Robson (1993) an exploratory research approach in this dissertation is accomplished through literature search in addition to interviews. On the other hand the formulation of hypothetical considerations about possible current and future customer-company relationships is based on a descriptive research approach.

Moreover explanatory research has to be seen in the attempt to confirm the correlation between customer orientation and business performance. The related primary research in particular includes customer oriented dimensions as independent variables and market share / profit as dependent variables.

As a result this dissertation uses different research approaches. In order to avoid pure nomi- nalism, ontology is a desired perspective. The study of reality (ontology) in this dissertation is combined with the study of knowledge (epistemology) based on both personal experience and observation.

However, it is evident that this dissertation uses triangulation. According to Clark et al (1998) triangulation can be described as the use of different research methods in one dissertation. Even though the dissertation has inductive elements in the beginning, in general it is the definite intention to use a deductive research process. This is in view of the fact that it formulates a general thesis (chapter 4 and 5). The literature review along with the empirical testing of the hypotheses emphasise the movement from the general to the particular (Burrell / Morgan 1992). Accordingly the following research plan was formulated.

1.3.4 Formulate the Plan

In its roots the initial work plan stayed as it was presented in the proposal. Some additional perspectives were gained as the work progressed along with a three months extension of the working time. This extension is associated with a new employment situation for the author and a related move of the author’s family to a foreign country.

The entire work plan included a preparation phase which involved a first literature overview, the clearing of aims and objectives and the finding of a working title. Then the proposal phase focused on literature review along with the writing of the dissertation proposal.

Regarding the dissertation itself the work plan scheduled a research phase concentrating on in depth research of literature and field research which involved examining books, articles and studies about business models and processes. Literature about customer relationship manage- ment was identified and examined. A subsequent conclusion phase consisted of analysis, con- clusions and writing of the findings. The final work then included the writing of the summary, the bibliography and appendices. Eventually proof-reading and editing completed the disser- tation.

1.3.5 Collect the Information

Primary data was collected through a questionnaire, which was sent via Email to a defined target group (see chapter 6). With this approach 69 usable questionnaires were obtained between 28th August and 15th October 2003.

The covering letter gave reassurance about the respectable intention of the survey: It declared that the results will not be used for any other purpose and that it will be completely anonymous regarding both company and person related information. The hint that completing the questionnaire will not take longer than 6 minutes should motivate managers with permanent time constrains along with the possibility to receive the finished MBA dissertation as a ‘thank-you’. An additional short definition of processes used in the questionnaire should help the interviewees to better understand the questions.

The collection of primary data was achieved as follows:

- Design phase of questionnaire
- Pilot phase (questionnaires answered by friends)
- Adjustments phase
- Roll Out (1300 personalised emails to target group members)

Secondary data was gained through literature, articles and of course the internet. A valuable source was the library of the Johann-Wolfgang-Goethe University in Frankfurt. The author became a member of the library for business and economics. Access to the ‘online library’ made research much easier (http://webopac.server.uni-frankfurt.de). The majority of books was reviewed between October 2002 and May 2003. The literature review and the bibliogra- phy represent the results.

As mentioned above, the approach of this dissertation made it necessary to combine primary with a secondary research so as to analyse, conclude and finally find a critical approach regarding the research question.

1.3.6 Analyse the Data

The collected secondary data regarding ‘CRM’ and ‘Business Models’ was reviewed and categorised into different quality classes and status quo:

- Very good / usable
1. Printed
2. Read
3. Worked content into dissertation
- Include, should the occasion arise (then follow the procedure print, read, work content into dissertation)
- Not usable

Approximately 30% of the gathered secondary data was ranked ‘very good’ and therefore was used and quoted in the dissertation. The collected primary data was analysed by using SPSS Release 11.5.0 along with Microsoft Excel.

Regarding the research question, the basic fields of interest concerning the primary data are:

- The core competence of the interviewed companies
- Initial processes in companies
- The negotiating power between companies and both their suppliers and their custom- ers
- The search for and the analysis of customer oriented dimensions

The results were supposed to answer the following critical questions:

- Is it possible to create a customer centric index?
- Is it possible to create customer centric company cluster?
- How do the findings correlate with the margin along with the market share of the in- terviewed companies?

In particular for the cluster analysis a specified number of three clusters was prescribed. A two step cluster analysis using the log-likelihood distance measure and a Bonferroni adjustment were applied. For correlation coefficients the Pearson model was used.

A general assumption was that not all questions could be answered exactly. Here the experi- ence and the estimation of the interviewees should be the sufficient basis for a trend state- ment. Accordingly the collected primary data represent quantitative as well as qualitative re- sults. The author considered these circumstances when the findings were interpreted.

1.3.7 Present Findings

It is the intention of this dissertation to add a complementary perspective to the body of knowledge of customer-company relationships.

Using common methods in social science such as analysing documents, observation and asking critical questions is the objective of this MBA dissertation. The assumed critical gap between Customer Relationship Management and Supply Chain Management processes potentially has consequences for the future development of business models.

1.4 Limitations

Possible weak points may be found in four categories of the dissertation:

- Time
- Assumptions
- Secondary data
- Primary data

1.4.1 Time

Since the author and his family moved to the Philippines during the progress of writing the dissertation, time became a crucial point. The author therefore had to apply for three addi- tional months.

1.4.2 Assumptions

It is a clear intention of the dissertation to allow for criticism of the theoretically derived as- sumptions made by the author about the evolution of customer centric organizations. The supposed development of a future Customer Chain Management is a hypothesis that of course includes the limitation of not becoming reality. A new change in the environment can easily lead to such a turn.

Limitations are therefore included in the formulation of a hypothetical existence of a concept like the Customer Chain Management itself.

Furthermore an existing significant correlation between customer centric orientation and company success factors (margin, market share) is assumed.

In this case the limitations lie either in the assumption itself or in the quantity of available data regarding this correlation coefficient (see chapter 1.4.4).

1.4.3 Secondary data

Regarding the evolution of customer centric organizations several hints and indicators are found in the literature review that confirm the assumed trend. However, especially for chapter 5 (‘Step Three: Customer Chain Management’) it is quite challenging to find adequate litera- ture which deals with the topic in depth. A customer driven step from CCBM to CCM which is supposed to fill the gap between CRM and SCM is not yet recognised as a discipline in its own right.

1.4.4 Primary data

Limitations already assumed in the proposal are the access to experts due to time limitations.

With 69 received questionnaires the fear of not having access to experts is unfounded.

Still the amount of questionnaires is not high enough to answer all questions arising. This in particular applies to the questions regarding market share and profit.

Only 17 cases contain information about ‘market share’ and ‘margin’. This might be the other reason that a correlation between customer centric orientation and company success factors (margin, market share) can not be confirmed.

Furthermore the reliability of the collected data has to be critically reviewed. For example does one of the findings of the survey show that companies estimate their own negotiating power higher when they are the client compared to when they are the supplier? (see chapter 6.2.3).

It can therefore not be excluded that the whole self-assessment shows the interviewed companies more in the way they want to be seen than how they really are.

The range of possible answers is not standardised. So even when two participants of the survey meant the same, it is possible that they gave different answers. As a result the level of reliability can be questioned. Additional personal interviews could certainly increase the reliability by adjusting the quality of the given answers in the questionnaire.

However additional personal interviews with the target group fall under another limitation of this dissertation: the lack of time and money.

2 LITERATURE REVIEW

"Any customer can have a car painted any color that he wants so long as it is black." (Henry Ford)

This chapter will put the research questions into a historical context of comments and litera- ture. It will describe the evolution of customer company relationships as well as the different perspectives found on the topic through different decades. Furthermore central business mod- els will be mentioned. As an appropriate timeframe of investigation the last four decades were chosen and will illustrate the background of today’s status quo along with discussing defini- tions of CRM.

2.1 70ies and earlier: Black Fords

A glance into history illustrates that before the industrial revolution, business relations were on a one-to-one basis. The owner e.g. of a store rated his business in number of customers instead of market share. He knew each individual customer personally and knew also about his preferences and dislikes. If a customer suddenly stayed away, the business owner would have noticed this and would have thought about this (Peppers / Rogers 1997.21). Accordingly revenue was based on direct relations with customers and on what a business man knew and remembered about over his individual customers. Nonetheless this phenomenon started to disappear in the economy after the industrial revolution (Peppers/Rogers 1997.21).

Then after a long period suddenly in the 50ies production seemed to be the bottle-neck on most common markets. Demand exceeded supply with the result of a seller market. The central strategy of enterprises was to extend their production capabilities and to make distribution more efficient. A relationship to customers did not exist. The relations between customers and companies can be described as a single sided one. The bargaining power was clearly on the producer’s side.

Nonetheless in the 70ies retail companies became the first to be an equivalent and sometimes even superior partner of industry and manufacturing companies. Retail companies built up their own trade marks and gained market power compared to manufacturers (Schneider 2000.13).

One of the most important and influencing concepts in strategic planning of its time was the portfolio management issued by Boston Consulting Group (Hammer 1997.222). Obviously fitting in a producer market, the basic question of portfolio management is, in which product or service a company should invest in. However the approach seduced managers to concentrate merely on concepts but not on realizing them (Hammer 1997.222).

2.2 80ies: In search of excellence

Not until the 80ies did the situation transform into a buyer market. From then on companies had to acquire new customers actively in order to market their produced goods. Nevertheless such activities were far beyond relationships nor a management issue at that time (Schneider 2000.13).

Peters and Waterman for instance described key success factors of leading American companies in their famous book "In Search of Excellence" (Peters / Waterman 1986). Almost all of these key success factors were focussed on internal topics. During the 80ies however competition increased due to satisfied markets with simultaneous oversupply of products. Nevertheless the orientation for enterprises was not to satisfy their customers but to compete with other rivals and to compare their own efficiency through benchmarking.

This brought up management instruments like Total Quality Management (TQM) and forced enterprises to focus on processes such as leadership, production processes and communication (Dudenhöffer 1998). TQM is about analysing and improving the company’s value chain (Rapp 2000.43). One of the positive effects of TQM was that it also analysed and affected external processes such as marketing, sales, customer service. Nevertheless the majority of enterprises still improved function oriented processes and production (Rapp 2000,43).

Michael Porter’s concept of ‘competitive advantage’ and his identically named book considerably influenced strategic planning. In particular the concept of the ‘Five Forces’ helped managers to decide what to do, but again the concept was no help in achieving the goals (Hammer 1997.223). Again it is more focussing on internal difficulties.

In the late 80ies customer care subsequently was beginning to be part of marketing depart- ments and also of their core competence (Markus 2002.76). Concepts like Sales Force Auto- mation were developed the moment information technology was raised to be part of business processes (Gaul 1990). Others like the Efficient Consumer Response (ECR) strategy were a typical approach in improving inventory- and logistic systems along with sales promotion in the 80ies (Frank 1999). Rapp (2000) describes the process from TQM- via BPR- to CRMapproaches as a changing perspective which alternates from an enterprise to a customer perspective. This perspective is no longer from inside a company to the outer world, but exactly the opposite (Rapp 2000.44).

2.3 90ies: Core competence

In the early 90ies ‘Computer Aided Selling’ increased the internal efficiency next to the external impact (Frank 1999). Likewise in the early 90ies ideas like ‘Electronic Marketing’ found their way into corporate strategies (Markus 2002.76).

Schwetz (2001) at that time mentions the year 1997 in which the term ‘Customer Relationship Management’ is beginning to be a part of business language. Brown (1999) two years later already discussed three different stages of customer care: customer acquisition, customer re- tention and strategic customer care. Strategic customer care is defined as a focus on increasing the value and profitability of customers through enhanced customer care (Brown 1999.17).

Regarding the more generic side of business strategy, Michael Hammer introduced a reengi- neering concept in 1990 which resulted in a tremendous organizational change in corpora- tions. Not only was performance reconsidered, but also all processes. As a result processes became more relevant in terms of success factors and Hammer stated a few years later (1997.221) that processes even started to change the competitive position in the respective market segments. His legendary book ‘Reengineering the Corporation’ starts with a note stat- ing that corporations must undertake nothing less than a radical reinvention of how they do their work (Hammer / Champy 1993.4).

Business reengineering came along with the era of ‘core competencies’ mainly introduced by Gary Hamel and C.K. Prahalad (Hammer 1997.224). Identifying a company’s core competency already requires a defined and well known process chain. Hammer (1997.224) informs us that for many corporations this was not an easy thing to do.

On the other hand significant changes of processes seduced some companies to forget why processes originally needed to be changed. Business Processes Reengineering became a busi- ness of its own. Nevertheless some voices still expressed the need to concentrate on custom- ers:

"Reengineering should not be a mandate for downsizing or for improving those processes that are far removed from the customer and have no obvious impact on increasing customer value" (Roth 1995.470)

However in 1999, in respect of almost all market segments the supply exceeded the demand. From now on enterprises had to acquire their customers without exception in order to sell their products (Schneider 2000).

2.4 Y2K: Cost cutting

With the year 2000 a lot of economies had to confess a non growth or even decrease in their GDP. As a result demand declined and revenues were cut down. Markets were satisfied. Products became substitutes in terms of function, quality, price and form. In consequence enterprises on the one hand had to concentrate on increasing added value for customers and their own company profile in order to compete (Wiencke 1997.332). On the other hand cost cutting projects were common in almost every business. A lot of companies had to struggle with these challenges.

Shaw formulates and ranks requirements on how to take steps against these risks already in 1999:

- Customer needs: Identifying and meeting customer needs is seen as the primary goal of relationship marketing. Despite this high ranking, customer needs tracking has the lowest level of usage among measurement tools.
- Partnership: Working in partnership with suppliers and customers is the key focus, both in consumer and business-to-business markets.
- Increasing profits: Maximising customer retention and value, and so driving up profit- ability, is the goal.
- Loyalty: Building loyalty with customers, usually defined as maintaining repeat sales, is the central role of relationship marketing.
- Value: Managing and enhancing the value to both customer and company within the relationship.
- Satisfaction: The focus on satisfaction received a relatively low level of mentions, yet this is the most popular customer measure.

A survey that characterises the situation in Y2K (see figure 5) examines the most important management topics (Future Trend Institute 2002).

illustration not visible in this excerpt

Figure 5: Survey of 18 management topics

The study distinctly illustrates CRM as one of the most important topics of management tasks and issues. Consequently efforts were noticed to change the structures of sales organisations.

In the context of CRM the customer is always located at the beginning of all thoughts. The perspective changes from the business side to the customer side and the thinking from the outside to the inside. Additionally customer oriented processes are influencing the overall organization. Crucial processes are no longer current enterprise processes (like TQM). Crucial processes are customer processes. Solving the enterprise problems is not the mission. The mission is to give answers to customer problems (Rapp 2000.44).

Belz (2000.212) remarks that even revenue is no longer a reasonable target of sales divisions. Sales forces should emphasize the company's added value and the customer's uniqueness in order to act like partners (Belz 2000).

A lot of enterprises had to undergo the experience that increasing their competitive advantage through concepts like Business Reengineering, TQM or Lean Management was not enough to be successful (Handlbauer 1998.27). To do things quicker and better also meant focussing on the company’s internal processes, but not necessarily on their customers.

‘Adding value’ and ‘answers to customers’ are slogans that may sound reasonable but as a

matter of fact these are no more than verbal confessions. Slywotzky (2001) helpfully summarizes twelve critical questions for checking the knowledge of companies about themselves and their customers:

- Who are my customers?
- How are their priorities changing?
- Who should be my customer?
- How can I add value to the customers?
- How can I become the customer‘s first choice?
- What is my profit model?
- What is my current business design?
- Who are my real competitors?
- What is my toughest competitor‘s business design?
- What is my next business design?
- What is my strategic control point?
- What is my company worth?

A good number of these questions were used in the questionnaire which is part of this disser- tation.

Surviving in the recession means to balance a profit & loss with a customer orientation. Several scientists focused on key success factors like Michael Hammer who introduced his new book "Business is back to basics" (Hammer 2002). In this, his latest book, he explains his new approach to business processes and determines the expression of a "customer economy" (Hammer 2002.15). Hammer basically works out nine essential chapters which have to be seen independently from each other. In these chapters he reflects on strategies and recommendations about changing business processes so that they become more customer oriented (Hammer 2002). Hammer's nine topics are (Hammer 2002):

- Become "easy to do business with"
- Give your customer "more added value"
- Processes have priority
- Systemise creativity
- Make measurement part of management
- Manage without structures
- Concentrate on your customer
- Cooperate
- Integrate virtual

These nine topics may represent the reorientation of enterprises: away from shrinking strategies in order to reach profitable sizes they are now concentrating on growth-increasing forward strategies. A more detailed review of these nine topics is given in chapter 4.2.2.

Handlbauer (1998.30) examines the relation between customer loyalty and customer satisfaction. The result points out that there is a high correlation between both dimensions. In other words: customers that are satisfied seem to be more committed to a company, will recommend it to friends and seem to be less sensitive to heightened prices (Handlbauer 1998.30). Contrary opinions are part of chapter 4.3.3.

2.5 Summary

The aim of this chapter was to give an overview of relationships between companies and their customers due to market conditions. Major business models fitting in these market conditions were also highlighted. This chapter shall has positioned the research questions into a historical context.

3 STEP ONE: CUSTOMER RELATION MANAGEMENT

“Companies that sell what they produce will die. Companies that produce what they sell will survive” (Sprenger 1998.271) This chapter will deal with the evolution of Marketing to CRM and discusses appropriate definitions of CRM. Furthermore today’s CRM market will be discussed and a demonstration of CRM functionalities will be given. The intention of the chapter is to give a realistic picture of today’s situation in CRM.

3.1 From Marketing to CRM

As mentioned in chapter 2 the marketing driven 70ies resulted in a “Segment-of-One” strategy in the late 80ies (Oetinger 1997.347). This was an enormous step to an individualized and dia- logue driven communication of companies with their customers. Table 1 (Winger / Edelmann 1997.382) shows the correlation between the information needed and the possible segmenta- tion approaches.

illustration not visible in this excerpt

Table 1: Marketing approaches

Apparently the use of customized information increases the customer commitment. As a result the role of marketing changed (Oetinger 1997.350).

According to markets that will no longer be driven by what manufacturers choose to make and sell, but by what customers want to buy, the era of mass marketing seems to be over. To put it in a provocative way: marketing is dead. If customers were to be treated as part of a company’s financial assets, they then required investments. In times when profits are increas- ingly hard to earn, this money will have to be separated from advertising budgets and perhaps headquarter overheads.

This development from traditional marketing to CRM is illuminated in the table below (Ro- land Berger Strategy Consultants 2002c). CRM differs from classical marketing in many ways:

illustration not visible in this excerpt

Table 2: From Marketing to CRM

Until the early 90ies classical marketing made use of advertisement in print, TV and radio which resulted in a lack of transparency regarding efficiency and effectiveness of the cam- paigns. CRM based marketing changes the communication environment by adding more value through the following differentiators (Roland Berger Strategy Consultants 2002a):

- The Content: Time, kind, range of information
- The Medium: Email, SMS, letter, fax, posters, announcement, sponsoring, etc.

Customer Relationship management is found to be a promising instrument for the optimiza- tion of business to consumer (B2C) relationships. CRM offers the chance to win competitive advantages. In order to keep contact with consumers a wide range of CRM instruments is al- ready used. Integrating all existing instruments into a holistic CRM concept is one of the main topics. Figure 6 (Amacher 2000) shows the increasing amount of techniques used in customer related approaches divided into technical platform, SW, Middleware and solutions .

illustration not visible in this excerpt

Figure 6: Use of IT in CRM approaches

Modern information and communication technologies are a crucial factor for CRM. Depending upon the assigned technology one can differ between eCRM (linkage of e-Commerce and CRM) and mCRM (linkage of m-Commerce and CRM). Whether as on-line or off-line application all variants use the comprehensive possibilities of efficient data processing.

When IBM started its CRM initiative in 1998 (Vogt 1998.170) they initially investigated cus- tomer’s needs such as ‘fulfilling commitments’, ‘simplifying business processes’, ‘offering the best proposal already in the beginning’ and ‘understanding the customer business in order to offer the best solution’. Following Vogt IBM decided to change processes only within the sales and marketing department. This way of implementation illustrates the dilemma of the early years of CRM: CRM was understood to cover a minor part of the whole value chain.

3.2 Market conditions

In 2001 International Data Corporation (IDC) predicted brilliant future prospects for CRM businesses: The CRM sector was said to increase in the year 2005 to a volume of 3.8 billion dollars. Only a few months later IDC reduced its prognosis to 2.4 billion dollars. Forrester Research calculated a decrease of 5 % of the revenue from CRM solutions in 2002 (Roth 2002).

In a marketing efficiency study Roland Berger Strategy Consultants (2002a) conclude that efficiency in marketing becomes one of the main topics: More than one third of the enterprises plan steep cuts in marketing budgets. They estimate savings of more than 10 %.

Roth (2002) illustrates that today’s CRM market is in consolidation. While in the year 2000 the software providers could still sell numerous CRM solutions today the market is very quiet. The prognoses in the meantime are again positive, but on the other side several forecasts have already proved to be not too reliable.

Many middle sized CRM software providers have admitted their negative development or are glad if they survive. But even the software giants have to fight with problems: Siebel Systems with a market share of approximately 25% in Western Europe and thus the Big Player in this segment realized 28% less in revenue in 2002 than one year ago. Also the German software company SAP announced a decrease by 3% in CRM license business in 2002 (Roth 2002).

"Actually the money for CRM projects is there. But the companies do not exactly know what they get from such an investment" states Ralf Korb, chairman of the ‘CRM-Forum of the German direct marketing association’ (Deutscher Direktmarketing Verband) (Roth 2002).

Accordingly many enterprises reject from investing in CRM projects since rumours of failing rates extend up to 80%. "Our understanding changes of what CRM is. The term CRM is too much connected with technology and therefore by many is disapproved. There are many arguments to include into the calculations" declares Nick Hewson, Managing Director of the Hewson Group (Roth 2002).

This experience is confirmed by Roland Berger Strategy Consultants which investigates that only 27% of the companies surveyed are satisfied with the implementation of CRM. 77% of the companies surveyed are neutral or are rather dissatisfied with the implementation of CRM (Roland Berger Strategy Consultants 2002b).

One reason may lie in underestimating the new challenges the companies are confronted with (Roland Berger Strategy Consultants 2002c):

- The dynamic changes in the market and competitive environment call for a reorienta- tion of corporate strategies and structures
- Customer Relationship Management offers a comprehensive solution to the market challenge
- Customer Relationship Management approaches are still often driven by IT solutions

3.3 Definitions

The intention of this chapter is to select an appropriate definition of CRM which will be used in this dissertation. Several definitions are already in existence. Leading experts define CRM as:

- CRM is a business philosophy regarding customer identification and saving customer bases as well as optimizing the customer value. The conversion of this philosophy is realized by automation of all horizontal business processes, which involve sales, marketing and customer services over multiple communication channels (Meta Group 1999 in Amacher 2000).
- Customer relationship management is an interactive process for achieving the opti- mum balance between corporate investments and the satisfaction of customer needs to generate the maximum profit. CRM involves (Shaw 1999):

- measuring both inputs across all functions including marketing, sales and ser- vice costs and outputs in terms of customer revenue, profit and value. o acquiring and continuously updating knowledge about customer needs, moti- vation and behaviour over the lifetime of the relationship.

- applying customer knowledge to continuously improve performance through a process of learning from successes and failures.

- integrating the activities of marketing, sales and service to achieve a common goal.

- the implementation of appropriate systems to support customer knowledge ac- quisition, sharing and the measurement of CRM effectiveness.

- constantly flexing the balance between marketing, sales and service inputs against changing customer needs to maximize profits.

- Marketing is building and sustaining customer and infrastructure relationships. It is the integration of customers into the company's design, development, manufacturing, and sales processes. All employees need to be in the business of building customer rela- tionships (McKenna 1993).

- “CRM is a strategy for the improvement of the quality of customer contacts in sales, support and marketing with the goal of an optimized customer satisfaction, customer loyalty and increased profit.” (Rapp 2000.56).

- “Probably we should think of it in terms of relationship management as much as rela- tionship marketing - and relationship management necessitates cross-functional, process-based approaches." (Christopher 1998)

- CRM is not (Rapp 2000.55):

- a new slogan for customer satisfaction o a new kind of direct marketing o an IT solution Obviously several definitions of CRM are reported nowadays in literature. The range of defi- nitions is wide and reaches from philosophical to communicational approaches (Markus 2002). Markus (2002.81) suggests four different perspectives on how CRM could be seen:

- Management perspective: CRM as a corporate strategy

- Process perspective: customer centric products and processes

- Controlling perspective: increase customer and shareholder value

- Technology perspective: integrated customer information

Compared with key account management (KAM) CRM is to transfer the advantages of Oneto-One customer relationships to the mass-market. Of course, not every customer can be attended by an individual responsible person. Nevertheless it shall be possible to serve the customer continuously through the individual requested process. This requires competent coworkers equipped with access to relevant information in the form of a CRM system (Wehrmeister 2001.278). In addition, Christopher (1998) has introduced a broader view of markets. The framework outlined in his book, Relationship Marketing for Competitive Advantage, consists of six markets: internal market, referral market, influencers market, employees market, suppliers market as well as customers market.

The previous definitions shall demonstrate the wide range of existing meanings. In this dissertation the following definition is suggested:

Customer company relationships contain strategies which shall align all enterprise processes consistently to profitable customers. This intention stands for recognizing the customer’s needs and their expectations. With CRM the enterprise shall be able to react individually to valuable partnerships with their customers. Involved in this are all departments which have customer contact and all communication channels to the customer.

As a result this dissertation will now distinguish between

1. Customer Relation Management (CRM) (chapter 3)
2. Customer Centric Business Models (CCBM) (chapter 4)

with the intention of differentiating between a sales oriented and a process oriented approach of customer company relationships.

3.4 CRM sectors

CRM is divided into different sectors in terms of objectives. This chapter will illuminate the main areas of CRM by giving an overview of existing functionalities.

The basis for all individualizing concepts is the ability to store and understand the customer’s behaviour (Winger / Edelmann 1997.382). Generic ways to increase the value for customers can be divided into (Roth 1995.459) operational excellence, product leadership in addition to customer intimacy.

In a cross-industry survey Roland Berger Strategy Consultants (2002b) investigate the main project focus when talking about CRM. They report that CRM projects focus on:

- Customer loyalty
- Customer segmentation
- Target group concepts
- Customer data integration

The survey indicates a wide range of functions delivered by CRM systems. This can be explained by the fact that customer oriented information systems have already existed for quite a time. Especially in the early years some of them became independent solutions. To be mentioned are (Sexauer 2001.191):

- Database Marketing
- Computer Aided Selling
- Call Centre Solution
- Online Marketing

Another classification of CRM sectors is given by Meier (2001.16) who defines CRM as a balanced combination out of:

- Classical Marketing
- Campaign management
- Customer commitment programs o One-to-One Marketing
- Information Technology o Data warehouse
- CRM-Software
- Customer Contact
- Call Centre Management
- Customer Interaction Centre

In order to compare CRM approaches of different companies on a more holistic basis Roland Berger Strategy Consultants (2002b) suggest dividing CRM into enabler and processes as follows:

CRM enabler
- CRM strategy
- Organization
- Culture
- Technology

CRM processes
- Data collection integration
- Customer data analyses
- Customer segmentation
- Products/services and pricing
- Communication and branding
- Multi-client ownership
- Multi-channel management
- e-commerce
- Sales Force Automation
- Customer service
- Loyalty programs
- Customer satisfaction

This classification allows responses to questions on specific CRM issues such as the room for improvement (figure 7 (Roland Berger Strategy Consultants 2002b)).

illustration not visible in this excerpt

Figure 7: CRM gap analyses

However, this dissertation follows an approach by Hippner / Wilde (2002) who describe the central tasks of a CRM system as a:

- Systematic consolidation and analyses of all customer information
- Operational support and synchronisation of marketing, selling and services
- Controlling and integration of all customer communication channels

[...]

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Details

Title
Customer Centric Business Models - Two Steps Beyond Customer Relation Management
College
University of Applied Sciences Ludwigshafen  (MBA International Management Consulting - University of Ludwigshafen, University of Lincoln)
Course
MBA
Author
Year
2003
Pages
128
Catalog Number
V21211
ISBN (eBook)
9783638248792
File size
1290 KB
Language
English
Tags
Customer, Centric, Business, Models, Steps, Beyond, Relation, Management
Quote paper
Thomas Rolf (Author), 2003, Customer Centric Business Models - Two Steps Beyond Customer Relation Management, Munich, GRIN Verlag, https://www.grin.com/document/21211

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