31 Mar 2003  Research & Ideas

How Your Employees and Customers Drive a New Value Profit Chain

Thinking of your customers and employees as key creators of value can produce profitable results. Harvard Business School professors W. Earl Sasser and James L. Heskett discuss their new book, The Value Profit Chain. Plus: Book excerpt.

 

It may be time to think about who really creates value in your organization, starting with customers and employees. Harvard Business School professors W. Earl Sasser and James L. Heskett discuss their book, The Value Profit Chain.

Mahoney: The premise that happy employees produce happy customers, and happy customers produce value for investors, makes sense. Why do so many employers fail to follow this logic?

Sasser: I'm not sure I would use the word 'happy' unless 'happy' is a synonym for highly satisfied. The key is that organizations are in value exchanges with both their employees and customers. If the organization does not create superior value for its employees, it is very difficult for the employees to produce superior value for customers. By leveraging value to both employees and customers relative to its costs, an organization delivers value to its investors.

Q: You give the example of Wal-Mart, where the employees' well-being is created in part by company meetings to which family members (children, parents, spouses) are invited. What are some other ideas you would recommend to companies in order to strengthen employee morale?

Heskett: The point here concerns ways in which super-large organizations can maintain a sense of "family." In Wal-Mart's case, it involves such things as clear channels of communications, particularly electronic but also involving frequent store visits by senior executives who spend a great deal of their time in the field; bringing people back to Bentonville headquarters for recognition; and executive merchandising contests that create incentives for executives to spend more time in the stores.

All of this reflects basic company values and culture. In other very large organizations, anything that is intended to encourage executives to provide on-the-scene examples of how the organization's values are lived on the job is important. This invariably requires a larger-than-normal travel and communication budget, incentives for top management executives to spend more time in the field alongside front-line employees, frequent recognition, and involvement of top management in the hiring and retention decisions regarding large numbers of managers.

Many organizations don't know the profitability of their existing customers. Many treat all customers basically the same.
—W. Earl Sasser

Q: Your research supports what people in today's job market don't want to hear—that companies should create fewer, more significant jobs. This strategy seems to have the potential to damage employee morale. How can companies use work-force reduction to successfully reengineer an organization?

Sasser: Operating with fewer, better people can provide a competitive platform upon which to grow the business. As we move more and more to a knowledge economy, brains, not brawn, create the winning hand.

Q: The current mantra in the business world is 'customers first.' But treating customers like employees means that some customers will need to be let go. Can companies afford to be choosy in the current economic climate? What methods can managers use to develop existing customers, and identify those who just don't fit?

Sasser: Many organizations don't know the profitability of their existing customers. Many treat all customers basically the same. Allocating resources to retain the most profitable and to induce customer behaviors that lead to greater profitability is the key to survival. Typically, 20 percent of the customers or clients are producing 80 percent of the profits. Many of the other customers are unprofitable on a fully loaded cost basis. If these customers are not contributing to covering the overhead, let them go quietly. The best approach is to raise prices slightly to these customers. Most are "mercenaries" who will quickly, but quietly, switch to a lower-priced competitor.

Q: The effectiveness of the Value Exchange is improved through efficient information management. Mobil's Speedpass (read book excerpt here) is an example of how knowing your customer can lead to the creation of new products, increased loyalty, and the acquisition of new customers. How can companies begin to integrate knowledge transfer into their organizations? How can companies be sure they are collecting the right information?

Heskett: The collection and processing of information about customers is one of the most critical functions performed by the "listening" organization. It provides incentives for and recognizes the involvement of sales, customer service, and field service personnel in this effort. It combines information obtained from the field along with that assembled at headquarters from other sources of information. This is the foundation of value exchange, particularly if the information collected describes the needs not only of ultimate customers but also of intermediaries such as retailers and wholesalers.

Q: What is the most important take-away? What can business leaders start doing now to improve their Value Profit Chain?

Heskett: The first step toward the development of a value profit chain is that of obtaining an understanding of customer lifetime value and that of true employee value at various levels in the organization. These are the drivers of subsequent effort in many organizations we've observed. From this understanding on the part of top management a sequence of efforts to establish a vision, values, and specific actions flows.

How Speedpass endeared customers to Mobil

by James L. Heskett, W. Earl Sasser, and Leonard A. Schlesinger

Value, what one receives for what one pays, is second nature to customers. However, it is so often forgotten by those serving them that it holds the key to successful competitive opportunities designed to differentiate products and services. Consider the case of Mobil's Speedpass, developed in 1996 under the leadership of Joe Giordana, then a marketing manager for the company. It became one of the most successful innovations in the history of petroleum retailing.

For years, petroleum marketers have sought solutions to the problem of gassing up cars, a process their marketing research had told them repeatedly was regarded by customers as a necessary evil—second only to dental work—to be minimized if at all possible. One by one, they sought to eliminate what customers hated most. Thus self-service was almost immediately successful, most commonly thought to be because of lower prices offered to do-it-yourselfers. As a matter of fact, just as many consumers valued the elimination of waiting time and the interaction with service station employees. Self-service still required a payment process that many customers found inconvenient, however, that is, until Speedpass, a device the size of a key chain that is waved at a reader on a gas pump for gasoline and used for other purchases in service station stores, which are then billed to a credit card. It sounds simple—but it wasn't. 3

First, Mobil had to identify those who would be most likely to try Speedpass. In its tests, it found that they were likely to be more tech friendly, time constrained, educated, and affluent than average consumers. Then Mobil had to prove that Speedpass worked, speeding up an undesirable task while providing accurate, timely billing as well as access to other products and services. In tests, Speedpass reduced the average time to gas up, roughly 3.5 minutes, by 30 seconds. Unless it resulted in more sales, however, it would be hard to convince service station and convenience store owners to pay for the Speedpass technology, costing $15,000. These fears were eased when it was found that Speedpass users visited Mobil stations one more time per month than other Mobil customers. Thus, Speedpass was found to be a device for leveraging value over cost for both customers and retailers.

Once the convenience of Speedpass was proven to the early innovators, larger groups of potential users had to be exposed to not only Speedpass but to the way in which it could be used, a task for a massive television advertising program. By 2001, Speedpass was regularly being used by 5 million consumers. Of these, many were thought to have switched allegiance from another brand of gasoline in an industry in which customer allegiance was thought to be influenced largely by price and convenience rather than brand. Further, Speedpass users, because they were more likely to concentrate their purchases at Mobil stations and to include nongasoline items in those purchases, were found to spend significantly more per month than other customers.

Reprinted by permission of The Free Press. Excerpted from The Value Profit Chain: Treat Employees Like Customers and Customers Like Employees by James L. Heskett, W. Earl Sasser, and Leonard A. Schlesinger. Copyright 2003 by James L. Heskett, W. Earl Sasser, and Leonard A. Schlesinger. All Rights Reserved.

Footnotes:

3. Much of this section is based on Keith H. Hammonds, "Pay As You Go," Fast Company, November 2001, pp. 44-46.

About the author

Leonard A. Schlesinger, a co-author with James L. Heskett and W. Earl Sasser of The Value Profit Chain, formerly taught at Harvard Business School. He is now Chief Operating Officer of Limited Brands.