Don't sell the customer short

In the last of a series on stakeholding, David Wheeler and Maria Sillanpaa argue that business should heed the views of consumers

CONCERN for the rights of customers has not always been the top priority for business. Price-fixing, profiteering and exaggerated product claims were constant temptations for manufacturers and retailers in the early years of the industrial revolution. The founding father of free enterprise, the economist Adam Smith, observed that "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Happily, a few systems have developed over the past 200 years to prevent the worst abuses of the customer. There are regulatory frameworks at national and international levels which guard against the circumvention of free trade principles by cartels and monopolies. And there is a general understanding of the importance of product quality, safety and reliability throughout industry and commerce.

But there are few areas of stakeholder relations which remain as ambiguous and complex as the relationship between a company and its customers. Putting goods and services into a market and selling them involves important commercial and ethical choices. Markets are not value-free zones. Monetary factors govern pricing - ie costs of production, distribution and margins versus the ability of the customer to pay. But increasingly it is product quality, reputation and brand strength which drive the final purchasing decision.

This is why branding is taken so seriously today, and why companies like McDonald's, Coca Cola and Nike spend billions of dollars every year on advertising and promotion to support their brand "values". Often these values are little more than lifestyle statements aimed at targeted age- groups. It is estimated that by the time they reach the age of 18, American children have been exposed to 350,000 advertisements. In America tobacco company sponsorship of sports and other activities of interest to the young tops $5bn per annum.

Advertising represents one-way communication; often of the megaphone variety. And all too often it appeals to the worst in people. According to figures released by the UK Advertising Standards Authority last week, complaints about the sexist portrayal of women in advertising doubled last year.

A more sophisticated approach is to conduct two-way communications with customers so that their values and needs can constantly feed back through the supply chain, leading to continuous adjustment and readjustment of products and services.

In recent years there have been many examples of mainstream companies which have forged deep relationships with their customers using novel approaches to the alignment of values. In some cases this has involved complete reinvention of the "value chain".

IKEA has a worldwide network of stores selling simple, low-cost, high- quality furnishings, made to Scandinavian design but globally sourced. The key to IKEA's success is a redefinition of the value equation between the company and its customers. The company's stores are convenient to use and provide family-friendly facilities. Their goods are mostly flat- packed for self-assembly at home. The deal is that customers add their own effort in return for a lower-cost product.

Another phenomenon which illustrates the importance of understanding the changing values of customers is the rise of the green consumer. In 1995, the Co-operative Wholesale Society published a report based on the UK's "largest ever independent survey of ethical concerns" entitled Responsible Retailing. The Co-op found that 57 per cent of the British public were more worried about the ethical history of the products they bought than five years previously. A third claimed to have boycotted a shop or product on ethical grounds.

A MORI poll in 1995 found that 23 per cent of Britons avoided using products or services with a poor environmental record, and 40 per cent claimed to choose "environmentally friendly" products.

A number of companies have been able to ride this wave of rising ethical concern and strike a chord with their customers' values. The Body Shop and the Co-op bank are obvious examples in Britain. In the US, there are many more examples of companies which have taken on campaigns which resonate strongly with all stakeholders, including customers.

Some of the most powerful testaments to effective customer engagement are quite subtle. In Britain, the mixed fortunes of the privatised utilities are of special interest. Contrast the positive reputation of British Telecom - a company committed to mass communication with customers - with the appalling public relations of the water companies and British Gas. Who can dispute that "it's good to talk"? It is not surprising that BT recently became the first FT-SE 100 company to commit itself to a systematic process of stakeholder auditing and reporting - a process designed to formalise communications with stakeholder groups.

Three US shoe companies have vied for moral leadership on social issues: Ryka Inc, a women's sports shoe supplier, has pioneered campaigns on violence against women; Reebok has promoted awareness of human rights issues; and Timberland has taken on racism through mass advertising. Levi Strauss has championed the rights of textile producers in developing countries. Patagonia is committed to organic cotton for its clothing.

These examples of successful British and American companies illustrate the potential for constructive emotional engagement with customers and other stakeholders. It is just as easy to cite classic case studies of companies which have made monumental errors of judgement on customer values. Consumer boycotts of Shell (over Brent Spar and its involvement in Nigeria), Nestle (linked to the sale of baby milk formulations in developing countries) and Mitsubishi (because of logging operations in Asia) are among the best known.

Brand owners do not have things all their own way. Counterfeiting and bootlegging are still big business in fashion and the music and entertainments industry. And supermarket chains still provide occasional entertainment when they tread on the toes of heavyweight players in highly branded markets. In 1995, Grand Met took exception to UK supermarket chain Asda producing look-alike products. According to the drinks giant, Asda's "Windward Caribbean white rum with coconut" bore an uncanny resemblance to Malibu Caribbean white rum with coconut.

Despite the huge advertising spends of the big corporations, we do not see this type of one-way communication as a guarantor of long-term prosperity.

In an increasingly globalised economy we believe that the two most important drivers for market differentiation and commercial success will be the quality of the product offered and the depth of the relationship between vendor and customer. Advertising can play a role in reinforcing both of these, but it provides no substitute, particularly as print and broadcast media fragment, and as potential customers go to the Internet and other specialist sources for product information.

As we described in last week's article on employee participation, maximising customer satisfaction with product quality requires a seamless alignment of needs and expectations throughout the supply chain: from providers of basic materials and services, via the employees of intermediaries, to the end-user or consumer. The business case for quality is well established: customers are a lot easier to retain than they are to win, and customer satisfaction is the key element in establishing long-term loyalty.

According to Frederich Reicheld, author of The Loyalty Effect, employee loyalty and customer loyalty are very closely related.

On average, US companies lose 50 per cent of their customers every five years, and 50 per cent of their employees every four years. But the most successful companies in America hold on to their employees and customers much longer.

Japanese companies are well known for their commitment both to employee loyalty and customer satisfaction. The commercial success of companies like Honda and Matsushita is no coincidence. The Japanese electrical giant is now the 18th largest company in the world, just behind IBM, employing a quarter of a million people.

The important thing to bear in mind here is that "quality" is not just about physical attributes. For goods and services it may also mean satisfying emotional needs, concerns about health and well-being, and assumptions on reliability and convenience. And for today's "green consumers" it also means taking account of the social, environmental and animal welfare impacts of production and use.

The concept of total quality management (TQM) is based on this all-embracing view. The European Foundation for Quality Management European Quality Award (EQA) sets a standard which is perhaps the best example of an integrated approach to aligning customer values with business processes. The EQA uses a system which makes explicit the links between leadership, internal processes - eg staff training and development - customer satisfaction and business success.

In coming years it is doubtful whether every British company will be able to compete on costs with competitors based in the low-wage, low-regulation economies of China and South-east Asia. Where textiles have gone, motor manufacturing and electronic goods will increasingly follow. But one of the most enduring factors still working in favour of British industry is its ability to maintain and deepen relationships with customers in Britain and overseas. The time to start talking is now.

q The authors may be contacted at The New Academy of Business - Centre for Stakeholding and Sustainable Enterprise, Kingston University Business School, Kingston Hill, Kingston Upon Thames KT2 7LB.