Making Customer Value a Boardroom Priority
By Jill Griffin and Marilyn R. Seymann

Question: What one factor can drive organic corporate growth, sustainable
earnings, strong profitability, a growing market capitalization and brand equity
appreciation? Answer: Customer Value. At the heart of a firm's sustained
financial health is the faithful creation and delivery of customer value defined as
the rewards---real or perceived, tangible or intangible--garnered by customers
through their experience of selecting and using a company's products and
services. Yet, in most boardrooms, the issue of customer value gets largely
ignored.
Weaving Customer Value into Board Oversight
In his book, Boards That Deliver, Ram Charan writes, "How a board goes about its
monitoring function has a big impact on the business. The board's approach to
monitoring sends important signals to management. If the board solely ensures
regulatory and legal compliance and digs into the minutiae, management tends to
focus on details and reporting requirements. If, on the other hand, the board
broadens its monitoring role to include an assessment of the drivers of business
health, it helps management be more forward looking and focused on critical
issues. The board's monitoring can then add significant value."
Sadly, in many boardrooms, very little time is routinely dedicated to issues that
drive the company's future performance. What's a board to do? Look for ways to
integrate customer value issues into already-established oversight areas including
(1) corporate strategy, (2) financial performance, (3) operations performance and
(4) risk management. What follows is a quick look at each of these areas and
some suggestions on how a customer value focus can help a board director make
richer contributions to each of the four.Shaping and Monitoring Corporate Strategy
The most important part of a board's role is to set corporate strategy in
cooperation with management, define the risk parameters inherent in the
strategy and ensure the corporation has the talent to realize the strategy.
However, board participation should not stop there. The board should also
periodically 'test' the strategy's competitive resilience through questions that
center around customer value issues. Such questions could include:
· What key factors drive customer purchase decisions and customer
perceptions of value? How does this strategy address them?
· What are customers' most important priorities and what elements of this
strategy are matched to them? What priorities are not well served?
· How does this strategy compare to competitors? What differentiates it,
and does the customer care about that differentiation?
· How are old and new competitors affecting key customer purchase drivers
and the customer's perception of value? How does this strategy address
these shifts?
· How do we make money with this strategy? What are customers willing to
pay a premium for?
· How long will this strategy be sustainable? What changes in customer
value priorities will require a change in current strategy?
· What set of short-term metrics can be used to determine how well the
strategy is working and when changes to the strategy may be needed?
Monitoring Financial Health
By their very nature, a company's financial results are lagging indicators, and can
remain strong even while powerful, damaging customer value shifts are in the
making. The forward-looking board also focuses on leading indicators to help
shed insight on what the future holds. Directors should consider the following
four financial sensors and how they can help detect customer value shifts.
1. Margin. In their book, Winning the Race for Value, authors Sheehy, Bracey
and Frazier observe, "If you watch where margin is going, you will find it isusually chasing value. Margin is a surrogate for value; when value shifts,
margin follows. Thus tracking the margins of your firm and competing firms
can point you to where value is headed. By tracking margin, you can actually
"see" the movement of value in the numbers. If a product commands 20%
margins in an industry whose overall margins are 5% to 6%, then something is
up. The perceived value of this product is clearly higher than its competitors."
Case in Point: Where can a director find great role models for
commanding high margins? Look for firms that excel in commodity-
infested markets. Meet Granite Rock co-CEO Bruce Woolpert whose
family's one-hundred-plus-year old business quarries granite and has a
dozen sites between San Francisco and Monterey. In an industry where
low bid typically reigns supreme, Granite Rock customers have historically
paid, on average, 6 percent more than they would with the competition.
Citing one of many customer-value lessons, Woolpert reported, "We
thought we had done a great job after we had done our mining process and
run the rock through the plant, and created these beautiful, uniform
stockpiles of rock." But customer value research showed Woolpert that
getting customer trucks loaded and back on the road was more important
to this segment of customers. "And so we developed a new system called
Granite Express with our benchmarking partner Wells Fargo Bank. Our new
system automatically loads trucks like an ATM machine." The truck driver
simply swipes an authorization card that closely resembles a credit card,
pulls the truck in, and a machine loads the truck automatically. This loading
service is available to drivers 24/7. Woolpert reported, "It used to take
twenty four minutes from the time you left the public road to get loaded,
get your sales tag, and be out on the public road again. We've got that
down to seven minutes now. And …..[he quotes California's trucking minute
valuation at the time of the interview] so that seventeen minute savings is
now something that cities and counties and contractors and individuals
who come into our quarries can benefit from."How did the marketplace reward Granite Rock? Market share doubled.
And, explained Woolpert, "We did it not by cutting prices, not by stealing
our competitors' salespeople, or any of those kinds of things. We did it by
changing ourselves."
2. Competitive Growth Rates. A director should monitor who, among the firm's
competitors, is not growing and who is. When doing so, put aside size and
profitability comparisons and focus singularly on growth. Customer value
winners often start small, but grow very quickly. Probing management about
the "why's" behind this growth and its affect on corporate strategy can help a
director fulfill the customer value watch-dog role.

3. Market Valuation. As irrational as the market can seem at times, it is still one
of the best and most useful value barometers available to directors of public
companies. The board's routine monitoring of market valuation of all the
players in a firm's competitive space can reveal insightful, important patterns
regarding customer value shifts.

4. Brand Equity Changes. The value of a brand--it's equity-- is a powerful,
invisible asset for determining corporate value. (At the heart of strong brand
equity is strong value as perceived by the customer.) Strong brand equity
allows your firm to (1) command a price premium without suffering a loss of
revenue and (2) command a larger market share, at a give price, vs.
competitors. So how does a board measure brand equity? One effective
approach is offered by USC Marketing Professors Deborah MacInnis and C.W.
Park who outline their straight-forward, two-part calculation (using a firm's
basic financial information) in their instructive article, "How to Measure Brand
Equity" (www.MarketingProfs.com). In monitoring the brand equity metric, a
director should probe on the following:
· When brand equity is on the rise: What factor(s) are driving this
escalation? Is it sustainable? Why or why not?
· When brand equity is on a downward trend: What factor(s) are driving this
decline? How can the decline be halted?· When band equity is stable: How can brand equity be
jump-started into an upward trajectory?
Operating Performance
Measuring What Matters. While financials report how the business performed
yesterday, it's critical that the board monitor what is happening now,
operationally, that, in turn leads to future financial results. Ideally, this
monitoring begins with management and the board identifying the critical
activities driving financial performance and how to measure them. A director's
healthy skepticism is helpful here, because management is often confused about
what the important customer value drivers really are. As the following case,
(originally profiled in the Harvard Business Review article "Bringing Customers
Into the Boardroom" authored by McGovern, Court, Quelch and Crawford) shows,
customer value research can help.
Case in Point. Innovation is a much acclaimed jewel in Starbuck's
customer value proposition. ( Think: " Half Caff, Triple Tall, French Vanilla,
Soy, No Foam, 140 degrees, With Whip, Carmel Maccahiato" Starbucks
beverage order.) To drive growth, the coffee giant has steadily pursued
new beverage development for its retail stores. But mysteriously, over
time, as menu innovations increased, customer satisfaction scores
decreased. (Starbuck researched showed a "highly satisfied" customer
spent $4.42 per visit , while an "unsatisfied customer" spent $3.88.)
Customer value research revealed that 75% of customers reported fast,
friendly, convenient service was highly important, while only 15%
considered new, innovative beverages to be highly important. Bottomline,
customer wait time was crucial to the customer's perception of value
delivery. With this insight, Starbucks aggressively added staff to cut wait
times, streamlined order taking and drink preparation and introduced the
Starbucks Card to quicken payment . The result: Customer satisfaction
levels jumped 20%. Before these wait time improvements, 54% of
customers were served in less than three minutes. Afterward theimprovements, 85% of customers were served in less than three minutes.
But the value saga continues….
The customer's value definition is always in flux and an "over-delivery" on
one value factor may cause under-performance on another. That was
Starbucks Chairman Howard Schultz's big worry earlier this year, when, as
reported by the Wall Street Journal, he sent a blunt memo to Starbucks
executives via email with the subject line "The Commoditization of the
Starbucks Experience." In it, he specifically questioned whether the chain's
aggressive growth and efficiency initiatives (i.e. wait times, etc.) were now
robbing the customer of the unique experience so pivotal to the brand's
storied success. About the chain's switch to automatic espresso machines,
he wrote, "We solved a major problem in terms of speed of service and
efficiency. At the same time, we overlooked the fact that we would
remove much of the romance and theatre." The decision to move to this
new machine, he wrote, "became even more damaging" since it "blocked
the visual sight line the customer previously had to watch the drink being
made, and for the intimate experience with the barista." Regarding the
move to "flavor locking packaging" which eliminated the need for fresh
coffee to be scooped from bins, he observed, "We achieved fresh roasted
bagged coffee, but at what cost? [We suffered] the loss of aroma---perhaps
the most powerful non-verbal signal we had in our stores."
A firm must continually scrutinize its customer value delivery and directors can
serve as important "sets of eyes" in this critical oversight.
The Employee--Customer Value Connection. Who creates and delivers
customer value? Employees. That's why keeping employees 'engaged' should be
an important area for management and its board to monitor. Just ask customer
service champion, Wachovia. The banking leader routinely measures employee
engagement and defines it by three areas: speaking positively about the
organization, exhibiting a strong desire to continue working for the organization,
and exerting extra effort to serve customers and contribute to the organization's
success.Do engaged employees drive financial results? Retail giant Best Buy's analytics
say yes. For the past decade, the retailer has been measuring employee
engagement and its effect on store performance. Analytics have shown that for
th
every 10 of a point increase in employee engagement, the stores saw a
$100,000 increase in operating income.
But what about disengaged employees? Now more than ever, the dark side of
employee behavior demands board oversight. That's because the Internet is a
virtual tool kit for disgruntled employees who want to damage a company's
customer value delivery systems. Consider the case of UBS PaineWebber analyst
Roger Duronio. Upset by what he considered to be a meager annual bonus, the
employee released a logic bomb virus that disabled 2,000 of the firm's Unix
servers. Because of this sabotage, UBS financial traders were unable to make
trades for up to several weeks in some locations. Four long years later, the
company reports that some of the systems have still not been recovered. While
not disclosing the cost of the lost business, the firm reported costs of $3 million
for system reinstatement. (Mr. Duronio was convicted of computer sabotage and
sentenced to 97 months in prison.)
Monitoring Risk
When contemplating financial risks, a director must keep an eye out for possible
customer value "potholes". Consider the following four examples:
Customer Revenue Risk. When it comes to customer revenue distribution,
forget the 80/20 rule. Most firms have far more revenue concentrated with a few
large customers than the Pareto Principle contends. (A recent customer analysis
for the regional office of a "Big Four" accounting firm found 63% of the region's
net revenue was driven by just 3% of the firm's clients!) Directors should
periodically probe for such risks, ensuring management has thought through the
necessary "what if" contingencies.
Analytical Competitors. A new breed of competitor is emerging in most every
industry: The company that uses analytics, data and fact-based decision making.
Look no further than Casino operator Harrah's and its enormous financial success.Reports Harrah's CEO Gary Loveman, "We use database marketing and decision-
science-based analytical tools to widen the gap between us and casino operators
who base their customer incentives more on intuition than evidence."
To succeed as an analytical competitor, data intelligence must be focused on the
"right", high-impact areas of the business. For Harrah's, that means leveraging
the data to provide custom-tailored service experiences for high value customers.
Directors should assist management in anticipating this new form of competition,
where its application can provide greatest leverage for the firm, and how to best
prepare to compete on this emerging turf.
Over-reliance on "Old Media". Is the firm's marketing plan focused primarily on
"old" media such as TV, radio, print, billboards? Or has "new", Internet-related
media earned a budget line or, at minimum, some experimentation opportunity
within the firm's media mix? Are metrics in place to measure ROI? Younger
consumers are Internet users and an over-reliance on old media can be a risk to
future sales. Ensuring that management is routinely evaluating new media
opportunities should be an important board oversight.
New Products and the Talent Pool to Deliver Them. A director's focus on
customer value should prompt questions about the firm's future pipeline of
products and services: Where is customer value migrating and how is that
impacting the company's product development strategies? What new employee
skill sets will be necessary to execute these plans?
Winning Customer Value Starts in the Boardroom
Leveraging customer value is a critical, challenging corporate discipline that
deserves board oversight. But doing it well can be tough. Why? Because the
oversight requires a willful "forward-focused" director mentality and a hefty
tolerance for "shades of grey." This can be especially difficult for any board
director accustomed to debating issues that are largely "black and white."
Additionally, the more successful the firm's history, the harder the director must
often work to help management move beyond its "we've always done it this way"
mindset and address the possible value shifts looming on the horizon. Twofactors can help a board accomplish its oversight responsibilities: (1) Maintain a
healthy skepticism when probing management about customer value --- become
a careful listener for "fact" vs. "management gut feel." (2) Know that, as a
director, your true value to management, shareholders, and all other
stakeholders resides in your thoughtful "what if" probes and your willingness to
challenge the status quo. After all, winning the race for customer value begins in
the boardroom.