The Imperative of National Customer Satisfaction Measures By

The Imperative of National Customer Satisfaction Measures By Professor Claes Fornell University of Michigan Mexico City, September 2009

Sources of Economic Growth Productivity Quality Sustainable Economic Growth © 2009 CFI Group. All

Benefits to the Economic Decision Makers Investors Business Managers Government Consumers © 2009 CFI

Investors Need to Know… The relationship between a firm’s current condition and its future

Managers Need to Know… How to improve the firm’s current condition by allocating scarce resources such that the strength of the customer relationships are maximized © 2009 CFI Group. All rights reserved. 4

Government Needs to Know… How to best encourage economic growth and living standards for

Consumers Need to Have… A voice in measures that reflect their economic living standards

Why Now? The Economy is Changing © 2009 CFI Group. All rights reserved. 7

Why Now? The Global Forces Movement of: Information Capital Work (not labor) Shift in

Consumer utility is the true standard for economic growth Sellers compete for buyer satisfaction

Implications • The cost of poor service will be borne by the seller • When buyers are powerful, assets of supply (balance sheet assets) have little predictive power • Productivity and quality of economic output must be better balanced • Capital follows power © 2009 CFI Group. All rights reserved. 10

ACSI: A Growing Presence in the US “The American Customer Satisfaction Index, the definitive benchmark of how buyers feel about what business is selling them. ” - New York Times, August 8, 2004 © 2009 CFI Group. All rights reserved. 11

A Brief Introduction to ACSI: Data 280, 000 telephone numbers Sampled randomly Screened: Recent experience as a customer of the selected companies 80, 000 telephone interviews + 4, 000 internet interviews © 2009 CFI Group. All rights reserved. 12

A Brief Introduction to ACSI: Analysis The ACSI Equations where h¢ = (h 1, h 2, . . . , hm) and x¢ = (x 1, x 2, . . . , xn) are vectors of unobserved endogenous and exogenous variables, respectively; B (m x m) is a matrix of coefficient parameters for h; and G (m x n) is a matrix of coefficient parameters for x. The PLS estimation implies that E[hz¢] = 0, E[xz¢] = 0, and E[z] = 0, where z = h - E[h|h, x]. © 2009 CFI Group. All rights reserved. 13

A Brief Introduction to ACSI: Analysis The ACSI Equations © 2009 CFI Group. All

A Brief Introduction to ACSI: Analysis The ACSI Equations where y¢ = (y 1, y 2, . . . , yp) and x¢ = (x 1, x 2, . . . , xq) are the measured endogenous and exogenous variables, respectively. Ly (p x m) and Lx (q x n) are the corresponding regression coefficient matrices. By implication from PLS estimation (Fornell and Bookstein, 1982), the noise or measurement error has the properties E[e] = 0, E[d] = 0, E[he¢] = 0, and E[xd¢] = 0. © 2009 CFI Group. All rights reserved. 15

ACSI Scores – National, Sector & Industry Q 3 2008 – Q 2 2009 76. 1 Utilities 73. 7 E-Business 81. 5 Transportation 72. 6 Manufacturing/ Nondurable Goods 82. 3 Information 70. 2 Public Administration/ Government 67. 9 Hospitals 77 Ambulatory Care 80 Health Care & Social Assistance 78. 5 Retail Trade 75. 2 76 74 74 76 78 Supermarkets Gasoline Stations Department & Discount Stores Specialty Retail Stores Health & Personal Care Stores Hotels 75 Full Service Restaurants 84 Limited Service Restaurants 78 Accommodation & Food Services 78. 9 Finance & Insurance 76. 0 75 84 73 78 81 Banks Credit Unions Health Insurance Life Insurance Property & Casualty Insurance Manufacturing/ Durable Goods 81. 6 E-Commerce 80. 0 Energy Utilities 74 Airlines 64 U. S. Postal Service 74 Express Delivery 82 Newspapers 63 Motion Pictures 74 Computer Software 75 Fixed Line Telephone Service 72 Wireless Telephone Service 69 Cellular Telephones 72 Cable & Satellite TV 63 Network Cable TV News 71 Personal Computers Electronics (TV/VCR/DVD) Major Appliances Automobiles & Light Vehicles © 2009 CFI Group. All rights reserved. 75 83 81 84 17 74 Internet News & Information 83 Internet Portals/Search Engines 83 84 79 85 Food Manufacturing Pet Food Athletic Shoes Personal Care & Cleaning Products 83 Soft Drinks 83 Breweries 78 Cigarettes 80 Apparel 68. 0 Local Government 67. 8 Federal Government 82 Retail 74 Brokerage 75 Travel

A Brief introduction to ACSI: Graphic Model Perceived Product Quality Perceived Service Quality • Reliability • Customization • Overall Customer Complaints Perceived Overall Quality • Overall • Customization • Reliability Customer Expectations Customer Satisfaction (ACSI) Perceived Value • Price Given Quality • Quality Given Price • • • Overall • Customization • Reliability © 2009 CFI Group. All rights reserved. Satisfaction Comparison w/ Ideal Confirm/Disconfirm Expectations • Complaint Behavior Customer Loyalty • Repurchase Likelihood • Price Tolerance • (Reservation Price) 18

Growth in ACSI and Consumer Spending: 1995 – 2009 (Q 2) 8% 7% 6% 5% Annualized, Seasonally Adjusted Rate of Growth 6% 4% 3% 4% 2% 1% 2% 0% -1% 0% -2% -3% -2% -4% -5% -4% % Quarterly Change in Consumer Spending % Quarterly Change in ACSI (lagged) -6% -7% -8% Source: Consumer Spending from U. S. Department of Commerce, Bureau of Economic Analysis © 2009 CFI Group. All rights reserved. -6% 19

The Global Context Global Forces: Information Capital Work (not labor) How do they affect

The Buyer – Seller Relationship Who Benefits Most? • Who is getting more choice?

The Buyer – Seller Relationship The Result: The balance of power between buyers and

The Effects Punishment and Rewards Corporate Balance Sheets Capital Movements Business Strategy © 2009

For Investors: Do customers know something investors don’t? © 2009 CFI Group. All rights

The Conventional Answer: No, because markets are efficient and reflect all available information ©

But… How does this information reach investors (satisfied customers are not on the balance

Is there another answer? © 2009 CFI Group. All rights reserved. 27

Shift in Power Between Buyer and Sellers Capital Follows Power © 2009 CFI Group.

Rewards and Punishment The Successful Seller Product Markets Repea t Buyin g tal api

Rewards and Punishment The Unsuccessful Seller Punished by: • Buyer defection in product markets

Can You Beat the Market? Only if you know something that others don’t ©

10 Years of Annual Returns CSAT Stock Portfolio 2000 - 2009* 50% S&P 500 40% 36% ACSI Stock Portfolio 31% 30% 26% 22% Yearly Performance 20% 13% 11% 14% 18% 16% 9% 10% 4% 3% 0% -10% -6% -9% -12% -13% -20% -23% -26% -30% -40% -39% -50% 2000 2001 2002 2003 2004 *2009 is YTD through September 18 © 2009 CFI Group. All rights reserved. 32 2005 2006 2007 2008 2009

Even Lower Risk – Market Neutral vs. HFRX Equity Market Neutral Index *2009 is

From Investment to Business Management Good Customer Asset Measurement Tells Us: • What the company has done to its customers • What customers will do to the company • What the company can do to affect the above in the future © 2009 CFI Group. All rights reserved. 34

For Management What Losers Do > Buy customer loyalty with price discounts > Get short term profit at the expense of weakening customer relationships > Get too close to the customer > Try to exceed customer expectations © 2009 CFI Group. All rights reserved. 35

For Management What Winners Do > Manage customer relationships as true economic assets > Balance productivity and service quality > Maximize customer complaints > Earn loyalty of customers by satisfying them > Combine time and space © 2009 CFI Group. All rights reserved. 36