This case study looks at the adverse impact of a changing market environment on a, hitherto, highly successful business strategy. It also highlights the value of in depth customer feedback surveys that measure relative as well as absolute performance.
The subject of this case study is a transport company that specialised in collecting containers from the port and delivering them to clients. The Company used its own fleet of trucks and delivered containers within a 30 kms radius of its depot that was located a short distance from the wharf. Although it had a number of direct customers, the majority of its business was with freight forwarding companies who out-sourced this stage of their operations to a transport specialist. The freight forwarders would place orders with the transport company and indicate to which of their clients the containers were to be delivered. The transport company would invoice the freight forwarders who in turn would invoice their clients. I’ll refer to the transport company as Lightning Pty Ltd.
Over a period of seven years, three customer feedback surveys were conducted that not only measured customer satisfaction levels in Lightning’s performance but also measured them in relation to Lightning’s competitors. Lightning’s business strategy was to offer customers an unrivalled quality of service for which their customers would be willing to pay a significant premium.
The litmus test of service quality in this industry is the ability of the wharf carrier to deliver containers to the customer’s premises on time. Plus or minus 30 minutes from the stated time is the target. Lightning’s management realised that this goal could only be met by making a very significant change to the traditional supply chain. Instead of picking up containers directly from the wharf and delivering them to customers, Lightning negotiated with the stevedoring companies to pick up containers in the early hours of the morning which were then delivered to their own depot where they were unloaded and stored for a matter of hours before being uploaded and delivered to customers at a time of the customer’s choosing. Whilst this involved adding extra steps to the supply chain, it avoided the interminable and unpredictable delays associated with the traditional modus operandi that made delivery to the final customer a lottery. Lightning supported this operational master stroke with exemplary customer service and a sophisticated in-house IT system addressing the complete order fulfilment process from order placement to invoicing the customer.
The first survey confirmed the success of this strategy. The overall customer satisfaction rating was 80% (any percentage over 79% is excellent) but, more importantly, customers regarded Lightning’s service as vastly superior to their competitors. Respondents were asked to name the two closest competitors to Lightning. If they were capable of doing this – and in this first survey there were many respondents who said that Lightning didn’t have any competitors – they were asked whether they currently used or had recently used the competitors in question. If they had they were asked to state whether they considered Lightning to be “better”, “same” or “worse” than the competitor on the four key parameters of –
■ Quality of carrier service
■ Quality of customer support
■ Quality of IT systems
■ Value for money
A sentence of definition for each of the above was read out to the respondent to ensure consistency of interpretation.
If the percentage of “better” votes exceeded the sum of the “same” and “worse” votes – i.e. over 50% – Lightning was considered to have a competitive advantage. In the first survey, the “better” percentages were 80%, 74%, 92% and 71% respectively – a remarkable performance. The 71% for Value for Money was achieved despite the fact that 42% of respondents rated Lightning’s charges as more expensive than other wharf carriers.
The second survey was conducted four years later. In the intervening period, Lightning had gone on line with their IT system so customers could log on and book “slots” for container deliveries. A tracking system was also installed. In addition, Lightning had also strengthened their business relationships with their customers’ decision-makers so that it was as strong as that between both parties’ operations staff. As a consequence of these initiatives, Lightning’s Customer Satisfaction Index reached a heady 84%.
However, contrary to what one might have expected, their competitive position declined in each of the four attributes measured. Quality of Service dropped 4 percentage points to 76%; Quality of Customer Support 6 percentage points to 68%; Quality of IT systems 2 percentage points to 90% and, most significantly, Value for Money 14 percentage points to 57%. In addition, the percentage of Lightning’s customers who considered their charges as higher than other wharf carriers had risen from 42% to 68%. So what had happened to cause this decline in Lightning’s competitive position?
First, it must be said that its competitive position was still very healthy. After all, the percentage of “better” votes was still comfortably in excess of 50% for each of the four attributes. Nevertheless, although there was a long way to go, their competitors had started to close the gap. Across the four attributes the number of “same” votes had doubled to 24%. The biggest decline had been in Value for Money. I use a universal pricing formula where the price – P must equal or be less than the Customer’s Own Perceived Value – P =< COPV – if a customer is to continue to buy your product or service. Lightning had continued to be aggressive in their pricing strategy and, consequently, a greater percentage of clients, who in Survey 1, felt that the service charges were less than the COPV, now thought that the service charges were equal to or even slightly greater than their perception of the value received. However, Lightning management concluded that there was no need to modify what the feedback told them was a winning strategy.
The third survey was conducted a year on from the onset of the GFC. The decrease in the overall number of containers entering the port led to further consequences that had a major impact on Lightning’s competitive position.
■ Being the port’s largest wharf carrier, the drop in container traffic had a disproportionate impact. Lightning’s ability to offset the fall in overall demand by increasing its market share was very limited.
■ The supply of wharf carrier capacity exceeded demand for the first time for many years
■ This led to greater price competition and lower market prices
■ Because carriers were not operating at full capacity, many were able to improve on their ability to deliver at the time their customers requested
■ The freight forwarders were also feeling the pinch as were many of their customers. The final customer usually has a preference for containers to be delivered in the morning before 10.00am so they have the remainder of the day to unstuff them, often with casual labour. This understandable preference is not ideal from the wharf carrier’s perspective as it results in poor utilisation of capacity. Having the largest fleet of vehicles and drivers, this was a particular problem for Lightning. Everyone wanted containers delivered between 7.00am and 10.00am and then deliveries dropped off sharply. In the face of a fall in overall demand for Lightning’s services and poor utilisation of their resources, Lightning had no option but to reduce their resources to contain overheads but this action in turn reduced their ability to cope with peak demand and deliver containers at the time requested
■ Because of all these factors, the service gap between Lightning and its competitors closed significantly and one competitor, in particular, developed a strategy that out-flanked Lightning’s previously unassailable position in IT systems. One of the shortcomings of Lightning’s on-line booking system was that it was developed in-house and was incompatible with the off-the-shelf systems that freight forwarders were using. This led to double entry by the freight forwarders’ operations staff. When there was no viable alternative, this inconvenience was willingly accepted by Lightning’s clients but then one of Lightning’s competitors offered an EDI (Electronic Data Interchange) solution that negated the need for double entry.
The combination of all the above factors did not impact on Lightning’s Customer Satisfaction Index that remained at a very healthy 83% but the number of respondents who regarded Lightning’s service charges as higher than their competitors rose another 10% to 78%, almost double that of the first survey. However, the Company’s competitive position had markedly deteriorated.
Those respondents who considered the Quality of Carrier service to be “better” than the nominated competitors had declined 23% to 53%; Quality of Customer support was down to 55% from 68%. Their major competitor’s adoption of direct data entry reduced the number of “better” votes from 90% to a still healthy 76%. But by far the biggest and most serious fall was in Value for Money. The 71% of respondents in Survey 1 who considered that Lightning offered “better” value for money had now declined to a lowly 26%. 37% of respondents now felt that Lightning’s Value for Money was “worse”.
Lightning’s strategy of offering a premium service at premium prices had reached its use-by date. It was simply not tenable in the new market environment. The lessons to be learned?
■ Economic forecasters may have been invented to make weather forecasters look good but there is one economic forecast that has withstood the test of time and that is that when overall supply is greater than overall demand, prices will fall. When market prices falls, some suppliers may still command a premium but it is a premium based on a lower price
■ In a capitalist economy, customer satisfaction levels are not necessarily the best indicator of the supplier’s performance. It is the supplier’s relative performance that counts. After all, if one supplier’s performance is bad but still better than its competitors, that supplier will still have a competitive advantage.
■ Like most markets that witness the entry of an innovative new player, the wharf carrier market split into a number of different segments over time. At the time of the first survey, Lightning created a segment of its own. Now there is a) premium segment occupied by Lightning and one competitor, b) an economy segment comprising those carriers that offer an acceptable lower cost alternative for the rate conscious customer and c) the small boutique carriers who perform minor miracles on much smaller volumes.
■ All business strategies are founded on a number of assumptions. Lightning’s was no exception.
● It was clear to the planners that wharf cartage was hopelessly inefficient and that prospective clients would readily welcome a new entrant that would challenge accepted practices and provide an unrivaled level of service.
● Uncoupling the pick up of containers from the dock with their delivery to the customer was the key strategy that made that level of service possible.
● Furthermore when you have zero market share, general economic parameters are not that significant, especially in a market with many competitors and relatively low barriers to entry.
● Freight forwarders proved willing to pay a premium for the service because if they calculated the total extra costs incurred when dealing with their existing carriers and the angst that late deliveries caused their clients, the premium was well worth it.
It is inevitable that over time some of the assumptions on which the original strategy was founded will no longer hold true.
● Firstly, the competitive scene changes. When a new entrant raises the bar of customer expectations, two things will happen. Its success attracts other new entrants who believe they can emulate it and the best of the existing companies raise their own game.
● Secondly, a business strategy founded on zero market share must be reviewed and modified as market share rises. The old sporting adage that it’s harder to stay at the top than it is to get there is no less true in business.
● Thirdly, my experience of the feedback from customer surveys leads me to believe that customer service in all its forms is the number one determinant of high satisfaction levels. However, as high satisfaction levels attract new customers and the demands on the customer service providers increase, it becomes harder and harder for the previous standards to be maintained.
● Furthermore, there is a natural tendency to focus one’s time on the new customers at the expense of the existing ones.
■ When reviewing a business strategy, one has to separate the external environment from the internal one. One has no choice but to adapt to changes in the external environment. Lightning had no choice but to adapt to the implications of the GFC on its business. Pricing – an internal factor – was within their control as were their IT systems.
■ Finally when a business strategy is approaching its use-by date, management has to be able to distinguish between “doing the right thing” and “doing things right”. Is it the strategy itself that needs revision or do the problems lie in its execution? Most organisations are very reluctant to change the former, particularly if it has proved successful over time but, if indeed, that is where the problems lie, no amount of “doing things right” will improve the organisation’s performance.
There is no argument that strategies have a shorter lifespan these days. The old practice that a three year strategy remained untouched until the three years were up is not tenable. Strategies need to be reviewed on a regular basis or whenever an assumption is challenged by a change in the external environment. As an engineering friend of mine pointed out, it’s easier to change direction when you are moving than it is when you are standing still.
Graham Haines is the principal of Plans to Reality, a consultancy that specialises in the effective execution of business and strategic plans. His client feedback surveys are used to establish the current reality prior to strategy formulation and to measure progress towards the resultant goals. He is the author of a unique business book – “Execution to Die For – the Manager’s Guide to Making It Happen”. He can be contacted via his web site email@example.com