Using the Drucker Institute’s five-dimensional model of corporate effectiveness, firms can expect to see financial gains if they improve customer satisfaction.
The Wall Street Journal’s recently released ranking of the Management Top 250 offers a holistic appraisal of the corporate effectiveness of America’s largest public companies. The rankings are based on the Drucker model and measurement system developed by our team at the Drucker Institute. Behind the top 250 is a longer list of 693 large-cap, U.S. and Canadian firms that were ranked by the institute. These rankings and the underlying dimensional ratings shed light on the role of intangibles, such as customer satisfaction, in driving business success. The conceptual foundation for our work is drawn from the writings of the late Peter Drucker, generally regarded as the “father of modern management,” who also commented on marketing and customer satisfaction saying, “To satisfy the customer is the mission and purpose of every business.”
A firm’s Drucker Score is derived from a validated model that treats corporate effectiveness as a higher-order construct (aka “latent variable”) that’s composed of five performance dimensions: customer satisfaction, employee engagement and development, innovation, social responsibility (including environmental, social and governance factors) and financial strength. The model is operationalized using 37 specific indicators from a wide variety of third-party sources; eight indicators focus on customer satisfaction.
The nonfinancial metrics were all current as of the first quarter of 2017, but depending on the timing of data capture by the sources, some largely reflect 2016 performance. The financials were current as of June 30, 2017. Drucker measurements are at the firm level, not the brand level, and the firm is the unit of analysis. Brand-specific scores were averaged for firms with multiple brands.
The eight indicators of customer satisfaction in the Drucker Model include the American Customer Satisfaction Index (both absolute and industry-relative), an index of five Temkin measurements (both absolute and industry-relative), Satmetrix net promoter scores (both absolute and relative), the CSRHub Product Rating (absolute only) and the wRatings Corporation Quality Gap Score (absolute only). The first six are applicable to B-to-C businesses while the latter two cover both B-to-C and B-to-B firms.
CSRHub excepted, all indicators involve the collection of primary data from samples of customers. CSRHub is an aggregator of massive amounts of secondary data. While all eight indicators were found to converge on the same customer satisfaction dimension, they are not interchangeable. Some are probably better-suited to certain purposes than others, (e.g., predicting the economy versus assessing touch points or getting a quick read on loyalty).
The Wall Street Journal highlighted the top-scoring companies overall and by dimension. Among the 15 highest scorers in customer satisfaction were B-to-B tech providers Hewlett Packard Enterprise Co., Teradata and Cisco Systems; B-to-C seller Molson Coors Brewing; and JetBlue Airways, which has both commercial and consumer clients.
Though the performance of individual firms makes for interesting case studies, insights may also be gained by looking at the data through an industry lens. The Global Industry Classification System (GICS) group with the highest average customer satisfaction scores was automobiles and their components. Among U.S. vehicle manufacturers, Ford did particularly well. It’s also noteworthy that three auto component suppliers were among the Wall Street Journal’s top companies for customer satisfaction (Autoliv, Tenneco and Johnson Controls). These findings suggest that customer satisfaction is best assured when each firm in the entire supply chain is striving for it. Some of the factors contributing to an aligned supply chain may include channel leadership, the adoption of industry quality standards and competitive pressure. Though the auto industry has recently dealt with quality issues (e.g., Takata airbags) and reputational scandal (e.g., Volkswagen emissions), these appear exceptions rather than the rule. Takata and Volkswagen are not U.S. companies, so they are unranked.
Three related industries with notably high average scores were food and staples retailing (e.g., United Natural Foods and Costco); household and personal products (e.g., Kimberley-Clark and COTY); and food, beverage and tobacco (e.g., Dean Foods and PepsiCo). Those clusters basically represent the enormous supply chain that puts food on your table and cleaning products under your sink.
Another cluster of industries with high customer satisfaction scores might simply be labelled “technology” and includes software and services (e.g., First Data Corp, Salesforce.com, Oracle and IBM); semiconductors (e.g., Nvidia and Analog Devices); and technology hardware and equipment (e.g., TE Connectivity, Juniper Networks and Apple).
Perhaps the most fundamental insight gleaned from the Drucker modeling is the considerable overlap that exists among all five dimensions of performance. That overlap is what we interpret as corporate effectiveness. While the Drucker Institute’s efforts to date have been focused on creating a single, summative measure of effectiveness, we recognize that there are cause-effect linkages among the five dimensions and that they are probably mutually reinforcing. The institute is just now turning its attention to unraveling those influences.
For example, we observe that customer satisfaction is correlated with the other four dimensions, but we were surprised to find that the weakest correlation is with employee engagement and development. Considering all that has been written about the employee-customer-profit chain (and before that the service-profit chain), we expected a stronger correlation. Adopting an industry lens may help explain the contrary finding. Specifically, we observe that most of the higher correlations between customer satisfaction and employee engagement involve service industries. The industries with the strongest linkage were telecommunications, consumer services (e.g., restaurants and lodging) and transportation (e.g., airlines, railroad and rental cars). Utilities and insurance were not far behind. These industries all involve high customer contact or have a major customer service component. Based on these results, we are led to the proposition that the relationship between employee engagement and customer satisfaction is not always strong or direct and may be mediated by other factors such as innovation. Further research is underway to examine that theory.
A businessperson might wonder what our data reveal about the link between customer satisfaction and financial performance (measured in terms of market share, shareholder returns, return on invested capital, return on assets, return on equity, earnings and economic profit). As others before us have found, we detect a solid correlation. Yet it is important to remember that correlation does not prove causality. Is it possible that the flow of influence is from financial performance to customer satisfaction or that reciprocal causation exists? Perhaps companies that do well financially are more likely to invest in customer satisfaction because they have the resources to do so.
Though our work does not directly address that issue, we have a smoking gun based on a multiyear analysis that examined the cross-lag effects of the performance of intangibles (combining customer satisfaction, employee engagement, innovation and social responsibility) on financial performance and vice versa. We found that the main flow of influence is from the intangibles to financial performance. Specifically, it appears that a 1.0 standard unit improvement in the performance of intangibles drives a 0.26 standard unit improvement in financial performance over two years. To put that in context, a firm that moves from the 50th to the 70th percentile on the intangibles composite in the first year of study could expect to see its return on invested capital rise by 1.5% by the third year (a change from 10% to 11.5% on average). One way to boost the performance of intangibles is by increasing customer satisfaction.
Lam Research is a firm that has realized these gains. Lam is a leading supplier of chip-making equipment to the semiconductor industry. From 2012 to 2016 Lam’s intangibles T-score rose from 46 to 58 due, in part, to a nine-point improvement in customer satisfaction (T-scores have a mean of 50, a standard deviation of 10 and generally range from 0 to 100). During that same period, Lam saw operating return on invested capital rise from 4.83% to 11.76% while its stock price climbed from $36 per share to $106. In 2016, Lam received top supplier awards from both Intel and Infineon, who cited Lam’s continuous pursuit of excellence, its quality, value and service commitment.
We feel that the database being built around the Drucker Model (including five years of past data and plans to repeat the rankings on an annual basis) will prove to be a treasure trove of insights for marketers.
Lawrence A. Crosby is the retired dean of the Drucker School of Management. He is the chief data scientist at the KH Moon Center for a Functioning Society, a part of the Drucker Institute at Claremont Graduate University.