The Spoiled American

An underlying shortcoming exists that prevents U.S. companies from globalizing— U.S. companies and the managers and executives who run them are spoiled.

[powerpress: http://gsbm-med.pepperdine.edu/gbr/audio/summer2010/spoiled.mp3]

Global exports

At the start of his administration, President Obama set a goal to double exports from U.S. companies. The hope was that increasing exports would dramatically benefit the U.S. economy in a number of ways. Chiefly among these would be to significantly improve the U.S. balance of payments, and also to measurably decrease unemployment as more workers were needed to produce U.S. exports.

Tremendous opportunities do exist for U.S. companies to expand exports (and international business in general). However, an underlying shortcoming exists that prevents U.S. companies from globalizing—U.S. companies and the managers and executives who run them are spoiled. In this article, I assert that because U.S. companies have achieved relatively easy success in serving their domestic markets compared to their counterparts in other countries that have had a lengthy history of serving multi-country markets, it will be difficult to achieve the Obama administration’s goals until U.S. companies overcome their “domestic complacency.”

Do the Numbers Make Sense?

Is the assumption that doubling U.S. exports will benefit the U.S. economy true? In 2009, the U.S. trade balance suffered an estimated deficit of approximately $450 billion (exports of $1 trillion, imports of $1.45 trillion). Assuming no reduction in imports, simple math tells us that doubling exports would produce a swing from a $450 billion deficit to a $550 billion surplus ($2 trillion less a constant level of imports of $1.45 trillion). So, we can conclude that achievement of the administration’s goal of simply doubling exports would certainly resolve the problem of a negative trade balance.

The implications for employment could be just as strikingly positive. Assuming that the economy has increased by the $1 trillion in exports (or approximately an additional 7 percent in 2009 GDP of over $14 trillion), we must also assume an equivalent increase in the number of jobs needed, thus unemployment would decrease from approximately 15 million (about 10 percent) to 5.34 million, or a 3.5 percent unemployment rate. In other words, a 7 percent increase in the GDP would result in an increase of 7 percent in the number of employed. While this model may be oversimplified, for our purposes, I believe that we could agree that such dramatic increases in exports would doubtlessly result in very attractive positives for the U.S. economy.

Potential for More Exports?

The real question is, is the doubling of exports a realistic goal? Is there room in the market for more exporters? How maxed out are companies in the U.S. in their export capabilities? How many U.S. companies could export more and to more countries? Or do more U.S. companies who do little or no exporting need to be convinced to begin exporting (and then presumably assisted in doing so)? Implicit in the Obama initiative is the desire to get companies who already export to expand their reach to more countries under the assumption that it’s a lot easier to convince the “converted” than to convert non-exporting U.S. companies to think globally for the first time.

In terms of how many U.S. companies are currently involved in exporting, the short answer is not many:

  • U.S. exports in 2009 accounted for approximately $1 trillion U.S. in goods, representing only 7 percent of the U.S. economy and involved a much smaller portion of total companies (discussed below).[1]
  • The Department of Commerce reports that only 1 percent of all U.S. companies export to another country. Of the approximately 17,000 large U.S. companies (with over 500 employees) who are presumably better positioned to export, only an estimated 5,000 (29 percent) are exporting to at least one country.[1]
  • The total number of U.S. exporters decline to 0.5 percent when the contiguous NAFTA countries (Canada and Mexico) are stripped out of these figures. The number of U.S. large companies decline to 12 percent.[1]

The takeaway from these facts is that the U.S. economy is much more dependent on internal demand as the driver of its success, and when this suffers a downturn as it has in recent years, the U.S. economy doesn’t have the advantage of appealing to a global marketplace. Thus, very significant opportunities exist to increase exports through: (1) encouraging the companies that are already exporting, primarily to Canada and Mexico, to expand their export activities to other countries, and (2) stimulating the 99 percent of companies (and over 70 percent of large companies) to begin exporting for the first time. Emerging markets may still be relatively booming during the current downturn, but the U.S. doesn’t benefit from this as it is not really serving these markets as much as it could and should. In fact, the one major emerging market to which we do export a lot, China, enjoys an approximate $225 billion goods trade surplus with the U.S., (over three times the amount that the U.S. exports to China). On the other hand, both developed and emerging markets such as Germany and China are, in order of magnitude, much larger exporters than the U.S., and enjoy major trade surpluses, as is well known.

One might argue that the U.S. economy doesn’t really need to export: we are already very global. A significant number of U.S. companies have set up operations in other countries and are therefore manufacturing and providing services in these countries so we don’t need to export from the U.S. It would stand to reason then that our export numbers are so low because our foreign direct investment (FDI), which measures the extent of our activities in other countries, is so high.

However, this argument doesn’t really hold water. According to research conducted by A.T. Kearney, the U.S. continues to rank near the bottom of the top 60 countries in terms of FDI.[2] Furthermore, to the extent that a company has investments in other countries, it is most likely already exporting to that country as part of its global sourcing strategy, so the export numbers presumably already reflect the influence of FDI to some extent.

So why do so few companies export and why this tremendous shortfall in the globalization of the U.S economy when such an orientation and effort is sorely needed? How did we get so far behind most other economies? And are we likely to stay there?

I believe that the shortfall exists and will continue to exist for the two major inter-related reasons stated above: (1) U.S. companies are spoiled; and (2) American managers and executives themselves are also spoiled.

The Spoiled American Company

In general, U.S. companies are spoiled because historically they have needed only to operate in the relative simplicity of their very familiar home country market to be successful. This situation is unlike that of companies in other countries, like Germany, which has had to search out markets in several countries.[3] And, unfortunately, it seems that the vast majority of U.S. companies believe either that their home country market will continue to sustain them for the foreseeable future or if it is not currently, it will resume soon once the U.S. returns to its position as the dominant global market.

We can understand easily the reasons for this thinking. For decades the U.S. markets have been the largest globally as well as the fastest growing for most goods, certainly enough so to support even the most ambitious of companies’ business expectations. But this is changing; for example, in 2007 consumer spending in emerging markets was equal to that of the U.S., and has continued to grow. In fact, JPMorgan Chase projects that by the end of 2010, almost 35  percent of the world’s consumer spending total will be in emerging markets, while the United State’s share will have declined to approximately 27 percent.[4]

So do U.S. companies really understand the importance of emerging markets? That doesn’t seem to be the case. A recent McKinsey Global Survey reported that North American companies have made the lowest rate of actions to capture emerging market growth than any other region.[5]

According to the New York Times, Coca-Cola, the premier global brand, reported disappointing quarterly profits earlier this year, primarily due to weak sales in the U.S., their largest single-country market, (although three-quarters of sales come from outside North America). Specifically, sales in the U.S. declined by 2 percent, while volume increases in emerging markets were in double digits, for example, India (+29 percent), Turkey (+18 percent), Brazil (+12 percent), as well as in Russia, Egypt, Vietnam, and the Philippines.[6] Clearly, Coca-Cola shouldn’t need convincing to energetically pursue volume in emerging markets.

There are those who argue that this global imbalance will right itself once things return to normal, but it’s not quite clear how they intend for this to happen. Do they believe that the U.S. will return to growth rates as high as or greater than emerging markets, for example, and/or that the rest of the world’s growth will slow down? Or do they mean that goods in other countries will become more expensive, for example, from a revaluation of their currencies (think China) so that U.S. prices will become more attractive globally? Or do they believe that Congress will be able to restrict imports, which will allow U.S. companies to replace imported goods with locally manufactured goods?

Few economists that I’ve been exposed to honestly believe that any of the above will happen or will have much of a positive effect. In the past when we’ve tried to dampen imports, for example during the Great Depression through import restrictions, the rest of the world did likewise in retaliation, thus severely restricting U.S. exports and pushing the country (and the world) into an even greater Depression. And, recent speeches by Congress blaming China’s unwillingness to revalue their currency for the trade imbalance are only wishful thinking. It is unreasonable to assume that a rise in Chinese prices will automatically persuade consumers to beat a path to the doors of U.S. companies. Very few analysts agree that any reasonable increase in Chinese prices will make much of a dent in the massive U.S. trade deficit with the rest of the world through increased U.S. exports or decreased imports from China, but perhaps it’s easier to blame somebody else for our lack of success.

The Spoiled American Executive

It is my experience that, in a business environment where there has been little or no exposure to international business, American managers have perceived little need to focus their career aspirations on anywhere else but the U.S. And, as discussed, this negatively affects their willingness and ability to seek out international opportunities for their companies. Put another way, if a U.S. manager believes that ample career opportunities are available in the U.S., why would he or she be motivated to promote international business within a company or seek out an international career?

Societal influences may also come into play here. Perhaps our education system does not encourage international thinking. For example, foreign language education, which certainly provides one aspect of international sensitivity, lags far behind other countries. In my own international experience over a 20-year period, I found that a very high  percentage of non-American expatriate executives spoke at least a second language, and in many cases, a third or fourth language before they even embarked on their first non-home country assignment. And they always learned their host country language fairly fluently. Unlike the vast majority of American executives working internationally who attempt to survive solely in English, it’s not unusual for an experienced international executive to speak several languages.

Incidentally, as a consequence, when an American executive does take an international assignment, the associated expatriate remuneration, benefits, and perquisites that are required to support him/her far outweigh what the company would pay a local or a non-American expatriate (a so-called third country national).

Conclusion

Because of the relatively very low penetration of exports by U.S. companies, it’s clear that significant opportunities exist for increasing the U.S. economy dramatically through its export activity. But, to capitalize on these opportunities, we need to understand better why more companies are not exporting and then address the related issues. My contention is that the mindset of U.S. companies and their executives, which has been influenced by a long history of success in serving almost exclusively a domestic market, will need to shift attitudinally to one that recognizes the necessity of doing business globally. Only then can the necessary steps be taken to begin expanding U.S. exports.

[1] U.S. Bureau of Economic Analysis 2009, U.S. Census Bureau.

[2] A.T. Kearney/FOREIGN POLICY Globalization Index, 2007 Edition, ForeignPolicy.com; ATKearney.com.

[3] Lemon aid: Germany’s exporting prowess is leaving the rest of the euro area behind,” The Economist, July 8, 2010.

[4] A Special Report on Innovation in Emerging Markets,” The Economist, April 17, 2010 (p 10, exhibit 4) source: JPMorgan Chase.

[5] Five Forces Shaping the Global Economy, McKinsey Global Survey Results, 2010.

[6] Associated Press, “Coke Profit Fails To Meet Expectations,” New York Times, April 21, 2010, at B7.

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IT Outsourcing: China Grasps for the Lead

Rough economic times make the outsourcing of information technology (IT) an even more critical area of discussion for businesses. Recently, there has been a great deal of debate on whether a shift in the global outsourcing of IT is occurring. India has long been known for its dominance in the field; however, China, which plays a leading role in the outsourcing of manufacturing, is making strong headway in the industry and may soon pose a major threat to India’s supremacy.

New management models and business strategies have evolved since the onset of globalization. One such corporate strategy is global outsourcing, which is receiving more attention than ever due to its effectiveness in cutting costs.[1] Global outsourcing can be defined as a strategy that allows corporations to redesign, redefine, and reshape organizations by transferring the management and/or day-to-day execution of a business function to an external service provider.[2] Used responsibly, it can generate enormous benefits.[3] There are two countries that stand at the forefront of the global outsourcing movement: India, which is considered the mecca for outsourcing IT services, and China, which has a strong reputation in the outsourcing of manufacturing work.

India made the decision to focus on IT expertise early on; it also made developing competency in the English language a nationwide priority, thus increasing its competitive advantage in the global marketplace. India’s economy has developed through the promotion of internal consumption rather than on exports.

India’s top 10 IT companies make up approximately 45 percent of the entire global market.[4] Companies like Tata, Infosys, and Satyam enjoy worldwide reputations and attract and land multinational deals every year. In addition to English language competency and IT expertise, trust in those companies, and in India as the go-to-country for IT outsourcing, has grown because the nation successfully combines low labor costs with Western management skills.[5]

China has long been known for its low cost of labor and its evolving infrastructure, and the country has attempted to develop its economy by focusing on exports as opposed to growth through internal consumption. China is a classic example of an emergent economic power. Since opening its doors to globalization, China has efficiently utilized its resources, which mainly focused on cost advantages. Conscious of its deficit in technological expertise, China concentrated on a practical business—manufacturing.

The government, aware of the value of diversification, has continuously sought other strategies to ensure growth and has undertaken efforts to support other economic sectors, particularly its IT industry. In 2008, it handled approximately $1.6 billion in IT outsourcing services and about $14.2 billion in software exports.[6] Japan, for one, outsources many of its IT needs to China.

China versus India

China’s international deals focus mainly on product development, but it has conducted a great deal of testing for IT projects as well. China has mostly handled low-end, relatively uncomplicated IT applications,[7] but it can and does manage mid-sized applications, primarily orders from Japan and Korea. The country desperately hopes to land multinational deals in order to prove itself as a leader in IT outsourcing. As such, the Chinese government is making a significant effort to heighten the IT industry’s appeal to foreign companies and investors.[8]

Currently, standardized IT services are outsourced to China and the more complex IT services are entrusted to India. This pattern will likely continue until China develops its IT industry and addresses its major weaknesses. The issues cited most often in the literature are the level of IT expertise of Chinese workers and concerns about intellectual property rights.

While many people claim that conditions for IT outsourcing in China are not as ideal as those in India, this statement was far truer in the past than it is today. India itself is aware of the rising Chinese competition and the country’s business experts expect that it will not be long before the Chinese improve their deficiencies in order to attract more customers.

Infrastructure

China: The government has built entire cities and towns dedicated to the IT industry, presenting almost perfect conditions for companies. The most prominent example is Shenzhen, one of the fastest-growing cities in China and a preferred location for foreign investors. Moreover, the government offers tax deductions, financial support, and subsidies for new establishments.[9] Large companies, such as TCL, China’s largest electronics manufacturer, have established themselves in Shenzhen.

India: India is considered to have a fairly weak infrastructure and many external companies claim that it is insufficient and inferior to China’s. In addition, the public interest sometimes prevents changes. In China, however, once a decision is made by the government, it is implemented quickly, as with IT infrastructure expansions.







Photo: Vikram Raghuvansh







Market Structure

China: Unlike India, China does not have many large IT companies.[10] Market experts often note that the highly fragmented nature of the IT industry in China needs to change as small companies are riskier and less reliable partners than major players.[11] Many people argue that China’s IT market needs to consolidate in order to become more competitive.[12]

In today’s economy, companies must also be very cautious about political instability in foreign countries. Political instability and slow progress in providing data security in China have been causes of concern. As the industry matures, however, it is thought that fragmentation will decrease due to international interests, and laws will improve to guarantee safety.

India: Recent headlines about the Indian IT industry have been a source of alarm. At the beginning of 2009, it was revealed that the Satyam company had accounting discrepancies and the resulting negative publicity has affected the entire industry and raised the question of whether such problems could have occurred in China. Many foreign companies and investors see their businesses as endangered due to these revelations as it showed that regulations and laws in India were not as developed as expected.

To deal with the impending threat of China, Indian companies are also starting to acquire Chinese IT companies, opening the door for India’s involvement in the burgeoning market. In 2005, India invested nearly $50 million in the Chinese IT industry,[13] mainly comprised of stakes in Tata and Infosys.[14]

Quality/Track Record

China: One of the major concerns for foreign companies interested in investing in China is the country’s lack of protection for intellectual property in the form of trademarks, copyrights, or patent laws.[15] However, the government has already made dealing with piracy and other investor concerns a priority. Since China’s inclusion in the World Trade Organization in 2001, the nation has updated its laws to fulfill international demands[16] and in 2004, China announced stricter laws on intellectual property rights. Penalties for defiance of these laws have been raised significantly since then.[17]

India: India has more Capability Maturity Model (CMM)-certified companies than China. CMM is a program that determines the quality of software processes in organizations. While all of India’s top 30 companies are CMM certified, only 6 of the 30 top companies in China are certified, clearly showing the gap that the country will have to fill within the next few years.[18]

Labor Availability

China: Two serious issues linger in China—English language and IT skills. English is obligatory in interacting with foreign businesses, and while the Chinese educational system tries to emphasize the advancement of English, the population still seems to be lacking in this area. [19] In 2005, about 0.77 percent of China spoke English, compared to 10.66 percent of the population in India. [20], [21]

In addition, the country’s IT expertise is not yet at a desirable level. Although many students graduate with IT degrees from universities every year, the majority of China’s IT professionals still have less than five years’ experience.[22] Employees will require more training in order for China to become a competitive global force.

India: India has the disadvantage of higher labor costs than China. Although India has been known for its large pool of talented, low-cost workers, its wages have jumped by 25 percent since the onslaught of globalization.

Conclusion

As China continues to develop, there will be fewer reasons for an external company to avoid establishing itself there. In fact, it may be that in order to stay competitive and decrease additional costs, companies will be obliged to outsource their IT needs to China. The country’s potential has already been recognized by companies like IBM and Hewlett-Packard, both of which have established major presences there.[23] If the IT industry develops as expected, China could capture opportunities worth $56 billion by 2015.[24]

India’s acquisition of Chinese companies is a direct indicator of China’s growing IT outsourcing power. The country is trying to entrench itself in the Chinese IT industry because it anticipates China’s future capabilities. Many authors argue that China and India should consider working together in the field of IT—China would gain access to important IT expertise, while India would benefit from cheaper labor costs and a better infrastructure.

Today, India still has the lead over China in IT outsourcing and its advantages over China are still distinct. While China will almost definitely become an important force in the IT industry, the country still needs more time to develop its competencies. Many think that the Chinese IT industry will have to consider acquiring or partnering with foreign IT companies in order to grow and compete. Lenovo’s acquisition of IBM is an example of how Chinese companies can expand and “go global.” China’s leading software company Huawei Technologies has also established joint ventures with Western companies such as IBM, Siemens, 3Com, and Symantec.

Conversely, as China closes the gap between itself and India, India will have to make adjustments in its laws to prevent further scandals and companies will have to reconsider their strategies to make their offerings more attractive and maintain their customer bases. If India wants to sustain its reputation as the leader in IT outsourcing, it must also focus on both innovating and furthering its talents.[25]

[1] D. Elmuti and Y. Kathawala, “The Effects of Global Outsourcing Strategies on Participants’ Attitudes and Organizational Effectiveness,” International Journal of Manpower, 21, no. 2, (2000): 112-128.

[2] F. J. Casale, Introduction to Outsourcing, (The Outsourcing Institute, 1996).

[3] Ibid; D. Crane, “Renewed Focus on Financial Performance,” Outsourcing Center, http://www.outsourcing-bpo.com/sct.html.

[4] G. Filippo and J. Hou, “Can China Compete in IT services?” McKinsey Quarterly, 1 (2005): 10-11.

[5] J. Kotlarsky and I. Oshri, “Country Attractiveness for Offshoring and Offshore Outsourcing: Additional Considerations,” Journal of Information Technology, 23, no. 4, (2008): 228-231.

[6] T. Wang and G. Tian, “IT Outsourcing: China vs. India,” Bangkok Post, March 21, 2009. (hyperlink no longer accessible).

[7] T. Leach, “Outsourcing to China,” Bleum, September 29, 2009, http://www.bleum.com/software-outsourcing-news-events/offshore-outsourcing/outsourcing-to-china.shtml.

[8] M. Karthikeyan, “Is China a Threat to Indian IT Outsourcing?” ITonion!, January 15, 2009, http://www.itonion.com/2009/01/is-china-threat-to-indian-it.html.

[9] Z. Qu and M. Brocklehurst, “What Will it Take for China to Become a Competitive Force in Offshore Outsourcing? An Analysis of the Role of Transaction Costs in Supplier Selection,” Journal of Information Technology, 18 (2003): 53-67.

[10] B. Einhorn, “China Aims to Gain from Satyam Mess,” Business Week, January 14, 2009.

[11] E. Frauenheim, “Report: China’s Outsourcing Industry Lags India’s,” CNET News, February 3, 2005, http://news.cnet.com/Report-Chinas-outsourcing-industry-lags-Indias/2100-1011_3-5562791.html.

[12] G. Filippo and J. Hou, “Can China Compete in IT services?” McKinsey Quarterly, 1 (2005): 10-11.

[13] V. Sarma, “IT Outsourcing: China versus India,” Frost & Sullivan Market Insight, June 8, 2005, http://www.frost.com/prod/servlet/cif-econ-insight.pag?docid=39745707.

[14] B. P. Watson, “Will China Change IT?” CIO Insight, August 27, 2008, http://www.cioinsight.com/c/a/Expert-Voices/Will-China-Change-IT.

[15] G. Filippo and J. Hou, “Can China Compete in IT services?” McKinsey Quarterly, 1 (2005): 10-11.

[16] K. Sepetys and A. Cox, “China: Intellectual Property Rights Protection in China: Trends in Litigation and Economic Damages,” NERA Economic Consulting, February 17, 2009.

[17] S. S. Chan, IT Outsourcing in China: How China’s Five Emerging Drivers Are Changing the Technology Landscape and IT Industry, (The Outsourcing Institute, 2005).

[18] G. Filippo and J. Hou, “Can China Compete in IT Services?” McKinsey Quarterly, 1 (2005):1-11.

[19] E. Benni and A. Peng, “China’s Opportunity in Offshore Services,” McKinsey Quarterly, 3, no. 17 (2008).

[20] J. Yang, “Learners and Users of English in China,” English Today, 22 (2006): 3-10.

[21] Census of India, Indian Census, 10 (2003): 8-10.

[22] Karthikeyan.

[23] Watson.

[24] E. Benni and A. Peng, “China’s Opportunity in Offshore Services,” McKinsey Quarterly, 3 (2008): 17.

[25] S. Prasad, “China is India’s ‘Only Possible Threat,’” ZDNet Asia, May 9, 2008, http://www.zdnetasia.com/insight/business/0,39051970,62041177,00.htm.

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Customer Satisfaction Measurement

Firms can benefit by reviewing the lessons presented here in reviewing their own strategic opportunities.

The impact of globalization on strategy is a common theme in business literature today. More than generalizations about its importance, however, those who hope to make globalization work for them need to understand the specific opportunities and difficulties of working across national and cultural boundaries. There are nuances of attitudes and actions that are typical of a culture. Those differences may require different strategies.

One area where those differences may provide an opportunity or a pitfall is that of customer satisfaction and its measurement. In many places in the world, business organizations have been elevating the role of the customer to that of a key stakeholder over the past 20 years. Customers are viewed as a group whose satisfaction with the enterprise must be incorporated in strategic planning efforts. Forward-looking companies are finding value in directly measuring and tracking customer satisfaction (CS) as an important strategic success indicator. Evidence is mounting that placing a high priority on CS is critical to improved organizational performance in a global marketplace.

The attention given to CS, however, does vary. While few businesses would state that they don’t want to know what the customer thinks, there are those who seem to assume that the customer is satisfied with their products or services and that any attempt to measure satisfaction would be of little value. They may be correct in some cases, but in others they most surely are not; the competitor who does measure CS, and who figures out how to meet the customer’s preferences more effectively, will likely be in a position to take market share.

Sweden, Germany, the US, New Zealand, and Taiwan are among the countries that have established or initiated country-wide CS measurement programs. The European Union also has recommended a CS measurement program for its member countries. Cultural differences in the degree to which the customer mandate is embraced by management in these countries, and the manner in which it is implemented, do exist however. The concept of CS has not been embraced equally across organizations within these countries.

Germany presents a particularly interesting set of conditions. Germany has enjoyed enviable economic success in the postwar era and is often held up as a model economy whose management practices are worth emulating. At the same time, the country is widely characterized as having an inhospitable service sector. Germany’s own Customer Barometer has shown that German customers are not very satisfied and were becoming less so until very recently. This level of dissatisfaction has affected customer retention, with both loyalty and recommendation ratings dropping in virtually all industries. Businesses, whether in Germany or elsewhere, that are willing to make the effort to understand and deal with this dissatisfaction may find a profitable opportunity.

Several factors continue to pressure Germany to substantially increase its global economic activities, and understand and respond to customers. These factors include maturing domestic markets dominated by aging consumers; formation of the EU which is bringing new competitors into its domestic markets, and the economic stress from integrating Eastern Germany and refugees from other European countries into its economy. Despite this pressure, German companies appear to lag in their efforts to integrate customer concerns into the strategic planning.

One interesting personal insight on German attitudes about CS comes from a 1992 interview with one of the founders of the German Customer Barometer. He stated that a CS study in Germany would have to be government-funded because “…few executives in Germany would pay to find out how their customers feel about their offerings. They are much too confident in their own judgments of what customers need and their engineers’ abilities to deliver it.”

That comment became the genesis of a study to explore the current status of CS measurement usage in Germany. The results of our study hold value for executives from all countries. To the extent that these conditions continue to exist, it may suggest niches in the German market that can be exploited. Business people in other countries, including the U.S., who are indifferent to the satisfaction level of their customers should be aware that they may be vulnerable as well.

When considering how to collect our data, we felt that German executives might not respond well to mailed questionnaires from unknown individuals. We also were concerned that they would protect their companies’ strategies from outside people. As a result, we initially focused on German marketing research (MR) firms that sell CS data services, where we would more likely be received as “research colleagues.” We contacted managing directors of 80 firms and asked them to participate in face-to-face interviews about CS. Nineteen two-hour interviews were held during the summer of 1997. The agencies visited accounted for over 80% of domestic marketing research billings, including the top four agencies and 14 of the top 20 agencies. Managing directors were interviewed in all but the largest firms. In the latter, unit managers directly responsible for the CS measurement activity were interviewed.

We found the German marketing research community to be very candid. Contrary to our expectations that interviewees might paint a rosy picture of the receptivity of their services, they admitted that the attention paid to CS measurement by German executives is less than they believe is needed to assure Germany’s continued leadership in rapidly globalizing markets. They estimated that no more than 15 to 25 percent of German firms of any significant size formally measure CS. One marketing research executive noted that “… for German executives, ‘marketing’ merely equals ‘product disposal!’” The German Customer Barometer, with a basic report selling for only a little over $200, is purchased by less than 100 companies in Germany despite intense marketing efforts on its behalf. Industry-specific reports can cost up to $10,000.

Our study respondents felt that German interest in CS measurement was about six years old. This corresponds to the launch of Germany’s nationwide Barometer and parallels the duration of the current economic recession. Some observers expected that continued indifference will be the norm because so many cultural institutions resist change. Others expected that usage will grow because of increased global competition and the dawning recognition of the ease with which even the best-engineered products can be copied. Increased acceptance of CS measurement “only awaits the maturing of the new generation of leaders” claimed one manager. However, he later admitted that their school system continues to turn out business people who will most likely further the status quo. Some others felt that the widespread publication of the German Customer Barometer would provide more managers with a rationale to share their own CS data internally, whereas in the past such data might have been kept locked in a drawer.

Marketing research executives often mentioned the automobile, financial services, and media industries as strong users of CS measures, possibly due to being more global operations. At the other extreme, several mentioned retailers as the most resistive, citing cost concerns as their primary reason for not purchasing these services. However, the most aggressive users of CS data were felt to be less defined by industry than by one of three conditions: 1) Their market share has deteriorated and they seek to turn this around; 2) They are at or near the top of their industry and hope to use strong customer satisfaction scores to reinforce this position; 3) A key top executive is personally excited by the concept of customer satisfaction, in whatever form.

The MR executives believed that customer satisfaction information is used primarily for tactical problem solving (e.g., adjustments to ad content, some price changing) not for strategic issues such as opportunity generation. Product modifications still are dominated by information from the lab, not the marketplace.

Hurdles to Acceptance of Customer Satisfaction Measurement

Our interviews identified five major hurdles to an increasing use of CS as a strategic measure. First, is a lack of top management commitment to the concept of market research. German executives feel they already know their customers well enough: “If customers don’t like a product, they will tell us.” Integrated CS improvement programs that involve the entire organization remain difficult to implement. Hence, CS scores do not improve for these companies over time, and subsequently their top management loses interest in continuing CS measurement programs. Several MR leaders cited cases where weak CS scores were discounted by the rated companies’ executives: “Clients tell that ‘your data/methods are wrong’ or ‘these customers don’t understand our product’ or ‘customers are making too much out of an isolated incident.’” A few MR people went so far as to say that German executives operate on a passive survival model: “If I ask customers how they feel, I’m bound to get criticism. Better to assume service is fine until customers initiate the complaint.” It was also noted that the management reward system provides virtually no penalty for failing to act on an opportunity, but severe sanctions for trying and failing.

A second group of factors concern the attitudes of German employees. Workers have generally accepted a “win-lose” model in which customer gains can come only at the expense of the worker. For example, they view more convenient store hours for shoppers as meaning that clerks would not get home to their families at the times they were most needed there. Employees also seem to equate “giving good service” with “being a servant” (i.e. a lower class person). They may do their defined job well and with pride, but resent being asked to step outside its bounds in the interests of satisfying a customer’s needs. As a case in point, when one of the authors politely asked a German clerk where he could find a public telephone, the woman somewhat indignantly replied, “This is a supermarket. I am a checker,” and no further information was offered. Even top management’s best efforts may be stymied at the point of implementation.

Surprisingly, German customers present a third set of factors. According to MR executives, many German customers believe that German industry already offers the best products possible and don’t want to be bothered for their specific opinions. Most MR directors also felt that customers would resist the development of detailed customer databases as a threat to their privacy. In fact, some data-collection practices which are common in the U.S. are not permitted by the European Union.

A fourth group of factors concerns practices of the marketing research companies. Many of those interviewed were surprisingly passive with regard to account development. Virtually all executives went directly from educational preparation into the MR industry. Few had line experience. They tend to define CS measurement in terms of large-scale quantitative programs and believe that their own success will come only when they have well-established benchmark studies. Their current client contact is most often the head of marketing or marketing research, rather than top management; this makes it difficult for them to implement any cross-departmental solutions to CS problems. This tactical focus is further reinforced by the facilities at all but a few of the MR companies. The typical site leaves one with a feeling of an efficient “data factory,” not a professional strategic-level partner.

The fifth hurdle may present the greatest challenge of all: cultural factors that collectively inhibit change. German law often makes it difficult to improve customer satisfaction, whether measured or not, particularly the restrictive closing hours for shops. Numerous cultural institutions, including the school system, perpetuate the promotion of persons with low-risk profiles. One MR executive, a non-German national, offered perhaps the most encapsulating view of the cultural challenge: “If I run a focus group where a new idea is pitched to non-German executives, I will get suggestions as to how I can improve and hence attain their business. The same effort presented to Germans gets at best a list of reasons why it won’t work, more often merely an exasperated comment that ‘When you have a final design, bring it to me and I will tell you if I will buy or not. Don’t ask me to do your design work for you.’”

We do believe that there are several groups that can draw value from these results, however tentative. Most obvious are German executives who do not appear to be making the best use of the maturing resources available in their MR community. The German marketing research community also could benefit from greater attention to building institutions that work directly with top management on a strategic level, instead of focusing on data processing for marketing departments. “Best of show” companies who have succeeded in driving the CS imperative deep into all operations should be held up as firms worth emulating.

More generally, and for this audience, more importantly, the conditions found in Germany are present to some degree in all business systems and all cultures. While it is often easier to see problems in an environment other than one’s own, further reflection will show that the difference is often a matter of degree, not of kind. Change is frequently resisted by individuals and by institutions. We believe that all businesses, regardless of geography, whether users or suppliers of CS measurement services, can benefit by reviewing the lessons presented here in reviewing their own strategic opportunities.

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