The business environment surrounding companies has changed dramatically recently. Companies are urged to deal with such changes, as doing so will allow some to recover from financial crises and others to sustain profitability and continue to be industry leaders.
Four American academics discussed business challenges surrounding companies in various areas in a symposium “Corporate Competitiveness from an International Viewpoint,” organized by the Keizai Koho Center in Tokyo on June 5.
The first speaker, Jiwoong Shin, professor of marketing at the Yale School of Management, delivered a presentation, “Competitive Advantage through Customer Relationship Management Strategy.”
In the presentation, he said there are three keys to be a market leader: Innovation of product; cost leader; and relationships or customer intimacy. Shin’s presentation focused on the third item.
By his definition, customer relationship management is the business strategy of identifying, attracting, converting and rewarding the most profitable customers to bring about recurring exchanges with the business.
“In a nutshell, look at your customer base, identify angels and devils and do something special for them,” he said.
There is a study showing that 20 percent of “angel” customers generate 225 percent of profit. Only the top 50 percent of customers are profitable.
“You should realize there are always bad customers,” he said.
For example, bad customers for catalog marketing companies would return products they didn’t like, causing the companies to waste time and money on packaging and logistics.
He pointed out an extreme example of how one company dealt with bad customers. Mobile service provider Sprint “fired” troublesome customers, he said.
Sprint terminated wireless service agreements with customers who caused too many problems. An article about the practice appeared in the Wall Street Journal in 2007.
“This created bad publicity, the stock price dropped and the CEO was terminated. So don’t take such extreme measures,” he said.
Before firing customers, Shin recommended companies take lower cost approaches or provide unfavorable terms to bad customers so as to make them want to fire themselves.
On the other hand, rewarding good customers may not be the simple answer, either.
It is true that giving the best value to best customers would make them even more loyal and bring profits in the long term.
But another effective business tactic is to give better value to competitors’ customers and charge higher prices to existing customers, he said.
In markets where customers can change brands easily, companies should reward existing customers. Retail stores, airlines and hotels fall in this category. Magazines, telephones and cable TV represent another category and companies should look to reward new customers.
The second speaker, Peter Golder, professor of marketing at the Tuck School of Business at Dartmouth, made a presentation, titled “Measuring and Managing International Market Share Volatility: Insights from a Country, Category and Brand Hierarchy Framework.”
He started his presentation with a graph showing that Asia/Oceania’s share of world GDP has been increasing from 1969 to 2009, while Europe’s is declining and the U.S. has remained almost unchanged.
But it involves a certain amount of risk for companies to enter markets overseas. One way to measure the risk is market share volatility. In Golder’s research, he defined market share volatility as year-to-year fluctuations in market share, or relative annual change in market share of each brand in each category in each country.
Market share is an important measure of success and easier to observe than profitability, he said.
In conducting the research, his team obtained four years of market share data for 30,552 brands, all of which have more than 0.1 percent market share, in 52 countries in 34 categories, including personal care, food, drinks and healthcare products.
By country, Venezuela was the most volatile country with a mean volatility of 0.832. A number between zero and one, with one being the most volatile, expresses volatility.
Venezuela was by far the most volatile, followed by Argentina’s 0.335, Romania’s 0.324 and Morocco’s 0.256. The average volatility was 0.178. The least volatile was Switzerland with 0.049, followed by Hong Kong’s 0.074 and India’s 0.084. Japan had 0.150 and the U.S. had 0.154.
By category, beer, diapers and shampoo were the three most volatile, while tea, mouthwash and dental rinses were the three least volatile.
His research is useful for determining marketing strategies in unfamiliar markets, as well as setting up compensation plans for managers, he said.
Produce at home or abroad
Jan Van Mieghem, Harold L. Stuart professor of Managerial Economics at Northwestern University’s Kellog School of Management, was the third presenter. His presentation was titled, “Produce at Home or Abroad? Trading of Cheap Labor with market Responsiveness.”
“One of big themes everybody talks about is the end of cheap China,” Van Mieghem said. “Wages have has risen, doubling every five years.”
Manufacturers are trying to figure out whether to produce at home or abroad and they have to consider many factors to make that important business decision.
To simplify, companies have to balance two things: Keeping costs low and market responsiveness. Developing countries have lower wages and cheaper materials, but factories’ proximity to customers and management optimizes market responsiveness.
Mieghem’s research team asked companies about their strategies on the location of their production capacities. The companies basically want to “combine the best of both worlds,” he said, referring to low cost and market responsiveness.
In defining costs, his team used the concept of total landed cost, which is total supply chain cost from origin to destination for a given service level.
His team focused not only on typical costs of goods sold, or COGS, but also supply chain and service costs, including outbound freight, customs, duties and taxes and inbound freight.
In conclusion, he said it is essential to evaluate supply chain decisions from the perspective of financial return on invested capital.
Also, dual sourcing — having production capacities at home and abroad — allows companies to trade off costs and responsiveness. Companies should tailor their operations strategies to the strengths of their assets.
For example, companies should use inexpensive, slow suppliers for products with predictable demand and costlier, quick suppliers for products with unpredictable demand.
The fourth speaker, Bruce Kogut, Sanford C. Bernstein & Co. professor of leadership and ethics at the Columbia Business School, delivered a presentation, titled “Know-how and the Algorithmic Economy.”
Kogut spent the first few minutes explaining how monetization of know-how has changed throughout human history.
Until the 20th century, know-how of manufacturing was the major part of the economy, pointing out the U.S. auto industry as an example.
Similar to that industry, companies have been working to enhance efficiency by decreasing labor hours per unit produced.
He also mentioned foreign direct investment is about the transfer of organizing knowledge. Amid the emergence of multinational networks, know-how spreads rapidly and Japan will lose its productivity lead in 15 to 20 years, he said.
As companies seek ultimate efficiency, a “speculative answer” is the algorithm.
“It’s not robotic, it’s an algorithm. Algorithm technology is being used more and more,” he said.
For example, Uber is a company matching up drivers and people who want a ride. Uber does not own cars or employ drivers, but uses algorithm technology, and is valued at up to $50 billion.
“Algorithm methods capture all profit,” he said.
He went as far as to say it may be possible to have algorithmic CEOs in the future, which divides up tasks, allocates jobs and monitors progress and manages the modules to assemble a report or complete a job.
In the algorithmic economy, workers may enjoy more flexibility on working hours, but they should not expect to get paid well unless they are top management, have a special skill or created an application that people want, he said.
Christina Ahmadjian, a professor in the Graduate School of Commerce and Management at Hitotsubashi University, moderated a Q&A session.
After researching Japanese companies, she feels they are doing better learning best practices from overseas companies, instead of Japanese companies, she said.
Her first question was whether companies really listen to the panelists when they ask for advice.
Shin said they do. “A large bank came to us and we did an analysis. About 20 percent of good customers generate 270 percent of profit for the bank,” he said, adding that it listened to his advice, which did not include “firing” bad customers.
He also said Japanese and Asian companies have the tendency to treat customers like kings, but noted that “it’s ok to do some customer management.”
Ahmadjian then asked how much companies are really transforming, and Van Mieghem mentioned his experience of lecturing for a massive open online course, a so-called MOOC, which saw students from 181 countries participate, he said.
“I can do some experiments on the Internet that I cannot do in a classroom. We don’t know everything we can do with the Internet, but we can experiment. We are still in in the phase of running an experiment,” he said.
Golder said innovation goes hand in hand with failure. While Japanese tend to be afraid of failure, CyberAgent Inc., a Japanese Internet service company, which the four panelists visited during their visit, has a culture of promoting taking risks, he said.
Ahmadjian’s then asked what surprised the panelists during their trip to Japan. Mieghem said they visited many companies and most of them have a 10-year plan.
“I love plans and strategies, but I was surprised that every company has one,” he said.
Then audience was then given a chance to ask questions. One audience member commented on Shin’s presentation, saying some devils are necessary.
Shin said his point is not to get rid of devils, but replace them and keep changing customer composition.
Kogut added to Shin’s remarks, saying Uber has a system allowing drivers to evaluate customers. In the algorithmic economy, devil customers may be replaced naturally, he hinted.
Another member of the audience asked if having a 10-year plan is pointless.
Kogut said, “Now may be a good time to do something challenging. A 10-year plan may not be Japanese companies’ future.”
“I think MOOCs will change universities dramatically,” he added.
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