Quality Management

for Organizational Excellence

Lecture/Presentation Notes
By:
Dr. David L. Goetsch and Stanley Davis
Based on the book
Quality Management for Organizational Excellence (Seventh
Edition)

Seven:

Customer Satisfaction, Retention, and Loyalty

MAJOR TOPICS
Understanding Who Is a Customer
Understanding Customer-Defined Quality
Identifying External Customer Needs
Identifying Internal Customer Needs
Communicating with Customers
Using Customer Feedback to Make Design Improvements

Seven:

Customer Satisfaction, Retention, and Loyalty

(Continued)

Customer Satisfaction Process

Customer-Defined Value
Customer Value Analysis
Customer Retention
Establishing a Customer Focus
Recognizing the Customer-Driven Organization
Value Perception and Customer Loyalty
Customer Loyalty Model
Customer Loyalty versus Customer Profitability
Customers as Innovation Partners

Seven:

Customer Satisfaction, Retention, and Loyalty

(Continued)

Historically, customers were considered who used a

companys products and suppliers were outsiders who
provided the materials needed to produce the products. A
more contemporary view is that every organization has both
internal and external customers. An external customer is
the one referred to in the traditional definition. An internal
customer is any employee whose work depends on that of
employees whose work precedes his or hers.

UNDERSTANDING WHO
IS A CUSTOMER

UNDERSTANDING CUSTOMERDEFINED QUALITY

In a total quality setting, quality is defined by the customer.
When quality is defined by the customer, the following factors apply:
The customer must be the organizations top priority. The
organizations survival depends on the customer.
Reliable customers are the most important customers. A reliable
customer is one who buys repeatedly from the same organization.
Therefore, customer satisfaction is essential.
Customer satisfaction is ensured by producing high-quality
products. It must be renewed with every new purchase. This cannot
be accomplished if quality, even though it is high, is static.
Satisfaction implies continual improvement.

UNDERSTANDING CUSTOMERDEFINED QUALITY (cont.)

The key to establishing a customer focus is putting
employees in touch with customers and empowering
those employees to act as necessary to satisfy the customers. There are a number of ways to put employees in touch
with customers:
Actual contact may be in person, by telephone, or through
reviewing customer-provided data.
Identifying customer needs and communicating with customers
Employeecustomer interaction is a critical element in
establishing a customer focus.

IDENTIFYING EXTERNAL
CUSTOMER NEEDS
Historically, customers were
excluded from the product
development process. In a
competitive marketplace that
is global in scope, such an
approach can be disastrous.
Peter Scholtes, Barbara
Streibel, and Brian Joiner
recommend the six-step
strategy for identifying
customer needs:

IDENTIFYING EXTERNAL
CUSTOMER NEEDS (cont.)
The six-step strategy for identifying customer needs:
Speculate About Results: before gathering information about
customer needs, it is a good idea to spend some time speculating
about what might be learned.
Develop an Information-Gathering Plan: information gathering
should be systematically undertaken and well-organized. Before
gathering information, develop a plan. Decide what types of
information are needed and who will be asked to provide it.
Whenever possible, structure the plan so that information is
collected in face-to-face interviews.
Gather the Information: before implementing the entire
information-gathering plan, it is a good idea to conduct a smaller
pilot study involving just a few customers.

IDENTIFYING EXTERNAL
CUSTOMER NEEDS (cont.)
The six-step strategy for identifying customer needs (cont.):
Analyze the Results: Results should be analyzed carefully and
objectively. Do they match the speculated results from the first step?
How do they agree and disagree? What problems did customers
identify? What strong points? Were there trends? How many
customers complained of the same problem? What changes in the
product or services relating to it were suggested?
Check the Validity of Conclusions: select several customers and
share the conclusions with them. Do they agree with the
conclusions? Also share the conclusions with other people in the
organization and get their feedback.
Take Action: what changes need to be made? Which of these
changes are short term in nature, and which are long term?

IDENTIFYING INTERNAL
CUSTOMER NEEDS
One should not assume that communication will just happen. As
important as it is, communication rarely just happens in any
setting. Rather, it must be encouraged and facilitated, for
example:
Quality circles, self-managed teams, cross-departmental teams,
and improvement teams.
Communication that occurs over a cup of coffee in the break
room or during lunch can be equally effective.
Training that promotes communication and helps improve
communication skills is also important.

COMMUNICATING WITH
CUSTOMERS
Continual communication with customers is essential in a
competitive marketplace.
Establishing effective mechanisms for facilitating communication
and using them are critical strategies in establishing a customer
focus.
One of the main reasons continual communication is required is
that customer needs change, and at times, they can change
rapidly.
Communication with customers must extend to both external
and internal customers.
What applies on the outside also applies within the organization.

Know Your Customers Operations

As a supplier to other companies (customers), it is important to know
their operations. The more that is known about a customers
operations, the easier it will be to provide products that meet its
needs, this leads to:
Product enhancements. By knowing a customers operations,
suppliers might be able to modify their products to fit in better with
the customers operations.
Improved productivity. By knowing a customers operations,
suppliers might be able to propose process modifications that will
improve its productivity.
Internal improvements. By knowing a customers operations,
suppliers might learn facts that lead to internal improvements in
quality, productivity, and design in their own organizations.

USING CUSTOMER FEEDBACK TO MAKE DESIGN

IMPROVEMENTS
Quality Function Deployment and Design Improvements: It is
important to know that a product will meet the needs of customers
before you put it into production. This is the main reason for
conducting the research necessary to identify customer needs and
for communicating with internal and external customers. (QFD) was
developed with this in mind.
Affinity Diagrams and Design Improvements: is a useful tool for
making sense out of large amounts of customer feedback that
might come to an organization in any number of forms (e.g.,
customer complaints, surveys, feedback or comment cards, focus
groups, and telephone discussions).

Quality Function Deployment (QFD)

QFD allows for the systematic incorporation of customer needs,
production capabilities and capacity, and all other relevant
parameters into product development. QFD consists of the
following basic activities:
Deployment of customer requirements (quality needs)
Deployment of measurable quality characteristics
Determination of the correlation between quality needs
and characteristics
Assignment of numerical values to each quality characteristic
Integration of quality characteristics into the product
Detailed design, production, and quality control of the product

Quality Function Deployment (QFD)

Affinity Diagrams
The steps in developing an affinity diagram are as follows:
1. Form a cross-functional team that includes representatives from all of the key
functional areas in the organization
2. Ask the team to investigate the following question: What do our customers
dislike the most about our product?
3. Study the data from all of the various customer feedback sources and identify
categories of complaints, comments, concerns, and issues.
4. Write all of the feedback categories identified on a flipchart and post them on
a wall where everyone on the team can easily view them.
5. Sort all of the categories into related groups.
6. Develop header cards for each of the categories remaining on the wall charts.
7. Using the header cards, draw an affinity diagram. The affinity diagram is simply
a table consisting of each header, with the corresponding frequently given
customer feedback for that header listed under it.

Affinity Diagrams

CUSTOMER SATISFACTION PROCESS

Customer focus is more than just sending out surveys. Customer focus is part of a
process that leads to continual improvements in the organization that, in turn,
result in customer satisfaction. Resources are limited; consequently, they must be
applied where they will do the most to improve customer satisfaction and
customer retention.
Determine who your customers are.
Determine what attributes of your product or service are most important to your
customers.
Arrange these attributes in the order of importance indicated by your customers.
Determine your customers level of satisfaction with each of these attributes.
Tie results of customer feedback to your processes.
Develop a set of metrics (measurements) that tell how you are performing and
which areas within the process are having the greatest impact on performance

CUSTOMER SATISFACTION PROCESS (cont.)

Implement measurements at the lowest possible level in the organization.
Work on those processes that relate to attributes that have high importance but
low customer satisfaction ratings.
Work on those areas within the process that offer the greatest opportunity to
improve.
Update customer input and feedback on a continual basis. Then, as process
improvements correspondingly increase customer satisfaction, move on to the
process improvements that are next in importance.
Maintain open, continual communication with all stakeholders on what is being
done and why and on what results are expected and when.
Aggregate metrics organization-wide into a format for management review on a
continual basis. Adjust as necessary.

CUSTOMER-DEFINED VALUE
It is important for organizations to understand how customers
define value. The value of a product or service is the sum of a
customers perceptions of the following factors:

Product or service quality

Service provided by the organization
The organizations personnel
The organizations image
Selling price of the product or service
Overall cost of the product or service

CUSTOMER-DEFINED VALUE (Example)

Customer-Defined Value at Federal Express: One of the keys to the success of this
company is its commitment to customer-defined value. Part of the operating
philosophy of Federal Express is that customers are the best judges of quality.
Federal Express developed a system of Service
Quality Indicators (SQIs). as follows:
1. Delivery on the right day but after the promised time
2. Delivery on the wrong day
3. Unsuccessful trace of a package
4. Customer complaints
5. Proof of performance is missing
6. Missed pickups from customers
7. Damaged packages
8. Lost packages
9. Unanswered calls from customers (not answered within 20 seconds)

CUSTOMER VALUE ANALYSIS

The process used to determine what is important to customers is
called customer value analysis (CVA). The CVA process consists of the
following five steps:
Determine what attributes customers value most.

Rate the relative importance of the attributes.

Assess your organizations performance relative to the prioritized
list of attributes.
Ask customers to rate all attributes of your product or service
against the same attributes of a competitors product or service.
Repeat the process periodically

QUALITY CASE
Delivering Quality and Value at Cargill Corn
Milling Cargill Corn Milling (CCM) of North
America began operations in 1967 as part of
its parent firm Cargill Inc., a global provider of
food, agriculture, and risk-management
products. CCM manufactures corn and sugarbased foods, including whole-grain corn meal,
corn oil, animal feed, ethanol, dextrose, and
acidulants. CCM employs more than 2300
personnel in nine manufacturing plants and
eleven distribution centers throughout the
United States.
These personnel and facilities process more
than 10,000 bushels of corn every day. CCM is
one of three Cargill business units to receive
the Baldrige National Quality Award.

CUSTOMER RETENTION
measuring customer satisfaction alone is not enough. Another
important measure of success is customer retention.
It is a fact that even satisfied customers will sometimes migrate to a
competitor. Consequently, it makes more sense to measure customer
retention than just customer satisfaction. Customer retention is a
more accurate indicator of customer loyalty than is customer
satisfaction. No one is saying that customer satisfaction is not
important. Customer satisfaction is critical, but it is a means to an
end, not an end in itself. Curiosity about a competitor or the ever
present lure of variety.
How, then, can an organization go beyond just satisfying its
customers to retaining them? The short answer to this question is as
follows: To retain customers over the long term, organizations must turn them into
partners and proactively seek their input rather than waiting for and reacting to feedback
provided after a problem has occurred.

CUSTOMER RETENTION:
Be ProactiveGet Out in Front of Customer Complaints
Feedback-based processes, although necessary and useful, have
three glaring weaknesses.
First, they are activated by problems customers have already
experienced.
Second, feedback-oriented processes are based on the often
invalid assumption that dissatisfied customers will take the time to
lodge a complaint.
Third, the information that the customer complaint processes
provide is often too sketchy to yield an accurate picture of the
problem.
An effective vehicle for collecting customer input is the focus group
and hiring test customers.

CUSTOMER RETENTION:
Collect Both Registered and Unregistered Complaints
Follow-up interview . With this method, customers who have
registered complaints are contacted either in person or by
telephone to discuss their complaints in greater depth. This
approach gives representatives of the organization the
opportunity to ask clarifying questions and to request
suggestions.
Another way to get at unregistered complaints is to use
the organizations sales representatives as collectors of customer
input.

ESTABLISHING A CUSTOMER FOCUS

Companies that have successfully established a customer focus share a number of
common characteristics that can be divided into the following clusters:

Vision, commitment, and climate.

Alignment with customers.
Willingness to find and eliminate customers problems.
Use of customer information.
Reaching out to customers.
Competence, capability, and empowerment of people.
Continual improvement of products and processes.

RECOGNIZING THE CUSTOMER-DRIVEN ORGANIZATION

A customer-driven organization can be recognized by the following
characteristics:
(1) promptly follows through on all promises,
(2) can be trusted,
(3) has credibility,
(4) attends to even the smallest details, and responsiveness.
In addition to these characteristics, customer-driven organizations
exemplify the following management characteristics:
(1) effective communication with customers and their personnel
concerning customer needs, (2) use of customer-specific metrics, (3)
systematic use of customer feedback, and
(4) customer-focused organizational structure.

VALUE PERCEPTION AND

CUSTOMER LOYALTY
Companies work hard to build customer loyalty. Think of
Coke and Pepsi, for example. The goal is to keep the customer on
board for the long term. The theory is that a loyal customer is a
customer forever. It is easy to see what drives the desire to create
customer loyalty. Companies spend so much in marketing to
attract customers that they must keep them for the long term to
recoup their investments.

CUSTOMER LOYALTY MODEL

Organizations attempt to consistently exceed customer
expectations for the purpose of creating and maintaining
customer loyalty. 10 Customers constantly evaluateboth
formally and informallythe organizations they do business with.
From these evaluations, they form perceptions of the
performance of the organizations. These perceptions, if they are
positive, can lead to customer loyalty. Customer loyalty, in turn,
can lead to a higher level of competitiveness and better financial
performance: in other words, success.

CUSTOMER LOYALTY VERSUS

CUSTOMER PROFITABILITY
The common wisdom among quality professionals is that
customer loyalty is a must for organizations that hope to
survive and prosper in an intensely competitive global
environment. Customer loyalty is, as a general rule, a desirable
goal. However, the concept has become so ingrained in
contemporary business thinking that some organizations are
leaving out another critical factor in the success formula. That
factor is profitability.

CUSTOMERS AS INNOVATION
PARTNERS
Involving customers in the design, prototyping, and testing phases
of product development is no longer considered
an innovative strategy. The best companies in the global
arena apply this strategy as a matter of course. However, a
much smaller number of companies are taking the customer
involvement strategy to the ultimate level by actually making
them innovation partnersfull partners in the development
of new products and the modification of existing products.

PRODUCT INNOVATION MODEL

FOR CUSTOMER RETENTION
In order to retain customers over the long term in todays
hyper-competitive global environment, organizations must
innovate. If the key to customer loyalty is consistently providing superior valuesuperior quality, superior cost, and
superior servicethe key to providing superior value is
innovation. Innovation is how organizations continually
improve the quality and cost of their products as well as
the quality of their services. It is also how they continually
reduce the cost of doing business while increasing the volume of business they do.

Summary

Seven:

Customer Satisfaction, Retention, and Loyalty

(Continued)

In a total quality setting, customers define quality.

Therefore, customer satisfaction must be the highest
priority. Customer satisfaction is achieved by producing
high-quality products that meet or exceed expectations. It
must be renewed with each purchase. The key to
establishing a customer focus is to put employees in touch
with customers so that customer needs are known and
understood.

Seven:

Customer Satisfaction, Retention, and Loyalty

(Continued)

The six-step strategy for identifying customer needs is as

follows: speculate about results, develop an informationgathering plan, gather information, analyze the results,
check the validity of conclusions, and take action.
Customer needs are not static. Therefore, constant contact
with customers is essential in a total quality setting.
Whenever possible, this contact should be in person or by
telephone. Written surveys can be used, but they will not
produce the level of feedback that personal contact can
generate.

Seven:

Customer Satisfaction, Retention, and Loyalty

(Continued)

Quality function deployment (QFD) is a mechanism for putting

into operation the concept of building in quality. It makes
customer feedback a normal part of the product development
process, thereby improving customer satisfaction.
Measuring customer satisfaction alone is not enough. Many
customers who defect are satisfied. Organizations should, in
addition, measure customer retention.
Organizations should go beyond satisfying customers to
creating value for them in every supplier-customer interaction.

Seven:

Customer Satisfaction, Retention, and Loyalty

(Continued)

The customer loyalty model consists of four components: 1)

business performance, 2) global perceptions, 3) loyalty
behaviors, and 4) financial outcomes.
The goal of organizations should be more than just earning
customer loyalty; it should be earning the loyalty of profitable
customers. Organizations should never assume a positive
correlation between customer loyalty and profitability, nor
should they assume that a customer who is initially profitable
will always be profitable.

Seven:

Customer Satisfaction, Retention, and Loyalty

(Continued)

An innovative approach to product development that is gaining

acceptance is turning customers into innovation partners. With
this approach, the customer is given a technological tool kit for
designing his or her own products and making product
innovations. This approach is implemented using the following
steps:
develop a tool kit for customers that is easy to use
increase the flexibility of your own production processes
carefully select the first customers to use your took kit
continually improve your tool kit
adapt your business practices to suit the innovation partnership
approach.

Seven:

Customer Satisfaction, Retention, and Loyalty

(Continued)

In order to retain customers over the long term in todays

hyper-competitive global environment, organizations must
innovate. If the key to customer loyalty is consistently
providing superior valuesuper quality, superior cost, and
superior servicethe key to providing superior value is
innovation. Innovation is how organizations continually
improve the quality and cost of their products as well as the
quality of their services. It is also how they continually
improve (decrease) the cost of doing business while
increasing the volume of business they do.