| Introduction
Over the past two decades, management thought has evolved from a focus on market share and economies of scale to a focus on quality, satisfaction, and customer loyalty. Today´s global market economies require a more dynamic and holistic approach to customer management. My lecture today uses a new approach, called customer portfolio management (CPM), to help understand how to manage customer relationships within an Asian hospitality industry that is experiencing dramatic growth and evolution. In doing so, I will draw upon my ongoing research with Professor Fred Selnes from the Norwegian School of Management BI (Johnson and Selnes 2004, 2005; Selnes and Johnson 2004).
At its core, CPM is about creating value with customers who maintain very different relationships with a company, from acquaintances, to friends, to partners. A closely related concept, customer portfolio strategy (CPS), addresses the question of just how to optimize the value of a customer portfolio over time. CPM recognizes that all of the customers in a company´s portfolio are capable of creating value, but in fundamentally different ways and at different points in time.Understanding and using the concept, however, requires understanding your customers as a portfolio of very different assets. The value of the approach depends largely on the variability in a company´s customer relationships, from the weakest relationships in a portfolio to the strongest, and a company´s ability to adapt their service offering and marketing mix to these different relationships.
After explaining the CPM framework, I will specifically explore its implications for the Asian hospitality industry. Drawing on the lessons of US economic development and the evolution of management practices, and considering unique aspects of the Asian hospitality industry, the issues explored include: (1) the rapid growth stage of many Asian hospitality ventures, as with hotels and restaurants, (2) the rise of competition and eroding margins, (3) "high touch" versus "low touch" services, (4) the diffusion of service innovations, and (5) volatility in costs and resulting profitability. We will see how the CPM framework suggests just how Asian hospitality companies should adapt to changing market conditions.
Evolution of Marketing Thought
To understand the logic of customer portfolio management, it is useful to review the evolution of management thought over the past several decades using the evolution of western economies as an example.
In the decades immediately following World War II, marketing scholars identified market share as a key driver of a firm´s profitability (Buzzell and Gale 1987). However, one must consider the context and assumptions of the relationship. Economies like those in the US were growing rapidly, and competition was still relatively limited. The more cars that companies like General Motors built, the more cars they sold, and the more money they made. Enjoying monopoly or oligopoly-type status, companies could focus on size and the ability to optimize returns on volume, and associated cost reductions as a business strategy. However, as the economies of countries such as Japan and Germany were rebuilt and an increasing number of global competitors evolved, the positive relationship between market share and profitability evaporated. It was replaced by a positive relationship between customer satisfaction and profitability(Johnson and Selnes 2004). In what has become a much more competitive global economy, achieving higher rates of return suddenly required optimizing returns on customer satisfaction and relationship investments. Once customers had more choices, a company´s ability to better meet the needs of a customer, achieve higher satisfaction, and retain that customer over time became the means to increase profits.
Marketing logic essentially shifted in the 1980s and 1990s from a singular focus on offensive marketing (market share management) to defensive marketing(satisfaction and loyalty management). In today´s global economy from China and India to Brazil and South Africa, the hospitality industry is not just marked by more competitors, but by a combination of growth industries and mature industries, as well as a combination of new and old competitors. As a result, no one business logic is capable of guiding a company´s marketing strategy. For example, companies like L.L. Bean and Credit Suisse dutifully followed the customer satisfaction and loyalty logic and focused more of their marketing 4 efforts on customer retention, only to discover that they were developing no new customers.
Many of a company´s most profitable customers today were but strangers or mere acquaintances a decade ago. This requires a more holistic approach to managing customer relationships. Global competition and an abundance of customer choices have dramatically affected any one company´s ability to rely myopically on close relationships to generate profits. As a result, how can companies create value with all of the customers in a portfolio? Let me now describe the basics of the CPM framework. |