Executive Summary: Lubrizol, a $1.6 billion chemical company, asked 75 major customers to assess its strengths and weaknesses as a supplier. The results identified performance gaps that allowed Lubrizol to prioritize improvement efforts. As a result, Lubrizol has redirected its people and resources to create a leaner, more responsive, customer-focused organization.

What drives customer loyalty? And what makes customers jump ship? A company that waits for negative feedback from customers to filter down through the grapevine has waited too long.

So, how do you discover what your customers are thinking? You must ask the right questions in the right way and be prepared to press patiently for an acceptable response. Acceptable not in the sense that it need be positive or what you want to hear. But it must be specific. A vague reassurance in response to a CEO’s general query (such as, “Why, yes, we’re reasonably satisfied with your performance”) may be misleading and ultimately do more harm than good.

Lubrizol used such a process to benchmark customer satisfaction and provide answers to three all-important questions: Are we meeting customer expectations in areas where it counts most? How are we doing relative to the competition? Where will exceeding customer expectations pay off the most?

Measuring Preferences

Customer expectations are learned; everything begins with that premise. No company “owns” its customers to the extent that it alone is responsible for determining their likes and dislikes. Customer preferences are conditioned as much by the actions of your competitors as by your own. And you have more to worry about than just your direct competitors. Consider what happened when banks introduced automatic teller machines. They gradually became the preferred method of transaction for most routine business, and suddenly standing in long lines, for anything, anywhere became unacceptable. The repercussions were felt far beyond retail banking – at the supermarket checkout counter, at the airport, and at the car rental agency.

Before customer satisfaction can be accurately measured, the relationship between customer and company must be understood. A customer relationship comprises a hierarchy of discrete encounters. They can be classified into four basic categories – environmental, transaction, assistance and breakthrough. Measurement tools must gauge the relative weight of each encounter. Not all interactions affect customer satisfaction the same way. Some offer excellent opportunities; others offer substantial negative potential with almost no upside.

Environmental encounters offer substantial downside potential but little leverage to improve customer satisfaction. For example, if a customer enters a clean facility, he or she likely won’t notice. If the facility is dirty or disordered, the customer likely will form a negative opinion of the company. However, going beyond the minimum necessary to maintain a clean, professional setting in most instances may increase cost without adding value. For example, a midsize insurance company considered spending a large sum on office remodeling. Customer expectation research showed that the most profitable contacts took place off-site, at the client’s facilities. And when clients came on-site, they sought conference rooms in which small groups could gather in comfort and privacy. Remodeling dollars were spent accordingly.

A transaction encounter is one the customer expects to complete routinely with little effort. Easy comprehension of a billing statement is a good example. Transaction encounters can produce a positive impact if they exceed expectations, but typically they run the greater risk of creating a negative impression if done ineptly. Businesses in which transaction encounters might make a difference include technology-based firms whose reliability and error-free service must be taken for granted.

But many companies today ignore the potential payoff of going that extra mile for the customer, especially when downsizing. A large industrial company had continuously whittled its sales and customer service organization. Although moves helped cut costs, customer research demonstrated that more service and support was needed, not less, and that the company would do well to invest in more training.

The breakthrough encounter comes next in the hierarchy. This occurs when a company offers a new or reengineered service. For example, frequent flyer programs created a significant competitive advantage for airlines.

Breakthroughs usually occur when a company focuses on continuous improvement in such areas as cycle-time reduction and faster turnarounds and response time. When car rental agencies streamlined the pick-up and return process, they achieved similar breakthroughs in customer satisfaction.

Customer-Oriented Reengineering

When Lubrizol decided to explore customer preferences, it engaged New York-based Towers Perrin General Management Consulting to conduct a comprehensive survey. The company thought a third party would be most effective in providing objective, independent analysis.

Data on customer perceptions gathered by in-house staffers might be conditioned by prior relationships. Furthermore, negative feedback from a customer could well elicit a defensive response from customer personnel. One upshot: What was meant to be a fact-finding mission might turn into a debate.

Given the breadth of Lubrizol’s product line and the complicated relationships it maintains with customers – often working together on formulation, manufacturing, distribution and marketing – the undertaking was enormous. The international scope of the company’s operations made it even more so. A typical Lubrizol customer might talk to sales and engineering in Cleveland about a product being tested in England and scheduled to ship from Texas. In addition, Lubrizol was split into two strategic business units – one for basic automotive lubricant additives, and one for industrial and specialty chemicals. A large customer such as Mobil or Chevron buys products from both divisions, effectively doubling its contacts with Lubrizol.

Towers Perrin identified each customer’s most significant encounters with Lubrizol. Then it began face-to-face interviews with multiple respondents at 25 of Lubrizol’s largest North American customers, household names such as Chevron, Amoco, Quaker State and Valvoline. A second wave of interviews targeted 50 of the company’s major European customers, such as France’s Total and Elf.

The interviewers sounded out representatives in all of a customer’s functional areas, including senior corporate management, sales, marketing support, technical and scientific, order processing, manufacturing, and shipping and delivery. To assess the real impression Lubrizol was making on customers, the interviewers had to evaluate and weigh the company’s impact at each one of these multiple “touchpoints.”

Over two to three months, interviewers asked customers about quality, product approval and development time, order processing and customer service response to technical and performance problems. They asked how the sales staff measured up in terms of professionalism, product knowledge, accessibility and helpfulness. They asked about pricing policy, technical know-how and integrity. In short, they asked for a comprehensive assessment of Lubrizol’s strengths and weaknesses.

And because no company operates in a vacuum, Towers Perrin also asked customers to identify and evaluate Lubrizol’s major competitors.

Not surprisingly, the study revealed that different parts of customers’ organizations had different perceptions of Lubrizol. At several, for example, technical people were satisfied, while the purchasing department was not.

The interviewers asked customers not only to evaluate Lubrizol’s performance and that of its nearest competitors on a great many factors, but also to weigh the importance of each. Every question had three parts, for example: Do Lubrizol’s order-processing activities match your scheduling needs? Is the competition more responsive? To what degree is it important to speed up cycle and response times? In this particular example, customers said it was indeed important. They also thought Lubrizol’s competition was doing a slightly better job. Conclusion: Lubrizol should reengineer its order-processing function to be more flexible and to reduce cycle time (see chart).

Identifying these “performance gaps” allowed the company to prioritize improvement efforts. The analysis revealed what matters most to customers, showing the company where to invest resources to ensure a maximum return on that investment – in other words, in areas where the breakthrough encounters could occur.

On some factors, including “effectiveness in industry associations” and “relationships with key original equipment manufacturers,” customers rated both Lubrizol and its competition highly. However, neither of these factors was deemed to be important by many of Lubrizol’s customer segments. Conclusion: It would not be productive for Lubrizol to invest additional time, money or energy in these areas.

Problem Identification

Upon completion of the measurement process, Lubrizol identified many ways to gain a competitive advantage. The company also found several laggard areas. Customers had the most problems with:

– Bureaucratic structures with too many and overlapping sales contacts

– A time-consuming product-approval process

– A lack of flexibility and timeliness in order processing and delivery

Armed with the survey data and analysis, Lubrizol set out to reorganize itself around customer priorities. In scrutinizing the organization, management decided to create cross-functional task forces geared to the following areas:

Organizational structure: The company scrapped its two-unit structure, opting to form one combined organization. This reduced the “static” generated by redundant, confusing customer contacts and opened the way to simplified, more efficient communications.

Customer service: Lubrizol abandoned its strictly functional approach to customer service in favor of a more holistic approach. The company instituted a comprehensive customer-relations strategy that combined sales and technical services elements. Because salespeople were given responsibility for managing these more systematic customer contacts, the company instituted a rigorous training program.

Production capability: To reduce costs and improve delivery, Lubrizol has undertaken a 3-to-5 year effort to realign its production and distribution facilities. Worldwide, Lubrizol intends to reduce the number of its intermediate component manufacturing units by about one-third. This will improve capacity utilization and reduce production costs. At the same time, it will expand chemical blending operations and distribution facilities in Deer Park, TX; Bromborough, Great Britain; and Rouen, France.

Product development time: Because Lubrizol trailed its competition in this area, it moved to reengineer the entire product-approval process. The benefit is twofold: Paring delivery times keeps customers happy and cuts costs. The company is putting more product development resources – people and facilities – closer to customers in its technical centers in Hazelwood, England, and Atsugi, Japan, and is constructing a new laboratory blending operation facility at its Wickliffe, OH, headquarters. Moreover, the component production systems that will become available under the initiative can manufacture new products more quickly and cost-effectively.

As the result of its efforts to more fully understand customer perceptions, Lubrizol is now putting its people and its resources where they count – where they will make the most difference to customers. In addition, Lubrizol’s analysis of customer satisfaction provides a valuable baseline by which to measure the effectiveness of current and future improvement initiatives. In fact, the company plans to conduct a follow-up survey to evaluate progress in the near future. This will extend the benchmarking process to continuously chart customer-driven future improvements.

Thanks to a new and thorough understanding of customer needs and wants, Lubrizol is evolving from a functionally and product-driven supplier into a lean, responsive, customer-focused organization. Management’s only regret? “We wish we had done it sooner.”