1. The Imperative of National Customer Satisfaction Measures By Professor Claes Fornell University of Michigan Mexico City, September 2009

2. © 2009 CFI Group. All rights reserved. 1 Sources of Economic Growth ProductivityQuality Sustainable Economic Growth

3. © 2009 CFI Group. All rights reserved. 2 Benefits to the Economic Decision Makers Investors Business Managers Government Consumers

4. © 2009 CFI Group. All rights reserved. 3 Investors Need to Know… The relationship between a firm’s current condition and its future capacity to produce wealth

5. © 2009 CFI Group. All rights reserved. 4 Managers Need to Know… How to improve the firm’s current condition by allocating scarce resources such that the strength of the customer relationships are maximized

6. © 2009 CFI Group. All rights reserved. 5 Government Needs to Know… How to best encourage economic growth and living standards for its citizens

7. © 2009 CFI Group. All rights reserved. 6 Consumers Need to Have… A voice in measures that reflect their economic living standards

8. © 2009 CFI Group. All rights reserved. Why Now? The Economy is Changing 7

9. © 2009 CFI Group. All rights reserved. 8 Why Now? The Global Forces Movement of: Shift in the balance of power in favor of the buyer – at the expense of the seller Information Capital Work (not labor)

10. © 2009 CFI Group. All rights reserved. 9 Consumer utility is the true standard for economic growth Sellers compete for buyer satisfaction

11. © 2009 CFI Group. All rights reserved. 10 Implications The cost of poor service will be borne by the seller When buyers are powerful, assets of supply (balance sheet assets) have little predictive power Productivity and quality of economic output must be better balanced Capital follows power

12. © 2009 CFI Group. All rights reserved. 11 ACSI: A Growing Presence in the US “The American Customer Satisfaction Index, the definitive benchmark of how buyers feel about what business is selling them.” - New York Times, August 8, 2004

13. © 2009 CFI Group. All rights reserved. 12 A Brief Introduction to ACSI: Data 80,000 telephone interviews + 4,000 internet interviews 280,000 telephone numbers Sampled randomly Screened: Recent experience as a customer of the selected companies

14. © 2009 CFI Group. All rights reserved. 13 A Brief Introduction to ACSI: Analysis where  = (  1,  2,...,  m ) and  = (  1,  2,...,  n ) are vectors of unobserved endogenous and exogenous variables, respectively; B ( m x m ) is a matrix of coefficient parameters for  ; and  ( m x n ) is a matrix of coefficient parameters for . The PLS estimation implies that E[  0,  0, and  0, where  The ACSI Equations

15. © 2009 CFI Group. All rights reserved. 14 A Brief Introduction to ACSI: Analysis The ACSI Equations

16. © 2009 CFI Group. All rights reserved. 15 A Brief Introduction to ACSI: Analysis The ACSI Equations where y = (y 1, y 2,..., y p ) and x = (x 1, x 2,..., x q ) are the measured endogenous and exogenous variables, respectively.  y ( p x m) and  x ( q x n) are the corresponding regression coefficient matrices. By implication from PLS estimation (Fornell and Bookstein, 1982), the noise or measurement error has the properties E[  ] = 0, E[  ] = 0, E[  ] = 0, and E[  ] = 0.

17. © 2009 CFI Group. All rights reserved. 16 A Brief Introduction to ACSI: Analysis The ACSI Equations

18. © 2009 CFI Group. All rights reserved. ACSI Scores – National, Sector & Industry Q3 2008 – Q2 2009 17 Energy Utilities 74 76.1 Utilities 73.7 Utilities 73.7 Transportation 72.6 Transportation 72.6 Airlines 64 U.S. Postal Service 74 Express Delivery 82 Information 70.2 Information 70.2 Health Care & Social Assistance 78.5 Health Care & Social Assistance 78.5 Newspapers 63 Motion Pictures 74 Computer Software 75 Fixed Line Telephone Service 72 Wireless Telephone Service 69 Cellular Telephones 72 Cable & Satellite TV 63 Network Cable TV News 71 Hospitals 77 Ambulatory Care 80 Accommodation & Food Services 78.9 Accommodation & Food Services 78.9 Hotels 75 Full Service Restaurants 84 Limited Service Restaurants 78 Manufacturing/ Durable Goods 81.6 Manufacturing/ Durable Goods 81.6 Personal Computers 75 Electronics (TV/VCR/DVD) 83 Major Appliances 81 Automobiles & Light Vehicles 84 E-Business 81.5 E-Business 81.5 Manufacturing/ Nondurable Goods 82.3 Manufacturing/ Nondurable Goods 82.3 Public Administration/ Government 67.9 Public Administration/ Government 67.9 Retail Trade 75.2 Retail Trade 75.2 Finance & Insurance 76.0 Finance & Insurance 76.0 E-Commerce 80.0 E-Commerce 80.0 74Internet News & Information 83Internet Portals/Search Engines 83 Food Manufacturing 84 Pet Food 79 Athletic Shoes 85 Personal Care & Cleaning Products 68.0Local Government 67.8Federal Government 76Supermarkets 74Gasoline Stations 74Department & Discount Stores 76Specialty Retail Stores 78Health & Personal Care Stores 82 Retail 74Brokerage 75 Travel 83 Soft Drinks 83 Breweries 78 Cigarettes 80 Apparel 75Banks 84Credit Unions 73Health Insurance 78Life Insurance 81Property & Casualty Insurance

19. © 2009 CFI Group. All rights reserved. 18 A Brief introduction to ACSI: Graphic Model Customer Complaints Customer Complaints Customer Loyalty Customer Loyalty Repurchase Likelihood Price Tolerance (Reservation Price) Complaint Behavior Satisfaction Comparison w/ Ideal Confirm/Disconfirm Expectations Customer Satisfaction (ACSI) Customer Satisfaction (ACSI) Perceived Service Quality Perceived Service Quality Perceived Overall Quality Perceived Overall Quality Perceived Value Perceived Value Overall Customization Reliability Overall Customization Reliability Price Given Quality Quality Given Price Perceived Product Quality Perceived Product Quality Reliability Customization Overall Reliability Customization Overall Customer Expectations Customer Expectations

20. © 2009 CFI Group. All rights reserved. 19 Growth in ACSI and Consumer Spending: 1995 – 2009 (Q2) Source: Consumer Spending from U.S. Department of Commerce, Bureau of Economic Analysis -8% -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% -6% -4% -2% 0% 2% 4% 6% 8% Annualized, Seasonally Adjusted Rate of Growth % Quarterly Change in Consumer Spending % Quarterly Change in ACSI (lagged)

21. © 2009 CFI Group. All rights reserved. 20 The Global Context Global Forces: Information Capital Work (not labor) How do they affect the buyer-seller relationship?

22. © 2009 CFI Group. All rights reserved. 21 The Buyer – Seller Relationship Who Benefits Most? Who is getting more choice? The buyer The seller Who is becoming more replaceable?

23. © 2009 CFI Group. All rights reserved. 22 The Buyer – Seller Relationship The Result: The balance of power between buyers and sellers is shifting in favor of the buyer.

24. © 2009 CFI Group. All rights reserved. 23 The Effects Punishment and Rewards Corporate Balance Sheets Capital Movements Business Strategy

25. © 2009 CFI Group. All rights reserved. 24 For Investors: Do customers know something investors don’t?

26. © 2009 CFI Group. All rights reserved. 25 The Conventional Answer: No, because markets are efficient and reflect all available information

27. © 2009 CFI Group. All rights reserved. 26 But… How does this information reach investors (satisfied customers are not on the balance sheet)?

28. © 2009 CFI Group. All rights reserved. 27 Is there another answer?

29. © 2009 CFI Group. All rights reserved. 28 Shift in Power Between Buyer and Sellers Capital Follows Power

30. © 2009 CFI Group. All rights reserved. 29 Rewards and Punishment Seller Product Markets Equity Markets Repeat Buying More Capital The Successful Seller

31. © 2009 CFI Group. All rights reserved. 30 Rewards and Punishment Buyer defection in product markets Capital withdrawal from equity markets The Unsuccessful Seller Punished by:

32. © 2009 CFI Group. All rights reserved. 31 Can You Beat the Market? Only if you know something that others don’t

33. © 2009 CFI Group. All rights reserved. 10 Years of Annual Returns CSAT Stock Portfolio 2000 - 2009* 32 -13% 26% 9% 3% 14% 4% -9% 11% -6% 22% 13% 22% -26% -12% -23% -39% 36% 16% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Yearly Performance S&P 500 ACSI Stock Portfolio 2000200120022003200420052006200720082009 18% 31% *2009 is YTD through September 18

34. © 2009 CFI Group. All rights reserved. Even Lower Risk – Market Neutral vs. HFRX Equity Market Neutral Index 33 *2009 is YTD through July

35. © 2009 CFI Group. All rights reserved. From Investment to Business Management What the company has done to its customers What customers will do to the company What the company can do to affect the above in the future 34 Good Customer Asset Measurement Tells Us:

36. © 2009 CFI Group. All rights reserved. 35 For Management What Losers Do >Buy customer loyalty with price discounts >Get short term profit at the expense of weakening customer relationships >Get too close to the customer >Try to exceed customer expectations

37. © 2009 CFI Group. All rights reserved. 36 For Management What Winners Do >Manage customer relationships as true economic assets >Balance productivity and service quality >Maximize customer complaints >Earn loyalty of customers by satisfying them >Combine time and space