The Relationship of Customer Satisfaction to Strategic Decisions

By Jacobs, Fred A.; Latham, Claire Kamm et al. | Journal of Managerial Issues, Summer 1998 | Go to article overview

The Relationship of Customer Satisfaction to Strategic Decisions


Jacobs, Fred A., Latham, Claire Kamm, Lee, Choongseop, Journal of Managerial Issues


Continued erosion of market share in the global economy has placed pressure on companies to develop and market higher quality products and services at competitive prices. The acquisition of domestic and world market share continues to become more difficult to obtain and still more difficult to maintain as developing economies begin to seek a greater share of world markets (Kim and Chang, 1995). The evolution of global competition has placed emphasis on reducing cycle-time, continuous improvement in quality and cost control. Quality has been viewed as the first of four principles of Total Quality Management (Fredendall and Robbins, 1995; Dobyns and Crawford-Mason, 1991; Cole, 1989). Some believe that ". . . by the year 2,000, quality will no longer be a competitive advantage; it will be the price of market entry" (Hamel and Prahalad, 1994: 14).

These issues of continuous improvement in the quality of products and services offered to the marketplace and the improvement in the quality/cost relationship are not transitory. Their relationship to customer satisfaction and their impact on price and demand elasticity is becoming more important on a world-wide basis. Johnson and Petty suggest that the cost of poor quality can be viewed according to the "Iceberg Syndrome."

The true total cost consists of both visible and hidden costs. What you see and report are the visible costs of poor quality and what you don't see and measure are the more extensive costs of poor quality which consume the profit of a business. Estimates suggest that the total hidden cost of quality is at least three times and up to ten times the visible cost of quality (1995: 2).

Johnson and Petty further suggest that by spending three to five percent of operating costs on quality improvements, an organization has the potential of saving twenty to thirty percent of operating costs. Their list of quality costs and related savings are shown in Table 1. Thus, the understanding of quality, productivity, cost and related price and demand elasticity determinants is imperative for all businesses around the world.

Significant interest in how the issues of quality and productivity relate to marketing and accounting has been expressed across many functions of business and across many academic disciplines. However, the contributions to the whole debate from the various disciplines have not been combined into a single cohesive message useful in formulating and communicating competitive strategies. Accordingly, the purposes of this article are:

(1) To relate the concept and measurement of customer satisfaction from the marketing discipline into the "Total Quality Management" and quality-costing literature;

(2) To demonstrate that customer satisfaction, as a measure of quality, can be meaningfully related to price elasticity; and

(3) To develop a model that shows how the quality cost literature in accounting can be integrated with contributions from marketing and economics to provide a coherent strategic vision for the enterprise.

The remainder of this article is organized as follows. The next section provides background in traditional quality costing, Total Quality Management (TQM) and Continuous Improvement. Then we introduce concepts from the marketing literature dealing with customer satisfaction and relationship building. Next, customer satisfaction is integrated into the price/demand elasticity framework. In the following section, we develop a new integrative model for use in strategic planning for quality. We conclude with a summary and implications for further research and practice.

QUALITY COSTING, TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT

Industrial and quality engineers, operations management and accountants have approached the issue of "quality cost" from a quasi-mathematical viewpoint with substantial insight provided in the areas of plant layout, logistics and the flow of manufacturing throughput. …

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