Is Performance Management really the best approach for success?
Is an entrepreneurial mindset the holy grail of motivation and engagement?
By Dr. Reg Butterfield
19-minutes read
Image: Gerd Altmann via Pixabay.com
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The challenge for any new approach to organisational design and management is to ensure the organisation can be successful in any environment. Over the last months we have explored many ideas in our newsletters and in doing so demonstrated that my colleague Dr Ross Wirth and I have delved deeply into a wide range of subjects and sciences in our continuing search for the future of work, paid or otherwise.
In previous newsletters we have written about the issues of employee motivation and engagement, and the phenomena that cause situations such as the Big Quit where employees seek out new greener pastures upon which to graze. We have also been highly critical of the performance management systems currently used in organisations, typically under the umbrella of strategic human resource management (sHRM). Instead of motivating people they are more inclined to create compliance.
In this week’s edition we are exploring some basic foundations that need to be understood when considering new ways of gaining employee engagement, motivation, and the extent to which having an entrepreneurial mindset can help improve the outcomes of the work.
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The basic aim of a healthy organisation is to survive and prosper, which is usually represented by profit maximisation. These aims can only be reached in the long run if the organisation is able to generate added value and create new forms of value. This requires the organisation to ensure and maintain its competitive advantage over its competitors, thus developing the most suitable adaptation method for its environment (Porter 1980, 1985, 1990). Whilst much of Porter’s early work has arguably been overtaken by events during the last couple of decades, the need for competitive advantage is still pertinent.
How do organisations create and sustain a competitive advantage while simultaneously identifying and exploiting new opportunities? According to Ernst & Young (2018) their clients are looking for the skills associated with an entrepreneurial mindset as one of the must haves for success in the 21st Century. We argue that this is the primary need on which strategic entrepreneurship (SE) is based, placing it at the centre of strategic management and entrepreneurship. Thus, SE is concerned with advantage-seeking and opportunity-seeking behaviours resulting in value for both individuals and organisations. Ernst and Young describe an entrepreneurial mindset as “simply the way an entrepreneur thinks and acts. It’s a set of characteristics, behaviours and skills that drive action. A person with an entrepreneurial mindset recognises an otherwise overlooked opportunity; has the confidence to take a risk; communicates their ideas clearly; and can not only adjust but also learn from setbacks” (p. 3).
When considering such an approach it is important to know that there is limited evidence to show that entrepreneurs suffer a greater risk of burnout and other psychological illnesses than managers generally, as well as social isolation through long work hours (Fernet et al, 2016).
With this need for entrepreneurship in mind, we explore how such an approach can be created and sustained in healthy ways that meet both the organisation’s needs and those of the people who populate those organisations.
An organisation’s ability is an evolving and complex concept for which no standard has been identified, developed, or agreed. We do know that it is more than just a summary of its resources and involves things such as leadership and organisational behaviour, both of which are often referred to as ‘cultures’. Organisations can be a successful form of gestalt by virtue of their synergistic behaviour. Synergy highlights the achievement of greater value through cooperation. Where the behaviour is dis-synergistic it may result in less than a gestalt, which can lead to the demise of the organisation.
The cooperation of the members of an organisation is important to consider here. For example, it has been identified that organisations with good competences in relation to their ability and capability may still fail. This is often referred to as an Apollo group (Belbin 2000). Belbin explains that strong leadership is required with such a group of sharp, analytical minds and high mental ability if success is to be achieved. However, it has also been found that organisations with business areas of more modest competences have been successful because of their effective cooperation through some form of synergy.
When discussing the competences of an organisation Peters and Waterman (1986) referred to soft and hard factors. The former refers to people, knowledge, learning skills, organisational behaviour, communication strategies, procedures, work methods, managerial and leadership behaviour. Whereas hard factors today refer to machinery, robotisation, physical automation, raw materials, and the organisation’s infrastructure. We will return to competences in next week’s newsletter once we have formed a greater understanding of what added value means in today’s business environment.
Whilst there is little research into what added value means, many publications have commented that organisations need to create added value if they are to prosper and survive in the long term (Gremillion, 1998; Johnson, 1996; Porter, 1980, 1985, 1990; Schultz, 1989; Slywotzky, 1995, 1999). Some authors speak of ``added value’’, whilst others talk about ``adding value’’ or ``value-added’’; each is approached in different ways with little commonality. In this discussion we settled on the term “added value” because it is used so often in management journals and literature, as well as leadership training, even though it is not universally understood in any one domain, except maybe in finance.
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Does it really matter how we understand the term ‘added value’? We argue that it does if we are to identify new ways of working and managing organisations.
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Chernatony, et al (1998) explains that “The nature and role of added value are inextricably linked: the way in which added value is defined effectively determines its role. Furthermore, just as the value perceived by customers evolved over time, so the roles of added value seem to have widened in the literature” (p.43). They went on to chart the history of the idea of added value and its role. The traditional role was to distinguish brands from commodities whilst a more competitive framework emerged later that stressed superior customer value through operational excellence, customer intimacy, or product leadership. The focus also shifted to the processes that enable organisations to deliver superior customer value.
This meant that added value moved from its original role of differentiation to a basis for choice, by means of cues that enable customers to recognise superior value and be more confident in their choice. More recently, the role of added value has been advocated as securing competitive advantage and in doing so, stressed the active involvement of both customers and suppliers. This contrasts with the passive part played by customers in Porter’s (1985) value chain, which still influences many organisations today.
Whilst there has been little written about the sustainability of added value, there was the suggestion that whilst a product’s attributes may change over time, the brand and its value endure (McCracken, 1993). This was subsequently challenged on the basis that brands have very different numbers of people to whom they are salient (Ehrenberg et al, 1997). However, Hall (1992) showed how intangible added values were more sustainable, a point reinforced by de Chernatony and McDonald (1998) regarding employees’ commitment to customer service. de Chernatony’s observation is an important one, which we will return to later. First it is important to make sense of what customer value is before we can identify ways of adding value.
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Defining value is an extremely difficult challenge because it is so complex. We must deal with the subjectivity of value, variations between customers and within customers, between cultures, in different situations, pre- and post-purchase, and between tangible and intangible offerings. Each of these foregoing areas have been researched over the last four decades without a common agreement of what value is or means. Just to complicate matters further, customer value is also a dynamic concept because it evolves over time.
Woddruff (1997, p. 142) tried to pull all these aspects together into a definition, “Customer value is a customer’s perceived preference for and evaluation of those product attributes, attribute performances, and consequences arising from use that facilitate (or block) achieving the customer’s goals and purposes in use situations’’. However, it was not considered optimal because its richness and complexity impeded its translation into a measurable operational definition (Parasuraman, 1997).
Heskett, et al (1997) offered a new approach to the subject of determining customer value. It is based on what they call the ‘service-profit chain’ (SPC). The SPC is based on the understanding that profitability of a firm derives from customer satisfaction and loyalty. This satisfaction and loyalty come from a customer’s sense of value received. This value, it is argued, is calculated with reference to the perceived quality of what is received, balanced against the aggregated costs to the customer of availing themselves of the service.
Whilst supporting the Hesket model, Walker et al, (2006) raise an important element that they argue is missing from the SPC concept. That is, value in the SPC framework is exclusively subject-based and does not appear to recognise or allow for value that may be object-based. This is an interesting academic observation that leads to an excellent discussion. However, whilst important to mention here the discussion goes beyond the scope of this newsletter. We will focus on the original subject-based formula as it is helpful to understand the importance of the people aspect of customer value, which is not reduced because of the Walker observations.
Figure 1 illustrates the customer value formula, and we will focus on the left-hand side, employee, in this discussion as it relates to the core subject of this newsletter.
Figure 1: Customer Service Value Chain
Source: Hesket et al, 1997, p.12., adapted by Dr Reg Butterfield 2000.
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Reflection
Before moving forward, it is important to understand the emerging links thus far. We began with the idea that entrepreneurship behaviour is an important ingredient for people in organisations this Century if new ways of working are to be established alongside new ideas. This sits alongside the importance of synergy through cooperation for success, which may seem a little odd given that surveys show that entrepreneurs are often and erroneously thought of as extraverted individuals who avoid social contact. We also showed the link between the concept of what value means for customers and that added value is crucial for organisational survival. To meet the customer’s perception of value it is important to understand the relationship between hard and soft competences, and the environment in which they operate. This brought us to the employee elements of the customer value formula shown in figure 1.
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Service Profit Chain Formula
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You can’t create long-term value by ignoring the needs of your customers, suppliers, and employees. The SPC formula in figure 1 indicates that the behaviour of employees has a direct influence on customer behaviour via an intervening equation, which is briefly explained for contextual purposes.
Value, as perceived by customers, is the difference between the personal revenue (results + process quality) generated and the personal cost (price + acquisition cost). The individual components of customer value are discussed below. The greater the positive difference between customer cost and customer revenue the greater the value of the product and relationships (organisation and people) to the customer. Whilst the formula has the appearance of a mathematical calculation it is not the case. The formula shown in figure 1 is just a representation that enables a more holistic view of value to be shown. We have found that it is not common for people to have this overview perspective and associated relationships.
Outcome (or results produced for the customer)
The outcome is the delivery of an agreed product or service that meets the specification or contract agreed with the customer. This can be explicit or implied and can include elements of timeliness.
Process quality
Research shows that the way, or method, in which a service (or product in the value profit chain) is provided can be as important to customers as the results a service or product delivers.
Cost (or price)
Customers often perceive the cost of purchasing a product in terms of economic price. The price of a product, however, can consist of more than just a financial price. In some cases, these additional components of a price can be of more importance than the actual economic outlay associated with purchasing a product. For example, there is a psychological component of risk inherent in a product’s price. When we purchase products, we expect them to provide something of value or benefit to us. The more important the product is to a person; the more technically complex the product; and the more capital intensive the product, then the higher the level of risk that the product will not provide the expected advantages. Thus, the higher the price is perceived to be by individuals.
Access cost (costs of acquiring the product or service)
In addition to the economic price that customers pay to acquire products or services, there are additional investments associated with the purchase that increase the overall cost to the customer. A key component of these acquisition costs is the time and effort that customers must invest to physically acquire products or services. This investment of time and effort includes a customer’s search for product information to make more informed buying decisions. In other cases, the access cost includes the defining of a Request for Quotation, based on their assumptions of the solution or product that they seek, followed by a complex supplier selection process. Acquisition costs also include the time and effort that must be invested to travel to a store or other location to see a product demonstrated or have further discussions prior to delivery.
Long Term Profitability
The customer value profit chain model posits that high levels of perceived customer value result in high levels of customer satisfaction. This customer satisfaction leads to higher levels of customer loyalty. However. customer satisfaction and customer loyalty are two very different variables in the model.
Customer satisfaction represents an attitude. That is, how does a customer feel about the business relationship with a business organisation? Customer loyalty, on the other hand, is an action. That is, customers maintain business relationships and continue to do business with organisations. It is this customer loyalty that leads to three very profitable behaviours by customers: a. Purchase more over a given period; b. Repeat purchases on a more frequent basis and over longer periods than do other customers; and c. Loyal customers refer other prospects to the organisations that they trust and are highly satisfied with.
The Employee side of the equation
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Productivity — quality of output, loyalty, satisfaction, and capability are shown as being important for the execution and delivery elements of the intervening equation, which leads to customer satisfaction, customer loyalty, revenue growth, and profitability.
Even though Woodruff’s (1997) definition of value mentioned earlier is complex, it does highlight the need to link the productivity (quality of output) to the customer behaviour and not see the employee side in isolation, which may be the impression given by the Hesket formula at figure 1. This means that at least four elements of processes ensuring appropriate productivity need to be considered here.
- A clear, current, and well-tested understanding of customers’ priorities. Unless the key decision makers throughout the organisation really understand what’s important to customers, the best efforts of the organisation will be misdirected. It has been observed that, in most business situations, customers’ expectations and alternatives change faster than the “mental model” or beliefs of internal decision-makers about what’s important to those customers. If this is true in an organisation’s situation, there are two important implications. It implies that there is always a disconnect between internal beliefs and the external realities about the customer. In addition, it also implies that this disconnect is not only present but growing. To have improvements in employee engagement translate into improvements in the customers’ experience, organisations must work very hard to make sure they stay in sync with continually changing customer priorities.
- Alignment around a concise specification of the intended customer experience. What exactly is the experience you expect customers to have? Although every company designs their products and services, very few clearly specify or deliberately design what they do around the experience they intend their customers to have. As a result, the individual efforts of executives, managers, and front-line employees tend to be at odds with each other in subtle or even not so subtle ways. In turn, the experiences customers have tend to be inconsistent, fragmented, or just plain frustrating. If this is true, increases in employee engagement will not translate into any substantial improvement in the quality of the customers’ experience.
- Processes, technology, and management practices that get in the way of employees doing the right thing for customers. Is it easy for employees to do the right thing for customers or are there policies, procedures, systems, measurements, reward systems, etc., that get in the way? Although it isn’t intentional, most organisations have significant hurdles employees must overcome to deliver a great customer experience. Whilst very high levels of employee engagement can contribute to employees’ ability to overcome these hurdles, the uneven distribution of individual heroics across the organisation also tend to contribute significantly to inconsistency in the customer experience.
- “Unwritten rules” that drive behaviours inconsistent with the desired customer experience. These unwritten rules drive the real behaviours of the organisation. In virtually every organisation we’ve talked to and worked with, there are significant unwritten rules that are just inconsistent with delivering a great customer experience. These unwritten rules are unique to each organisation, driven by extensive legacy effects, and reinforced by the existing employee experience. Many of these unwritten rules typically center around things such as, what it takes to be successful in the organisation; the importance of financial vs. non-financial metrics; the importance of internal vs. external stakeholders (e.g., my boss vs. the customer); the importance of acquiring new customers vs. caring for existing customers; the ability to admit mistakes; the ease of cross-functional collaboration, etc. Unless these unwritten rules are surfaced and addressed, they get in the way of having improvements in employee engagement to drive a better customer experience.
Unfortunately, it is hard to think of many organisations where these barriers are not in place. The pervasiveness of these issues is one of the reasons why many organisations run the risk of investing heavily in improving employee engagement training and Customer Relationship Management procedures and yet not benefitting from them.
We posit that it is important to holistically design specific employee experiences that generate behaviours aligned with the specific experience you intend for customers and not just focus on improving employee engagement. What does this mean in today’s business environment?
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Is it enough to focus on the delivery of customer satisfaction?
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Thus far we have discussed the importance of employee behaviour in achieving customer satisfaction on the basis that such customers will be satisfied and loyal to the product or service. There is an increasing view that satisfaction is no longer sufficient today and that the service delivery needs to be more than just satisfying customers and needs to ratchet up to creating customer delight. This relatively new thinking should be expected because the environments within which organisations compete change often and customers themselves cannot be predicted for a long time. What constitutes a satisfactory service today might not be so the next few years. According to Alexander (2010), and countless other studies, increasingly, business organisations are facing stark realities that satisfying customers at an ordinary or basic level would be inadequate to ensure customer loyalty.
Alexander’s work suggested that employees’ extra attention affects customer delight, that customer delight has a positive relationship with customer repurchase intentions, and that employee extra attention has a positive relationship with customer repurchase intentions.
Customer delight is an emerging concept and interest that is beginning to expand. This means that there is no exact definition available from scholars and academics. However, it seems to focus on the delight of a customer being a positive emotional response to an ‘unexpected’ service experience. It is often argued that delight should be seen differently from satisfaction because whereas satisfaction suggests an expected service level, delight is often not expected by the customer. Providing delight requires going beyond ordinary or normal satisfaction to exceeding customer expectations or giving the customer an experience that is unexpected or unknown.
We suggest that this difference between customer satisfaction and customer delight is important because organisations’ processes, decision-making, and methods of production, and or service delivery need to take this into account. Service delivery also includes post-purchase services and support. It will not be possible to ‘delight’ every customer and as such all efforts to create high customer satisfaction need to continue. At the same time, organisations should adopt various ways of delighting their customers and, where appropriate, customise delight programmes for specific customers or services.
All of this means that the behaviour of the people in organisations needs to be reconsidered if they are to be capable of delivering this extra added value, particularly if the organisational barriers mentioned earlier are present.
Reconsidering the behaviour of people in organisations
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Thus far we have discussed the importance of added value for the survival of organisations, particularly those for profit. This added value is linked to what value means for the customers and how customer loyalty impacts revenue growth. In the past, mere customer satisfaction was deemed sufficient to achieve loyalty but, this has changed. Customer delight is now a higher level of emotional reaction that is more likely to lead to longer term loyalty. Whilst satisfaction is still important and necessary, it is not sufficient for long-term success in today’s VUCA World — more is required to “delight” the customer.
This shift to a higher goal of service delivery requires a new view on the employee capability and associated quality and production output. If the quality and productivity are to meet the revised standard of customer delight, it follows that the capability of the employees and how they work also needs to be re-visited.
Earlier we mentioned the competences of the people and their relationships through cooperation were an important aspect of the synergies that create a gestalt form of organisation. The challenge is to identify what this means and how to create it.
In our next newsletter we will continue this journey and explore how employee satisfaction and loyalty can be achieved whilst meeting this new idea of customer value and loyalty.
If you enjoy our reports on the journey to discover a new form of organisation that is future-proof and meets change as part of its daily business, please click on the like below and refer us to your friends and colleagues. It really does help to motivate us in writing these newsletters.
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Major References:
Alexander, M.W. (2010) “Customer Delight: A Review”. Academy of Marketing Studies Journal, 14, 39–54.
Chernatony, L., Harris, F., and Dall’Olmo Riley, F (1998), “Added value: its nature, roles and sustainability” in European Journal of Marketing · February 2000, DOI:10.1108/03090560010306197 · Source: OAI
Ehrenberg, A. and Scriven, J. (1997), ``Added values or propensities to buy?’’, Admap, Vol. 376, pp. 36–40.
de Chernatony, L. and Dall’Olmo Riley, F. (1998), ``Defining a `brand’: beyond the literature with experts’ interpretations’’, Journal of Marketing Management, Vol. 14 №5, pp. 417–43.
Fernet C., Torrès O., Austin, A., and St-Pierre, J., (2016) “The psychological costs of owning and managing an SME: Linking job stressors, occupational loneliness, entrepreneurial orientation, and burnout” Published by Elsevier GmbH.
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Hall, R. (1992), ``The strategic analysis of intangible resources’’, Strategic Management Journal, Vol. 13, pp. 135–42.
Heskett, J.L., Sasser, W.E. and Schlesinger, L.A. (1997), The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value, The Free Press, New York, NY.
Kacsmar, M. J., and Osborne, S. (2018) “Supporting the next generation — The entrepreneurial mindset and the future of work”, A research brief presented by EY and NFTE (Network for Teaching Entrepreneurship), Ernst & Young LLP.
McCracken, G. (1993), ``The value of the brand: an anthropological perspective’’, in Aaker, D.A. and Biel, A.L. (Eds), Brand Equity and Advertising, Lawrence Erlbaum Associates, Hillsdale, NJ.
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Walker, R. H., Johnson, L. W., and Leonard, S. (2006) “Re-thinking the conceptualization of customer value and service quality within the service-profit chain” Journal of Service Theory and Practice · January DOI: 10.1108/09604520610639946
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