Literature Review

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Submitted by: Hina Sadiq, Hajira Khan, Areeba Bashir, Sidrah Chaudhry, Maryam Noor

2011

Introduction:
Globalization has impacted businesses of all sizes. Customers now enjoy greater choices than before, while businesses must compete to stay relevant, with greater competition than ever before. Without customers, products do not sell, and revenues do not materialize, and devoid of customer loyalty, a profitable customer can be as short-lived as a dot come website. Therefore, customers do matter, and researching the customers behavior is in the best interest of the firm. Huber et al. (2001)1 stated that marketing strategists and industrial-organization economists now lay emphasis on the creation of superior customer value as a vital element for ensuring the companies success. This can only be done via understanding consumers behavior, in order to understand what strategies can be adopted by the firm to enhance the value being delivered to consumers. In this literature review, we will focus on: 1. How small businesses can modify their operations and management for their survival. 2. How small businesses adapt to changing consumer behavior. Small and Medium Enterprises have to cater to changing customer attitudes along with growing competition and increase in costs of operations. These factors force businesses to re-evaluate their structure to adapt to changing consumer requirements. Businesses must therefore work more diligently to understand who they serve, and how they can deliver superior customer value in order to stay relevant. They do so by studying the behavior of their customers, and understanding how they can enhance their product offering. Many small businesses are trying to be innovative and diverse, especially in the services sector in which wider choice of options are available for customers, increasing the level of competition. In some instances, small businesses are forced to lower their prices, thus finding themselves working harder for lesser return.

Understanding Consumer Behavior:

The behavior of consumers can be very subtle in nature, making it challenging for businesses to understand fully. According to Loudon and Bitta (1993)2, consumer behavior involves an understanding of individuals decision process and physical activity when they participate in evaluating, acquiring, using or disposing of goods and services. The main focus of any business is to attract and retain customers. It has been seen that businesses that undermine the value of their customers, lose their market share because
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Huber et al. (2001) Louden, D. L. and Bitta, A. J. D. (1993). Consumer Behavior Fourth Edition. Singapore: McGraw-Hill, Inc.

the competitors associate more importance to their customers (The Customer You Know: Keeping, Leveraging, and Profiting from Current Customers with Business Analytics, 2009)3 Deriving profits from the existing customers has proven to be more cost effective as compared to getting new customers New customers become valuable, if a business is able to sustain and grow by forming a partnership with its existing customers. Using information effectively is crucial in running a business. Information is an blessing that can give an edge to an organization during this coarse economic era. There is a desperate need for intense, factual decisions and clever plan of action. The understanding developed from information is a great source of empowerment for organizations, as it gives them tools to stay informed and consequently make the right decisions. (The Customer You Know: Keeping, Leveraging, and Profiting from Current Customers with Business Analytics, 2009)4

Consumer Relationship Management:

Nguyen, Sherif and Newby (2007)5 are of the point of view that through the implementation of a Customer Relationship Management System, organizations are able to collect and evaluate specific data and knowledge about their customers, in an orderly way, whichabove all, improves customer service and customer loyalty. Until lately, companies disregarded the significance of this which led to a loss of customers and consequently a decline in profitability. In addition to this, the fact that companies overlook their customers is sometimes intensified by the absence of appropriate tools, equipment or management methods. Dyche(2004)6is of the view that the intense competition in the business environment has compelled businesses to become intelligent about selling, causing companies to become smarter about who is buying from them. She describes Customer Relationship Management as being all about interpreting the infrastructure, aiding the delineation of and surge in customer value and the appropriate means by which to prompt valuable customers to remain sincere and loyal- indeed to make more purchases again.Operational aspects aside,Dyche adds that Customer Relationship Management is most importantly a business strategy, one that enables the company to strengthen its business practices across organizations, while establishing an iron-clad connection with its customers. Not just being a response to competitive pressures, it is also viewed as a strategic necessity, gaining executive level notice and equally big budgets.

The Customer You Know: Keeping, Leveraging, and Profiting from Current Customers with Business Analytics, 2009 4 The Customer You Know: Keeping, Leveraging, and Profiting from Current Customers with Business Analytics, 2009 5 Nguyen, Sherif and Newby (2007). 6 Dyche, J. (2004). The CRM handbook: A business guide to Customer Relationship Management. Pearson Education Publisher

If viewed from a Business to Business setting, Dyche states that Customer Relationship Management implies keeping pace with a savvy and progressively impatient consumer basewho are closer than ever to finding the businesses main competitor, and more inclined than before to share their poor experiences with their prospects. Moreover, Customer Relationship Management in Dyches view encompassesthe interpretation of how to improve business practices and customer relationships, with the use of Customer Relationship Management technology and customer statistics as part of a package that includes process and organizational changes with the final aim of differentiating itself from competitors through superior customer relationships. Nonetheless, Hutt and Speh (2007)7 add that Customer Relationship Management can be a valuable and profitable cross-functional management tool for maintaining a long-term exchange with customers across all the different points of contact with them, and access with the personalized treatment of the most profitable customers in order to determine customer retention and the success and effectiveness of marketing initiatives. Kincaid8 suggests that the internet has drastically altered customer expectations for speed, access, control, and globalization that extend to all areas of doing business. But the major change to CRM implementation that was a result of the internet is automation: replacingthe way that people are engaged in customer interactions online.

Small and Medium Enterprises:

Longenecker, Moore, Palich, and Petty9 define small business in terms of the number of employees, the assets of the business and volume of sales. These businesses normally are adopted to meet a particular demand, and are exempted from many tax regulations. Small businesses vary in size, ranging from one-person firm and firms that include up to a hundred employees. There are some external opportunities and threats which can affect the operations of SMEs. It is important for businesses to understand them and modify their business model accordingly. Prowle10 mentions in his book the following trends affecting SMEs: Demographic Trends: This includes variation in the size of the targeted population and its structure, in terms of age, sex and social class, which impact the demand for services within the region. Purchaser Trends: Trends related to purchasers, which are of great importance to service providers as they can denote opportunities or threats for the organization while

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Hutt and Speh 2007 Kincaid, J. W. (2003) Customer Relationship Management: Getting it Right. 9 Longenecker, J.G., Moore, C.W., Palich, L.E., and Petty, J.W. (2006). Small Business Management: An Entrepreneurial Emphasis Thirteen Edition. Ohio: South-Western, Thomson 10 Prowle, M. (2000). The changing public sector: Practical Management Guide. England: Gower Publishing Ltd.

they are carrying out business planning. Service providers need to bear in mind that purchasers alter their priorities frequently and they must be equipped with resources to meet the demand. Competitor Trends: Businesses must identify their current or potential competitors in order to gauge their standing in the market. Technological Trends:Businesses need to keep in mind all the developments taking place in technology. The more updated they are about their relevant technology, the greater edge they will attain over other businesses. Physical Environment Trends: Businesses need to analyze the developments occurring in their physical environment. Some trends which impact businesses include road development, housing development etc.

Using data mining techniques to adjust to dynamic Customer behavior

Recognizing and adjusting to changing customer behavior is an important aspect of surviving in a dynamic environment. Knowing what is changing and how it is changing is very crucial because it allows the businesses to provide the right products and services, meeting the changing market needs, especially in small internet based companies. Decision makers in internet based need to know the answers to following questions about their customers: Which customer groups sales are increasing? Which customer groups moved from one product to the other over the years? Whether certain groups of customers had gradually emerged to the major buyers over the years? (Song, 2001)11

Data mining is a process that is used for investigating and examining large amounts of data in order to discover significant patterns. Most of the existing data research has concentrated on developing techniques to build precise models. Data mining techniques include association rules, decision trees and neutral networks; these techniques cannot be applied alone to answer the above mentioned queries because they cannot handle dynamic situations well. Globalization: Kincaid12 mentions that the internet has effectively abolished country boundaries, with companies that used to deal with global customers, but interacted with them in fragmented geographic regions, feeling the impact of globalization most significantly. Prior to the internet, customers had access only to local goods, terms and pricing. Most global companies knew that geographic fragmentation results in internal operational problems and expense, but that did not become a major issue until customers gained contact with the

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Song 2001 Mining the Change of Customer Behavior in an internet shopping mall Kincaid, J. W. (2003) Customer Relationship Management: Getting it Right

internet, creating an information exchange medium that resulted in incredibly aware and knowledgeable customers, who wanted more from the product in terms of value offered. According to Acs and Preston (1996)13, globalization represents the web of linkages and interconnections which take place between states, societies and organizations, forming the current world economic system. They add that it results in the establishment of new structures and new relationships, with the effect that business decisions and actions in one region have consequences in other regions. Acs and Preston further mention that the growth of global markets accelerates competition and coupled with modern technology, it has increased the access of information to consumers, who are now more aware of what they are looking for and their expectations have gone up. Globalization and SMEs: With increasing globalization, SMEs are getting more attention by researchers, policy makers and practitioners (UNCTAD, 1993; Audretseh, 1995; Lu and Beamish, 2001). According to theoretical and empirical studies investigated by Dunning(1981) 14, he noted that small and medium enterprises are responsive to international events. Small and Medium Enterprises suffer from internal limitations related to insufficiency of managerial, informational and financial resources needed to counter the reservations of the global market and changing consumer needs. Piscitello and Sgobbi (2002)15 further add that those small and medium enterprises are likely to grow in the international market which differentiate themselves with a unique product offering and are making use of scant, unique and sustainable resources. Berry (2001)16views that globalization amplifies variation in customer sophistication. Taking an example of the telecommunication industry, Berry mentions how Lucent Technologies had to contend with scores of new and unknown customers, who had limited or next to little knowledge of the telecom business. The only factor in common amongst them was the desire to take part in the telecom communication revolution. For Managers at Lucent, who were used to working with limited large highly skilled established customers like AT&T, Berry states that this new unsophisticated customers raised unsettling questions for the managers. Implications for Businesses: Berry (1980)17 is of the view that having customers and not just acquiring customers, is vital for service firms. In terms of retaining customers, research by Bitner (1990) 18 and
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Acs, Z. J. and Preston, L. (1997). Small Business Economics. Maryland: Kluwer Academic Publishers 14 Dunning (1981) 15 Pistello, L., and Sgobbi, F. (2002). Globalization, E. Business and SMEs: Evidence from the Italian District of Prato. 16 Berry (2001). Harvard Business School Press 17 Berry (1980) 18 Bitner (1990)

Boulding (1993)19 shows that relationship quality, service quality and over all service satisfaction can enhance the customers intentions to remain with the firm, but they raise the question of what activities by the firm result in the customers shift from one service provider to another. Narayandas (2003)20 states that building progressive relationships with customers offers businesses a wide range of benefits, as it leads to the creation of loyal and dedicated customers who display a number of promising behaviors including a greater inclination to repurchase the word-of-mouth effect, reduced price sensitivity, resistance to competitors cajoling, collaboration with the vendor and readiness to invest in the relationship. Each of these behaviors contributes to either increased profits or reduced costs or both. In broader angle the business managers should use the change detection methodology in order to follow the changing trends. Analysis of customers changing behaviors is useful in providing products and services in accordance with their changing needs. For example developing products and services for youth. Controlling undesirable changes is also possible. In narrower angle, the managers need to understand customer needs more thoroughly and devise segmented marketing campaigns. For example, developing a direct mailing campaign for a specific market segment. Direct marketing can effectively be used for this purpose using the folloing techniques: Email marketing : cost effective and environmentally friendly solution. Behavioral targeting businesses can create more personalized web sites for their visitors. Web analytics gives marketers the understanding to determine whether the web site visitors are engage in the site. (Thorogood & Schulman, 2011)21

Change detection is more suitable in areas where the environment is rather dynamic. change detection can also be applied in analyzing the effectiveness of a marketing campaign (Song, 2001).22 Making informed decisions is of utmost importance, regardless of the approach that the business is taking to the new market environment. aggressive or conservative. Besides that, the customer of today is under immense pressure to save money and make smart buying choices. The options are plenty, price sensitive and the barriers to switch brand loyalty are considerably low. More over the customers are highly empowered and they do share their buying experiences, be it positive or negative, with their peers. Smart firms understand that they must make an effort to differentiate themselves by innovation and creating value for their customers. This is easily done by simply collecting customer data and by learning to leverage it for improvement in all facets of their relationships with their customers. Presently firms are not able to get all they can out of the data collected but they are a lot of
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Boulding (1993) Narayandas (2003) 21 Thorogood & Schulman, 2011 Adapting Marketing to Changing Customer Behaviors and Demands 22 Song 2001 Mining the Change of Customer Behavior in an internet shopping mall

value from their data. Information about the customers hold great significance and the business analytics can be a great source of help in yielding tremendous value ad helping companies survive in a business environment in flux. Many companies are now operating in a survival mode so an increased focus on existing customers has become imperative. Over 90 percent of executives are Presently directing their efforts on customer loyalty and retaining existing customer affiliation. They are woking on improving customer services. (The Customer You Know: Keeping, Leveraging, and Profiting from Current Customers with Business Analytics, 2009)23 Maximizing value through their existing customer relationships using the data already available to them has become a top priority for various organizations. Business analytics can help organizations in retention of customers by improving how the organization relates to them. 70 percent executives indicate that business analytics can have a significant effect on expansion of current customer relationships (The Customer You Know: Keeping, Leveraging, and Profiting from Current Customers with Business Analytics, 2009)24

Strategies adopted by businesses to survive:

Hutt and Speh (2007)25 view that given the fact that new customer satisfaction isconsiderably more cost-intensive compared to maintaining a profitable relationship with a current existing customer, companies ought to recognize the benefits of a Customer Relationship Management approach. For the purpose of meeting the demanding prerequisites, they suggest that businesses should finance those Customer Relationship Management systems which combine customer service, marketing and sales information; assimilating information from the companies touch points. Berry (2001)26 further adds that customers are pressed for their time. Retailers often contribute to the problem by wasting the customers time and energy in countless ways from puzzling store layouts to inefficient check-out operations, to bothersome hours of business, when shopping is difficult, causing the value of the retailers often plummets. Firms can compete more effectivelyby offering accessible locations, flexible operating hours, and by being easily available via the telephone and the internet. Organizations must take it upon themselves to make it easy for customers to identify and select their desired products, offering the convenience to let consumers complete and amend transactions swiftly and easily.The above signifies the four types of convenience discussed by Berry:
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Access Convenience

(The Customer You Know: Keeping, Leveraging, and Profiting from Current Customers with Business Analytics, 2009) 24 (The Customer You Know: Keeping, Leveraging, and Profiting from Current Customers with Business Analytics, 2009)
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Hutt and Speh (2007)

Berry, J. (2001). Harvard business school review April 2001.

Search Convenience Possession Convenience Transaction Convenience

Conclusion:
Driven by more demanding customers, global competition, and slow-growth economies and industries, many organizations search for new ways to achieve and retain a competitive advantage. Past attempts have largely looked internally within the organization for improvement, such as reflected by quality management, reengineering, downsizing, and restructuring. The next major source for competitive advantage likely will come from more outward orientation toward customers, as indicated by the many calls for organizations to compete on superior customer value delivery. Indeed, superior value of products/services delivered to customers leads to customer loyalty, the real driver of financial performance (see Reichheldet al., 2000; Heskettet al., 1997; Reichheld, 1994). Reichheld and Sasser (1990) show that, on average, a five percentage points increase in customer retention leads to between 40-50 percent increase in net present value profits. A few years later, Reichheld (1994) reports that a decrease in defection rate (or an increase in retention rate) of five percentage points can increase profits by 25-100 percent and that this result is consistent across a wide array of industries. Satisfaction is a state of mind and it is only important as an indication of the intention of the most important behavior of repeat purchase, favorable word-of-mouth, and referrals. Reichheld (1994) states that customers who describe themselves as satisfied are not necessarily loyal. He reports that 60-80 percent of defecting customers reported that they had been satisfied or very satisfied on the last satisfaction survey prior to their defection. Heskettet al. (1997) report that a study of retail bank depositors found that completely satisfied customers were 42 percent more likely to be loyal than merely satisfied customers. Reichheld and Sasser (1990) report that Xerox found that its completely satisfied customers were six times more likely to repurchase a Xerox product or service than its merely satisfied customers. The literature shows that loyalty and profits are strongly linked to value created for customers. Customers are loyal to a company as long as it offers them superior value compared to its competitors. Horovitz (2000) argues that customers receive value when the benefits from a product or service exceed what it costs to acquire and use it. According to Horovitz (2000) benefits can be improved, extended, and expanded. Improving a benefit means focusing on one or a few of the products attributes and rising the benefits offered beyond the current range. For example, the transformation of Heathrow Airport from a dull, purely functional airport into an exciting complex complete with user-friendly services and a

Customer-focusing issues have come out to be the most significant for executives in the business world. Customer-based initiatives & managing customer relationships are considered to be the most essential strategies for moving forward in the business world of today. Customers are the key to unlocking revenues and progress. (The Customer You Know: Keeping, Leveraging, and Profiting from Current Customers with Business Analytics, 2009)27 Organizations have now realized the significance of customer value. As a result they are incorporating business analytics as a part of their operational adequacy. Fact based decision making has become an essential ingredient of innovative business models. Business analytics are now being used widely in order to comprehenf the rising value of existing customers so as to emerge from global recession. New innovative businesses and executives have understood that data collection is insufficient. But using this data to manage dynamism is key. This will also prepare that for the growth period in economy (The Customer You Know: Keeping, Leveraging, and Profiting from Current Customers with Business Analytics, 2009)28

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(The Customer You Know: Keeping, Leveraging, and Profiting from Current Customers with Business Analytics, 2009) 28 (The Customer You Know: Keeping, Leveraging, and Profiting from Current Customers with Business Analytics, 2009)