Commentary by Jack West, American Society for Quality
November 16, 2005
Quality can be measured in many ways and from many different perspectives. The American Customer Satisfaction Index (ACSI) examines the quality of products and services from the user perspective. For a market economy in which sellers compete for the satisfaction of the buyer, this is the ultimate test. Unless buyers recognize and are willing to pay for quality, it matters little.
This analysis by the American Society for Quality (ASQ), the world’s leading authority on quality, examines the quality data from the third quarter results of the ACSI. Those index results were released this week and cover companies in eight industries of the Manufacturing Non-Durable Goods sector.In short, the ACSI examines three determinants of customer satisfaction: perceived quality, perceived value, and customer expectations. Of these, the primary driver of satisfaction is perceived quality--the component of ASQ focus in this report.
Customer satisfaction, as measured by the ACSI, is a customer’s evaluation of the entire and cumulative experience to date with a product or service provider. Overall perceived quality, in contrast, is the evaluation of the quality of a product or service provider over a more recent time period, such as “the past year” for hotels and airlines or “the past six months” for laundry detergent and beer. Quality is a good predictor of satisfaction but satisfaction is a better predictor of customer loyalty and business performance.
This commentary on the latest ACSI quality data includes the following information:
The Link Between Quality and Satisfaction
As displayed in the graphic below, fluctuations in user-experienced quality track closely with satisfaction (Figure 1).
As noted in the recent “Implications for the Economy, Stock Returns and Management: ACSI at 10 Years Report,” even though quality and customer satisfaction are closely related, they differ in important ways. One can be satisfied with something without necessarily believing that it is of high quality. In the fast food industry, for example, customer satisfaction is reasonably high– higher than one would expect from looking at quality alone. Customers do not find fast food items to be of particularly high quality, but prices that are low, and in some cases falling, contribute to higher satisfaction.
The 10-year report goes on to point out that, conversely, one can also believe that something is of high quality, but the price is so high that it contributes to dissatisfaction. According to the data, the hotel industry may be a case in point. Perceptions of quality with hotels are quite high (82), but a lower perception of value given high prices keeps the ACSI significantly lower (72). The corresponding numbers for the fast food industry are 74 for quality and 74 for satisfaction.
This report on quality offers further analysis by ASQ experts and is based on a key economic indicator and the nation’s leading measure of customer satisfaction, the American Customer Satisfaction Index. Produced by the University of Michigan in partnership with the American Society for Quality and CFI Group, the ACSI is produced quarterly, measuring more than 200 companies in 41 industries. The index has been issued and supported by the partnership for more than 10 years.
The ACSI uses two primary criteria to define the consumer’s quality experience:
ACSI data collection occurs through thousands of quarterly interviews with customers who have purchased and used specific products or services within defined time periods. It treats satisfaction with quality as a cumulative experience rather than a most-recent-transaction experience.
Customer interviews that formed the basis of the overall ACSI and its quality component on manufacturing non-durables occurred during the period of July-September of this year. Each quarter a different sector is measured, with the fresh data being used to update the national ACSI score quarterly on a rolling basis. ASQ plans to issue Quarterly Quality Reports, with analyses on these sectors, based on the latest ACSI scores.
What Do Quality Scores Mean?
Even though determination of quality is a complex and highly subjective calculus involving the simultaneous processing of many factors inside the mind of the consumer, that does not mean it can’t be quantified.
The ACSI relies on a tested methodology to help quantify the subjective evaluations of the goods and services acquired and consumed in the United States . Interviews with many customers probe multiple facets of quality such as product or service attributes, price, and market fit to measure the subjective evaluations of the goods and services acquired and consumed in the United States . Data derived from these interviews are used as inputs to the ACSI’s econometric model, which combines numerous proxy measures (reflecting the consumer’s overall consumption experience) to arrive at an index number on a 0 to 100 scale. This is not a percentage. Unlike the output of many familiar consumer surveys, an ACSI score of 80, for example, does not mean that 80% of consumers who were interviewed have high regard for the quality of the particular product or service in question.
The unique methodology used to calculate the ACSI and the quality component scores has the advantage of allowing for cross-industry and cross-company comparison. For example, it lets us say with assurance that consumers have higher regard for the quality of beer than they have for the quality of banking services, or that consumers think Heinz products have better quality than Dole products.
There was no change in perceived quality in the manufacturing non-durables sector overall in the third quarter of 2005 compared to the same period last year. The perceived quality index--again a component of the ACSI--remains at 87.4. Nevertheless, non-durables remain a bright spot compared to the overall national quality index, sitting a full nine index points above the overall national quality index of 78.5 for the economy as a whole. There was not a single company in the entire manufacturing non-durables sector that experienced a significant decline in its perceived quality score.
Overall, the continuing strong showing in consumer non-durables suggests that the market leaders in this sector have a solid understanding that quality as defined by the customer is a key ingredient of successful corporate strategy.
The consumer non-durables sector includes such products as food and beverages, apparel, personal care products, and cleaning products. There were no statistically significant changes in quality scores for the industry groups in the sector, although individual companies saw more dramatic changes.
The manufacturing non-durables segment is highly competitive, with very low barriers to deter customers from switching between brands and companies. Customer loyalty, a high-level concern of any business, is especially critical and fragile in the manufacturing non-durables area. Quality has been shown to be a strong predictor of loyalty; some 40% of changes in loyalty can be explained by changes in quality alone. Therefore, makers of nondurable goods clearly have strong incentives to pay attention to their product quality, and the relatively stable high quality marks in this sector indicate that many of these companies have learned that lesson.
The long history of consumer-product flops illustrates one side of this lesson. Consumers will be far more forgiving of a company whose new product fails due to a misreading of the market—New Coke comes to mind—than they will be for a product launch that fails for quality reasons. Unilever’s experience with Persil Power laundry detergent and Coca-Cola’s experience with Dasani in Great Britain are good examples.
In the Dasani case, Coca-Cola planned a £ 7 million launch in Great Britain for Dasani bottled water, which had risen rapidly to become the #2 bottled water brand in the U.S. The launch was scuttled within five weeks of its introduction in early 2004, all stock was pulled from shelves in the U.K. , and planned introductions in Germany and France were delayed when it was found that the water contained levels of bromate in excess of U.K. standards. The brand’s woes were further compounded by the revelation that the water, which Coke had marketed as one of the purest waters around, was actually treated Thames tap water.
Some estimates say that more than 90% of the 25,000 new products introduced annually in the United States are destined to fail, and even among the major high-volume, high-profile products put out by the savviest of marketers, about one in five of these will be unsuccessful. Even in the consumer non-durables arena, although the success rate for new product introductions is low, failures for quality reasons are much more rare than failures to due misjudgment of the market needs and wants.
What other factors might explain why consumers continue to give high marks to the quality of products in this consumer non-durables sector? The producers of these consumables apparently have captured the ability to keep their eye on multiple markets while doing a balancing act of attending to the demands of production quality/efficiency, supply, and marketing. The companies dominating these industries are global companies that manage to satisfy the needs of consumers in the U.S. market while also customizing their offerings to meet needs of consumers in other diverse markets. Accomplishing that requires robust quality systems that start with a thorough understanding of what the customers want, then translate that understanding into quality systems that move goods seamlessly and efficiently from suppliers through the production processes to distribution networks and ultimately to the customer. That level of attention to quality is a primary reason why customers perceive that these companies perform so well.
Company Highlights: H.J. Heinz has far and away the highest quality score in the food manufacturing category, followed closely by the Quaker Oats Co., Hershey Foods, Kraft Foods, the Kellogg Co., General Mills, Mars and ConAgra. Rounding out the group, still with very high scores compared to other companies in other industries are Nestle, Sara Lee, Dole Food Co., and the Campbell Soup Co. Trailing significantly behind the others but still much better than many other companies in other industries is Tyson Foods.
Analysis: In the food manufacturing category, H.J. Heinz recorded the largest gains of any measured company in the third quarter of 2005 compared to third quarter 2004. Dole Food was the only other company in this category to increase its score by a significant amount. The 11 other measured companies in the food manufacturing category were either unchanged or recorded increases or decreases that were not statistically significant.
The category as a whole, however, was unchanged from the same period last year. The food manufacturing category is marked by consistency of quality among the many well-known brand names. The aggregate score for the food manufacturing category is 88, just slightly higher than the aggregate for the entire manufacturing/non-durables sector (87.4).
The Heinz approach to quality is instructive, illustrating several ways in which quality strategy and tactics can play an integrating role in delivering results in a highly competitive consumer products environment.
In late 2003, Heinz made major changes in its consumer product brand management structure. These changes reached deep into the organization, aligning brand management teams with the factories and operational teams and helping focus and deliver the quality expectations to the consumer and customer. The changes were aimed at improving quality performance by enhancing communication to incorporate the voice of the customer.
Concurrently, many quality and continuous improvement tools were introduced throughout Heinz’s supply chain, including but not limited to the familiar Six Sigma methodologies and lean manufacturing systems. (Six Sigma is the name given to a process improvement methodology combining statistical quality improvement tools and a project-based approach focused on clearly defined bottom-line objectives. The name is derived from a statistical term indicating a very high level of control of variation within a process.) Heinz began its commitment to using the Six Sigma methodology in 2004 with the training of some 180 quality and process improvement specialists at eight or nine of its manufacturing facilities. These improved tools focus heavily on root cause analysis and management operating systems to deliver results.
Those results include expedited resolution to quality variances within Heinz operations and improved ability to meet consumer and customer requirements. The results are also evident in the rise in Heinz’s perceived quality score.
Beverages & Soft Drinks
Company Highlights: In the beverages and soft drinks category, Cadbury Schweppes had the highest score, followed very closely by Coca Cola and then by Pepsi.
Analysis: During the third quarter, warmer than normal temperatures were cited as factors in strong sales performance for nonalcoholic beverages, but that was not enough to prompt consumers to report any greater appreciation for the quality of these drinks. All three measured companies and the category as a whole were unchanged from last year. The beverages and soft drinks category had an aggregate score of 89, more than a point and a half above the manufacturing/non-durables aggregate industry score.
The “cola wars” are becoming less about cola as the international soft drink producers shift more of their attention to the noncarbonated beverages segment, which includes bottled water, flavored and enhanced waters, and sports drinks, which have greater appeal to today’s health-conscious consumers than do the traditional soft drinks. This changing product mix attracts a changing consumer base with potentially different views of what constitutes a quality product. The purchaser of a bottled tea or bottled water is looking for different things from these beverages than is the purchaser of a carbonated soda, yet the company that supplies these beverages has to listen to the voice of both these consumers.
Breweries – Beer
Company Highlights: Anheuser-Busch had the highest quality score in the Breweries/Beer category with Miller trailing two points behind and Adolph Coors coming in last.
Analysis: The brightest spot in the third-quarter manufacturing non-durables results is the brewing industry, where all measured companies racked up gains in consumer-perceived quality. This category has regained the ground lost in quality perception of U.S. consumers over the past decade. This is in spite of several trends rocking the industry, including strong performance and innovations by the competing spirits and wine businesses, major industry consolidation, and strong growth outside of the U.S. market. In general, it appears that brewers’ attention to markets other than the slow-growth U.S. market has not caused them to divert attention away from the quality levels that their U.S. consumers expect.
Company Highlights: Nike and Reebok have the same quality score this year.
Analysis: In the athletic shoes category, there were no statistically significant changes for either of the measured companies or for the category as a whole. However, the aggregate quality score for the athletic shoes category (82) lags significantly behind the manufacturing/nondurable goods score (87.4).
Major changes are in store for this category due to Reebok’s acquisition by Adidas, which is expected to be complete sometime in the first half of 2006. With 20% of the U.S. market, Adidas was not measured in this third quarter. The acquisition will bring together two very different business cultures: Adidas’s technology/sports performance culture and Reebok’s lifestyle culture. Add to that the potential complications of catering to a broadened customer mix, and the challenge for the Adidas/Reebok combine will be to maintain product quality as it attempts to go toe-to-toe with sales leader Nike.
Highlights: R.J. Reynolds and Philip Morris had the same company quality scores.
Analysis: The cigarettes category improved its perceived quality score this quarter over the same quarter last year, with all of the gain attributable to an increase in the quality rating from purchasers of R.J. Reynolds products. Nevertheless, Reynolds still has considerable ground to make up in order to regain the quality ratings it enjoyed a decade ago when these scores were first recorded. As a category, the aggregate quality scores for cigarettes (85) lags the manufacturing/nondurable goods overall aggregate (87.4) but still beats out the vast majority of other industries measured during other quarters, including supermarkets (78), life insurance (82), airlines (69), energy utilities (80), and cellular telephones (77).
In the other manufacturing non-durables industries measured this quarter—Personal Care and Cleaning Products, Pet Food, and Apparel—none of the companies recorded statistically significant gains or declines in perceived quality.
About the Author
Jack West is a past president of the American Society for Quality and a quality expert. A Six Sigma Master Black Belt instructor and consultant, West has held various engineering and management positions at Westinghouse Electric Corporation and Northrop Grumman. He holds a doctorate in business administration and a master’s degree in management, both from The George Washington University. John Ryan, ASQ public policy analyst and a member of the Society’s communications staff, also contributed to this report.