Customer Satisfaction as a Kind of Nonfinancial Performance Measure 'Literature Review' chapter

Excerpt from 'Literature Review' chapter :

Customer Satisfaction as a Kind of Nonfinancial Performance Measure

The Effect of Using Customer Satisfaction as an Integral Performance Measure, as evidenced by Chinese Manufacturers

Challenges to manufacturers as well as many other business structures are significant and often carry a great deal of weight in decision making and future business success. Performance measures are also often focused singularly on financial performance, ROA, ROE i.e. how much revenue the organization has received over time, how much of a certain product was sold and even how much money the organization has saved with regard to improved processes. These financial performance measures are often the core of review with regard to performance and yet there is significant evidence that non-financial performance measures are also an important aspect of doing business, especially in increasingly competitive markets. The manufacturing sector is a sector of business that relies on large sales to small numbers of customers. This being said the goal of manufacturing, if it has any staying power whatsoever must include the development of a clearer understanding of the impact of non-financial performance measures as a way to retain and even gain customers. This research will focus on one kind of nonfinancial performance measurement, customer satisfaction. Customer satisfaction was chosen because it is one of the most important strategic analysis tools for both manufacturers and service organizations (McLellan & Moustafa, 2008). Businesses cannot survive without customers in any context.

Logical literary assessment of non-financial performance measures would seem to be a realistic focus of literature and strategy for the manufacture sector as globalization and many other factors contrive to alter the manner and growth of the industry. Seeking to administer management incentives, high quality service delivery and employee retention through traditional financial assessments is clearly a lost cause. It is therefore clear why current research is leaning in the direction of application assessments for non-financial performance measures in conjunction with financial performance measures to fully understand the "balanced" process and reality of delivery of goods in the manufacture sector. Without such innovation in delivery, application and research the industry could lose incentive with regard to high rates of change and rapid expansion. Seeking to evaluate new and innovative ways to demonstrate and improve success is therefore the responsibility of research scholars in the industry and researchers have embraced this idea by seeking a better understanding of non-financial performance measures in the manufacturing sector.

One of the greatest challenges of researching and implementing customer satisfaction as a performance measure is its inability to be quantified and yet, challenging manufacturers as well as researchers to develop a greater understanding of non-financial performance measures is an important aspect of improved business processes, as there is significant evidence that such measures can mean the difference between maintaining the status quo on sales or increasing sales and therefore growing the business (Said, Hassab Elnaby, & Wier, 2003; Abdel-Maksoud, Abdel-Kader & Epstein, 2007). Honestly, who better is there to judge how services and products are delivered than those who receive them, and retaining as well as growing customer base in manufacturing can make all the difference (Lovelock & Wirtz, 2006, p. 1). From an accounting perspective, customer satisfaction can be used as a tool to monitor and control operation process, and it can also be used as a performance measure to evaluate and compensate the performance of company employees.

Customer satisfaction was chosen as the aspect of research to be focused upon in this work because it is one of the most important factors of business success for both manufacturers and service organizations. Business cannot survive without customers. The two main research questions associated with this review of literature are; How customer satisfaction is currently used as a performance measure? And Why customer satisfaction is or is not adopted by companies to judge performance? To begin to answer these questions one must do creative research as there is very little research associated with customer satisfaction as a performance measure in the manufacturing sector, despite countless calls in other industries to apply and utilize it to help develop better more efficient practices, quality of products, improve customer retention, reduce customer attrition and even in some case to develop more effective performance-based employee compensation packages (Smith, & Wright, 2004).

The majority of previous studies are quantitative and based on services organizations, such as banks, hotels, communication organization and so on. Some previous studies suggested that customer satisfaction would improve the financial performance of companies in the long run, as customers might repurchase. Yet in the manufacturing sector it takes a longer time for manufacturer customers to repurchase as compared with services organizations, therefore manufacturing organizations should also be studied to better understand how customer satisfaction can become a part of the performance measure standards in this sector. Though there are some conflicting findings with regard to whether the use of customer satisfaction would improve performance or not, most research has determined a positive link between customer satisfaction as a performance measure and better firm performance. Some marketing studies have proved that higher customer satisfaction would increase customer retention, reduce price elasticity, lower marketing costs and increases repurchase and referral intentions. All of these factors would improve financial performance of companies. However, some researchers suggested that higher customer satisfaction would reduce financial performance. For example, higher customer satisfaction might be generated from lower selling price and lower profit margins (Anderson, Fornell, & Lehmann, 1996). In addition, previous studies suggested that the overall use of balanced scorecard would improve financial performance of companies, but the effect of balanced scorecard is ambiguous, and needs to be further studied, therefore this work will not focus on a balanced scorecard approach, for two fold, its use is still misunderstood and it is not applied in the manufacturing industry in China (Lusk, Halperin & Zhang, 2006).

There is an oft made argument that customer satisfaction and customer loyalty or repurchase are two of the most important aspects of sustained financial performance (Kaplan & Norton 1992, 1996, 2001; Jones & Sasser 1995; Heskett et al. 2003; Reichheld 1993, 2001). Yet, most current and historical research rarely if ever breaks down what defines customer loyalty and how to achieve it. Additionally there is very limited research that focusses directly on the manufacture sector and regardless of the manufacture position of China no known research focusses on China's manufacture sector and the role of non-financial performance measures such as customer satisfaction and/or attrition. Managers in China and elsewhere need to know why customers remain loyal or not but more importantly need to better understand customer satisfaction as a driver of long-term financial success. (Smith & Wright, 2004) There are conflicted findings on whether customer satisfaction is acted on or not in most sectors. As suggested by some studies, managers would act on the best interest of the company if customer satisfaction is used to evaluate their performance (Franco-Santosa, Lucianetti, & Bourne, 2012). While other studies stress that customer satisfaction itself cannot be reliably measured, for example customers might not be able to reliably measure the quality of a product, so they might be satisfied or not satisfied for an incorrect reason (Jones & Sasser, 1995). So managers might perceive they are measured by an incorrect indicator, which would cause them to not act in the best interest of the company and at the very least overlook customer satisfaction as a necessary performance measure (Ferreiraa & Otley, 2009; Ittner & Larcker, 1998). Without this external point-of-view, along with the innovation and learning aspect the system is at risk of building products that are not desired or are underutilized while neglecting those which need greater emphasis, or manufacturing products at a lower quality that is desired by customers.

Lastly, without looking at the customer satisfaction aspect companies might fall into a trap of not understanding that the lowest cost product might not be the best product that could be offered to a customer, for a multitude of reasons. If one simply looks at internal measures the system runs the risk of devaluing products that are sought and appreciated by the consumer, which could be one of the only reasons the customer continues as a patron, simply because of financial cost or perceived business perspective regarding lack of need or need to streamline services (Wober, 2002, pp. 28-30). In other words expanding manufacture or demanding higher quality standards could cost more money that customers are willing to pay but there must be a balance as when products are not sold the business is not making money and is in fact investing money unnecessarily. Said, Hassab Elnaby, & Wier agree and stress that firms need to look at how such measures, especially used as incentives stress an integral part of measuring real business standards. The non-fiancial performance measures they look at are customer and employee satisfaction, quality, market share, productivity and innovation.

Our findings support the contention that firms that employ a combination of financial and nonfinancial performance measures have significantly higher mean levels of…

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