CHAPTER 2: LITERATURE REVIEW
2.1 What Do We Know About CRM and M&A? CRM in M&A
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CHAPTER 2: LITERATURE REVIEW
2.1 What Do We Know About CRM and M&A? CRM in M&A
Customer relationship management is an enterprise approach that extensively employs information technology, particularly database and Internet technologies, to achieve understanding of customer characteristics and to track customer behavior in order to provide appropriate products and services (Wu, 2010; Rigby et al., 2002;
Chen et al., 2010), to satisfy customer requests, to directly communicate with customers, and to maintain a satisfied and profitable customer base (Huang et al., 2005; Zeng et al., 2003; Xu et al., 2002). It is vital for companies to coordinate all service functions (Chattopadhyay, 2001), automate customer-service operations (Karimi et al., 2001), restructure business processes (Bull, 2003; Couldwell, 1998;
Chen & Popvich, 2003; Gurau et al., 2003), and present a unified view to customers.
The purpose of CRM is to acquire more customers, generate more from customers, and retain customers with high loyalty (Hosseini et al., 2010).
With continuous communications and interactive activities, businesses accumulate customer knowledge about customer preferences and consuming behavior. Based on analyzed customer data, businesses provide services and products tailored to customers’ changing needs and customized services that fit customers’ shopping behavior (Zeithaml et al., 1990). By fulfilling customer needs and cross-selling products or services, businesses increase customer contribution. By providing quality services and innovative products, businesses acquire and retain customers (Conway et al., 1999; Levesque et al., 1996; Xu et al., 2002). It was reported (Reichheld et al., 1990) that by reducing defections 5% businesses can boost profits from 25% to 85%
and increase company competitiveness. On the other hand, customers can easily switch to competitors because of disliked customer services or defective products or
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systems (Childs, 2007; Samet, 2010). Some M&A projects (Weber et al., 2000; Kotler, 2006; Raman et al., 2006; Rigby et al., 2002) succeed due to carefully reviewed customer data integration, service refinement, and strategic planning for merged services. For instance, during the merger between Chase Manhattan Bank and Chemical Bank clients were kept informed about every decision, and consequently there was no fall-off in clients, revenue, or business (Ramaswamy, 1997; Euromoney, 1997). Therefore, their customer data integration experienced fewer obstacles because they emphasized customer relations in the strategic planning.
By word-of-mouth on the Internet, customers share positive as well as negative opinions quickly about their experience with the services (Siddiqi, 2011; Hofstede, 2001; File & Prince, 1992). Thus, it can be a critical factor for many companies, especially those with integrated operations after the merger, to carefully review the merged customer profiles and plan effective strategy to retain and acquire customers.
2.2 Managing M&A Projects for Maintaining Customer Relationships
Past studies have addressed the challenges and difficulties of M&A, analyzing M&A projects from the perspective of pre-merger activities, merging strategies, and post-merger implementations. There are a few areas of concern that can lead to the success (Mayoff & Cherba, 1998; Levine, 2011; Davidson, 2011; Childs, 2007) or failure (Harper, 1998; van de Vliet, 1997; Mayoff & Cherba, 1998; McKiernan et al., 1995) of merging projects. By focusing on post-merging results with respect to CRM, we identify a few critical areas of managing M&A projects for CRM.
Strategy for Rebuilding Customer Base and Service Portfolio
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The term “strategy” means the company’s goals and directions for business integration. The strategic calculation and implementation of the integration can affect the results greatly. There are two sets of strategies that firms would need to scrutinize in order to make a smooth transition in customer services post-merger. The first strategy concerns refining and maintaining customer base. The planning session provides the chance to consider the quality of the merged customer base and plan for the removal of customers of bad quality and the retaining of good-quality customers.
This assessment provides the opportunity for understanding customer characteristics and planning for effective promotion and customer communication. The second strategy concerns refining and maintaining products and services. In accordance with the customer profile, it is also important to assess the portfolio of merged products and services and the refinement of the products and services post-merger (Goff, 1999).
Firms may lose customers after a merger due to reduced quality of products and services.
Service Culture
The term “culture” means an organization’s set of expectations for employees (Hofstede, 1980). A service culture is defined as a customer-centric culture.
Organizations of high service culture strive to develop service and performance competencies to exceed customer expectations and create superior value to attract and retain customers. The expected performance outcomes of a service culture involve improved product quality, increased market performance, and increases in customer satisfaction measures (Beitelspacher et al., 2011). However, due to a lack of standard service quality and service guidance, the merged service force may provide inconsistent services as they gain acquaintance with new customers and may manifest inappropriate attitudes (Gotschall, 1998).
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Because of the different values and beliefs regarding customer services in the merged companies, the integrated operation may provide customers with different experiences.
For instance, if one of the merged firms used to measure customer services by revenue generated and the other firm focused on customer satisfaction, the service providers of the merged firm may have to respond differently when facing customers with problems and when arranging resources to provide solutions (Harper, 1998).
Cultural clashes are mostly reported due to differences in organizational values, management style, and working patterns (Harper, 1998). Different strategies and customer service orientations will lead to great cultural differences between the two companies. In order to safeguard their own interests and communication service mode after the merger, the two merged firms may experience clashes at work. This could lead to reduced employee productivity, responsiveness, and innovation at work (Marks, 1997; Mayoff & Cherba, 1998). Both merging parties tend to protect their own way of customer communication and their problem-solving approaches. This makes it difficult for the two merged companies to serve customers who are used to previous products and services. The cultural clash could also be underlined by differences in performance expectations, and employees post-merger could experience difficulties in adjusting to different forms of performance evaluation (Harper, 1998).
The cultural conflicts can make customers suffer from unstable or inconsiderate services. For instance, Novell Inc. acquired WordPerfect Corp. (1994) and experienced cultural and cognitive clashes with WordPerfect. The two companies had fundamentally different ideas about customer service, and this raised many internal arguments (Harper, 1998). The results led to alienated customers and lower service quality (Vestring et al., 2004).
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Process Integration
Process integration for business merger requires a well-thought-out plan to provide similar or improved services to customers (Pai & Tu, 2011). An integrated system can support, and most of the time enforces, standardization of data and processes within the merged firm (Shang, 2005). This includes business policy discussion, dataflow synchronization, and procedure standardization to provide consistent services to customers. The integration process can become an opportunity to strengthen the capabilities of the combined organization and place it in a better competitive position (Robbins & Stylianou, 1999). To ensure customer satisfaction after the M&A, the merged firms need to invest appropriate effort in making the integrated processes serve customers in a convenient and reliable way and in capturing proper information (Xu & Walton, 2005; Salami, 2008). For instance, Wells Fargo Bank acquired Norwest Corporation (1998) with a focus on customer service, and thus it planned several ways to integrate processes and kept the quality of customer service as the priority. For one thing, they put customer convenience the top of the list in all services (Domis, 1998). Customer base increased after the merger due to lower cost and minimized error rate in processes (Costanzo, 2002). A successful transition from M&A should avoid errors from different business process methods (Alsmadi &
Alnawas, 2011). Therefore, it is important to standardize the integrated processes, remove redundant items, and build a synchronized practice in serving customers (Childs, 2007). In addition, employee familiarity with the operation is another key for process integration. Employee education on the new processes can avoid customer confusion and increase responsiveness to customers.
Technology Integration
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An integrated system providing quality information can lead to user satisfaction (Alaranta, 2005) after merger. The first task of system integration is database conversion. Loss or error in customer data during system conversion can lead to customer dissatisfaction, and slow and inflexible data access can create inconvenience in serving customers. For instance, when Wells Fargo acquired First Interstate Bank (1996), Wells Fargo did not link up the reaction of First Interstate’s workers and customers (Hiltzik & Mulligan, 1996). Millions of dollars in deposits were posted to the wrong customers' accounts, checks took weeks to clear, an automated telephone banking system went dark for several days, direct deposits were delayed, and several data losses led to a large decrease in customer base. As mentioned earlier, the bank lost $180 million in a single quarter because of problems in the system integration (Anthes, 1998). The merging of inconsistent infrastructures can cause system clashes and low operational performance (McKiernan & Merali, 1995). In most M&A cases, the two firms possess different technology infrastructures with a variety of supports from different partners. This can cause operational delays, loss of opportunities, and decreased revenues (Harrell & Higgins, 2002). Because of technology infrastructure differences, companies need to learn the other company’s system and build an effective plan for technology integration.
Communication
Communication is always an important task in all business change projects.
Communication with both employees and customers can smooth the transition and reduce uncertainty in the changing period. Miscommunication about the business plan, business expectations, and the progress of the project can cause a decrease in employee morale and an increase in customer attrition rate (Atkinson, 2004). Clear communication with employees can prevent operational errors and negative attitudes
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at work. To help employees respond to multifaceted changes, sufficient communication is a key factor for a successful transition into the new environment and for building employee confidence in the merged company (Xu et al., 2002; Wu, 2010; Davidson, 2011). Communication with customers about the M&A process and to assure the same customer rights and service quality post-merger can reduce confusion in business operation (Davidson, 2011). Full communication can help customers understand the company’s strategy and planning for the future, which can increase customers’ satisfaction because they feel respected and feel they are treated as individuals (Xu et al., 2002; Wu, 2010; Davidson, 2011).
Organizational Inertia
Business integration systems drive dramatic changes in both daily operations and critical decision making, affecting multiple levels of work, along with the distribution of power (Shang, 2005). Employees may manifest resistance through such behavior as sabotage and vocal protests or attitudes such as withdrawal and reduced commitment (Hultman, 1979). These resistance behaviors may lower productivity, affect the quality of goods or services, raise the costs of production, or lower the quality of services (Hultman, 1979, 1995; Judson, 1991; Odiorne, 1981). Individuals who are resistant to the changes may intentionally or unintentionally attack the new processes of the IT-enabled change, thus reducing productivity and/or quality by passive uncooperative actions (Marakas & Hornik, 1996) such as neglecting or delaying work assignments (Hultman, 1979, 1995; Judson, 1991; Odiorne, 1981), being reluctant to learn new knowledge and skills (Hultman, 1979, 1995; Judson, 1991; Odiorne, 1981), refusing to cooperate with other employees (Hultman, 1979, 1995), or making careless mistakes (Hultman, 1979). As another act of passive resistance, employees may devise creative
“workarounds” that produce a sense of reskilling to counter the deskilling produced by
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the change to the new system (Alvarez, 2008). Sometimes they may passively accept lower quality when they have difficulties in adapting to the changes (Hultman, 1979).
Such organizational inertia can cause delays in responding to customer requests, deficiencies in services, and decreased efforts to understand markets and customers and to improve products and services.
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CHAPTER 3: RESEARCH METHODOLOGY
To fulfill the research objective of understanding the CRM performance after M&A, this research plans two stages of empirical study. The first stage is to build a preliminary finding about the industry M&A by longitudinally tracking CRM performances of M&A cases in credit card services. The second stage is to conduct multiple case studies on selected M&A cases regarding their efforts in making the merger a success or a failure in CRM.
3.1 Research Framework
Figure 3-1 Research Framework
This research is based on the framework in Figure 3-1 to understand how companies retain customer relationships after merger and what factors could affect CRM success in the M&A process. The research planned to answer the first research question “can enterprises retain the same quality of CRM after the M&A?” by multiple case studies.
The research uses four CRM outcomes to measure the CRM results of merger implementation in the cases studied.
Influence factors
•Strategic purpose
•Customer base
•Brand effect
•Organizational mindsets
Critical factors
•Strategy for rebuilding customer base and service portfolio
•Service culture
•Process integration
•Technology integration
•Communication
•Organizational inertia
•Standard of procedures of the business transition
•Customer care
CRM outcomes
•Growth
•Loyalty
•Retain
•Customer contribution
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For the second research question “how do organizations retain the quality of CRM after the M&A?” this research applied cross case analysis. The research results propose eight critical factors which companies need to pay attention in the M&A process. Four influence factors are also identified that could affect company success in maintaining CRM quality after merger.
3.2 Selected Industry and Studied Services
Merger-and-aquisition activities are in an upsurge globally. In Asia, they have mostly taken place only since the Asian financial crisis in 1997 (Wong & Cheung, 2009). It is not only governments that have encouraged M&A but also stockholders who want to upgrade competitive ability and reduce costs in order to increase revenue. In Taiwan, because of opening to set up the commercial banks in 1990, so led increasing the banks of privatization and the non-performing loans also have increased. By passing the Finance Holding Company Law in 2001 to address the over-banking and non-performing loans problem, the Government of Taiwan started to promote M&A activities in the financial industry. The objective was to increase banks' profit margins through mergers and diversification of the industry (Tan, 2009). Since then, M&A activities have been prevalent in the finance industries—in fact, M&A has become a mass fervor activity in banks.
In this context, consumer banking is more closely connected to customers’ daily activities than corporate finance—it touches customers directly. Most banks have established customer-service centers to serve retail customers, and they have also established a CRM function to track and trace customer behavior and to work closely with the product sales, product development, and marketing functions. This study
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selects credit card services in consumer banking as our study field because out of all the business services provided by consumer banking, credit card services relate most closely to customers. It is integral to customer consumption in daily living.
3.3 Research Process
There are four steps to establish the research. The steps are explained in Figure 3-2.
Step Description Objective Approach Deliverables
1 Literature Review
To understand the critical factors for CRM success after mergers
Data collected from journals and trade magazines
Possible factors for CRM success and failure after mergers
2 Multiple Case Studies
To understand the CRM performance after M&A in credit card services
Published data about CRM
performance of the credit card industry
Findings about CRM performance after M&A in credit card services 3 Cross Case
Analysis
Critical factors for CRM success in post-M&A
In-depth case study of the selected cases of different M&A types
Findings about factors for CRM success in post- M&A of factors for CRM success after merger
Final findings about CRM success after merger
Figure 3-2: Research Process
First, based on previous studies and practical cases, the study formed factors for CRM success after merging. Then, we conducted empirical analysis on M&A cases since 2004 regarding CRM performance in the credit card industry. Next, based on the case analysis from the previous stage, we selected five cases of different types of M&A, and we cross-case analyzed patterns of CRM success and failure with previously formed CRM success/failure factors verified and enhanced.
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Data Collection of the First Stage
In the case-analysis stage, this study collected data from government published reports about credit card services in Taiwan between 2004 and 2011. Eight M&A cases were selected, and we analyzed CRM performance data one year before and after the declared date of merger. The reason for analyzing data one year after the merging was to assure that we eliminated the effects of post-merger turbulence such as a period of refinement of the customer base, activities related to cleaning out customers with bad credit, and learning the path for the new customer base.
The Banking Bureau of FSCEY reports the credit card performance of all credit card issuers on a monthly basis. The published data of each credit card service include a total number of credit cards issued, effective cards, active cards, cards cancelled, retail sales volume, and the revolving balance of the issued cards. In credit card terms, the retail sales volume is the amount of charges owed to the credit card company; the revolving balance is also called the consumer credit amount, which is the portion of credit card spending that goes unpaid at the end of each billing cycle.
Four CRM measures—customer growth, customer loyalty, customer retention, and customer contribution—are used to measure the CRM performance of credit card services before and after the merger. The indexes and calculation of the indexes are listed in Table 3-1.
Table 3-1: CRM Measures in Credit Card Services
CRM
Measures Indexes Calculation
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Growth
• Cards issued
• Effective cards
• Market share
• Cards issued
• Effective cards = total cards issued – total cards cancelled
• Market share = effective cards/effective cards of all banks
Loyalty Active cards • Active cards
Retain Attrition rate • Attrition rate = cards cancelled/cards issued
Customer Contribution
• Revolving balance per card
• Balance per card
• Revolving balance per card = revolving balance/effective cards
• Balance per card = retail sales volume/effective cards
• Customer growth means a company’s efforts to acquire customers; it can mean the company’s marketing strength in obtaining customers in the market and its ability to maintain customers’ active use of the card. It is reflected in the total cards issued, effective cards, and market share.
• Customer loyalty means customer continuous use of the services, which is measured by the return on investment of the efforts put into serving customers and promoting card use. In other words, it is reflected in customer use of the credit card.
• Customer retention is about a company’s efforts to retain customers, and it is reflected in the customer attrition rate.
• Customer contribution means a company’s efforts to promote more products/services to customers, such as cross-selling to gain more customers’
pocket-share. It is reflected in the card’s revolving balance and balance per card.
Customer revolving balance is for the card issuers’ to earn interest on this debt.
When the revolving balance amount is higher, the credit card issuer will earn
When the revolving balance amount is higher, the credit card issuer will earn