FAYETTEVILLE, Ark. - In a highly competitive business market, investors need a way to predict financial performance, while companies look for an advantage that will increase their profitability. And in the personal computer industry, that may all come down to the quality of technical support after the sale, according to University of Arkansas researchers Rod Smith and William Wright

"We found that in the personal computer (PC) industry, customer loyalty is a strong driver of financial performance," said Smith, assistant professor of accounting in the Walton College of Business. "But of the four characteristics of business processes performance that directly impact customer loyalty, the quality of tech support after the sale is the most influential. The strength of the relationship indicates that high quality post-sale service differentiates the financial performance of firms and confers a substantial competitive advantage in the PC industry."

Smith and Wright, professor of accounting, studied the financial performance of the top six personal computer manufacturers in the United States from 1994 to 2002 by using a balanced scorecard approach. This allowed them to evaluate the interrelationship among the four product value attributes that impact customer loyalty - brand image, vendor viability, product quality and the quality of post-sale customer support -and determined the causal links with financial performance. They reported the results of their analysis recently at the annual meeting of the American Accounting Association.

They chose to examine the PC industry because the product has a short economic life and the market is intensely competitive. In addition, a wide range of data is available to stakeholders, since the results of two different independent on-going customer surveys are compiled and published in trade journals twice a year. If customer loyalty does drive financial performance, analysts can easily obtain customer loyalty information to aid in decisionmaking.

"We emphasize customer loyalty rather than customer satisfaction, since loyalty is more closely linked to the customers’ intent to make subsequent purchases," explained Smith. "However, we expect that this research applies to customer satisfaction measures as well, since satisfied customers are more likely to be loyal."

All of the surveys questions were evaluated and questions requiring opinions or subjective responses were eliminated. The questions were then categorized as applying to product or service quality. A scaled ranking system was used to allow information from multiple sources to be combined. Survey information was combined with financial measures of brand image and viability for each firm.

The researchers compared these survey results with firm financial performance for 144 quarterly observations. During the study period, the six firms - Apple, Compaq, Dell, Gateway, Hewlett-Packard and IBM - increased their market share from 50 percent to 65 percent. By controlling for differences in average product price, the researchers could test whether measures of customer loyalty explained differences in revenue growth and profitability.

Firm viability and the quality of tech support were found to have the strongest relationship with customer loyalty. In turn, customer loyalty had a substantial impact on both sales growth and return on assets, according to Smith. In their study customer loyalty explained as much as 20 percent of sales growth. With mean quarterly sales in excess of $6 billion, "one standard deviation increase in customer loyalty could reflect as much as $500 million in increased sales," Smith explained. In addition, the researchers found that firms with high customer loyalty were able to maintain higher average price, which also contributed to sales growth.

"These results confirm the importance of recognizing product value attribute measures when evaluating relative firm performance over time," Smith said. "The balanced scorecard framework permits managers, investors and other stakeholders to assess whether a firm is successful in its product market and why. It allows the selection and collection of those key non-financial measures that drive financial performance."