EXIT, VOICE, AND LOYALTY

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Submitted by Terri Griffith on Sun, 12/28/2008 - 08:45

Holiday travel, combined with company cutbacks due to the economy, inspires this post. News stories this week were all about the dismal results to expect from the retail sector. Hotels had reduced staff and services. Airline desks were as you imagine them at this time of the year. Many storefronts were boarded up (e.g., Linen 'n Things, Mervins -- more telling than their failure may be that the space hasn’t been taken over by other retailers).

I write while waiting for my delayed flight. Fewer extra planes (cost cutting) means longer delays when there is an unexpected problem. Even the generally helpful gate agents of this generally perky airline were showing the stress of being understaffed. My traveling companion and I discussed our options. The conclusion is we wait, and get used to waiting and other forms of reduced services.

The market will work (I am an optimistic capitalist), and the downturn will engender innovation. Paul J.H. Shoemaker (research director for Wharton’s Mack Center for Technological Innovation) is quoted in Knowledge@Wharton:

The crisis has multiple impacts,... Loss of revenue and profit will at first instill a cost cutting mentality, which is not good for innovation. But if the patient is bleeding you need to stop that first. Then, however, a phase starts where leaders ask which parts of their business model are weak (and perhaps unsustainable) and that, in turn, can lead to restructuring and reinvention…. The investment approach, however, has to emphasize more of an options and portfolio strategy rather than static NPV (Net Present Value valuation method).

The Knowledge@Wharton article provides other interesting points about disruptive innovation and the like. However, my question is more focused on the perspective of the users – and brings us to my reference to Hirschman’s 1970 book, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States.

Exit and voice are our options. Depending on your loyalty to the firm, you can choose to take your business/employment elsewhere, or you can provide feedback (voice) to the firm regarding the issues that have you thinking about exit. Exit has a more subtle effect on innovation as the company has to notice, figure out why exit is happening, then come up with a response. With voice, the signal hopefully includes viable suggestions for innovation. (See Schultze et al., 2006 for a discussion of “Internet-enabled co-production” with customers.)

In order to distract myself from my multiple hour wait (now, I learn, even longer), I have been wondering how changes in technology make us better able to exercise exit and voice. We have a broader market to work from in this downturn than we would have in 1970 – we can get on the Internet and search for a different hotel, examine the reviews and see if we are likely to be better off somewhere else. We also have more direct methods for voice – for example, through on-line reviews, direct emails to customer service, blogging, or Twitter.  Some related info:

Increased computational capabilities has played a role in the increase of frequent flier/buyer/affinity programs. These programs are focused on increasing customer loyalty – ideally to then reduce exit – but do the companies then do more on their own to understand customer voice? In Hirschman’s 1970 world companies didn’t have the computational power to data mine, or the ability to get us to give up our demographic information in return for the possibility of discounts and free tickets. How are companies using this loyalty to speed-up innovation in this economic downturn?  Ideally, they will feel economic pain, and look for the most valuable adjustments, based on the data they have from their loyal customers.

How can we as individuals push the market toward innovation through exit and voice? Is it possible that this economic crisis will be more innovative that those of the past given the change in the information landscape?