How J.D. Power III Transformed the Auto Industry

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In 1968, J.D. Power III took the radical step of soliciting customer feedback about cars through consumer surveys. This move ultimately led automakers to shift their operations from a product focus to a greater focus on the customer. Today, J.D. Power and Associates is focused on gauging customer satisfaction across a broad array of industries.

Power is now the subject of a new book that documents that history: Power: How J.D. Power III Became the Auto Industry’s Adviser, Confessor, and Eyewitness to History, by Sarah Morgans and Bill Thorness.  Recently, Power was a guest at the Mack Institute for Innovation Management conference on the theme of disruptive technologies. Wharton professor of management John Paul MacDuffie sat down with Power to learn more about the experiences that led him to launch J.D. Power and Associates.

An edited transcript of the conversation follows.

John Paul MacDuffie: I am speaking with J.D. Power III — or J. David Power — also known to his friends and everyone else as Dave Power. He is here as our special guest at the Mack Institute for Innovation Management conference on the theme of disruptive technologies: What happens when they meet tightly integrated systems? Dave brought his own disruptive impact to the auto industry through the company he ran that bears his name, which delivered reports on the quality of automobiles — publicly and with the best and worst identified. Dave and I will talk about his career based on a new book on this topic. Dave, welcome to Wharton.

Dave Power: Thank you, John Paul.

MacDuffie: Your career started after you graduated from Wharton [and] you started your own firm. It is almost a modern career path when I think about what my students say, which is: “I want to work for a while, and then I want to start my own business.” Tell us some of the things that really brought you to that decision. You decided to go to the auto industry. Why was that?

Power: Fourteen percent of all jobs in the United States in the 1950s were due to the automobile industry. I thought that gave me plenty of chance to make a name for myself there.

MacDuffie: You went to Ford, but they didn’t put you in the automotive division right off. Tell us about that.

“The first few surveys that we did got close to 50% response rate. It ran 30% to 50% consistently because people wanted to talk about their cars.”

Power: Right. [The Ford Tractor Division hired me.] I was a marketing major, and they put me into finance — the so-called training program, which was on-the-job training. I learned a hell of a lot….

MacDuffie: You were doing auditing. You got a look at how the dealership system worked, which again wasn’t what you expected. But it probably had an impact because you ended up studying dealers the rest of your career.

Power: Yes. I audited the dealers after sales contests. I arrived just after the contest was over. [Ford] suspected that the dealers were getting credit for tractors or implements that they hadn’t sold yet. We had to go around and cross-check them. That was an experience that [allowed me to see] reactions of people when they get caught.

MacDuffie: The next step for you was out of Ford and into the market research business. Tell us about what you learned from that experience.

Power: I wanted to get out of finance, and Ford wouldn’t transfer me, so I ended up at Marplan, the market research arm of McCann Erickson. They had just won the Buick and the GMC account. We started doing a lot of market research for them.

MacDuffie: You learned a few things about how market research was done that you didn’t necessarily like, right?

Power: Right. I had a situation where I was representing the Buick division in this meeting. They had a big project — $1.5 million at that time was huge. We were told to measure the effectiveness of the advertising of all of the General Motors divisions. We had to create a questionnaire to do it. The first day we [drafted] question[s] 1a through 1b by lunch. After we came back, we didn’t even reach question two. We had about 40 people in the room trying to agree on the way the [survey] should be conducted.

MacDuffie: So the customer really controlled very tightly what data could even be collected, and that data came back just to that customer.

Power: Yes. If you did work for one car company, you had to remain captive to that. You couldn’t work with any other car company.

MacDuffie: It was the same way with the advertising companies, and it became an important principle for your business — that you would be independent and not be captive in that way. You worked for McCulloch, a company that made chainsaws. A very interesting part of that experience taught you about listening to the customer.

Power: Yes. When I was in Marplan in Los Angeles, we conducted a study for their client, McCulloch. It was interesting because what I found is that they were still doing their forecasting based on the number of trees that were going to be cut down in the Pacific Northwest and the trees in the Southeast — the pine trees that made pulp. They forgot about the casual user….

MacDuffie: I remember from the book that another thing you learned was they basically were applying the same standards they applied to their professional chainsaws to the home equipment, so it was built to operate 200 hours a year. These folks were probably only using it five or six hours….

Power: Yes.

MacDuffie: Completely over-engineered. You might have seen that a few times in the auto industry, too.

Power: Yes…. We opened up a whole new view of what they had to do. After I finished the study they asked the officials at McCann Erickson if they could offer me a job as director of corporate planning. Since it was the client, they said OK. That’s how I got to be an employee of McCulloch.

MacDuffie: Some time around then, some friends came to visit, and you decided to start your own firm. Tell us about that.

Power: A Wharton classmate came into town from Rochester, N.Y., with two other young fellows. All three of them had their MBAs and were going out to start a new company. This was very early in 1968. They said that they had quit their jobs, and they all had good jobs: General Electric, Kodak and Xerox. I said, “What are you doing?” My classmate said, “We are going to measure the meters at homes via satellite.” In 1968, we only had one or two satellites up there then. I said, “That’s crazy.” They said, “Well, if we don’t make it, we will get another job.” I thought about it, and I went home and talked to my wife. She said, “You should start your own company.” So that’s how we did it.

MacDuffie: Your wife was an important partner in the business from the start.

Power: Right. We had child labor. They never let me down.

MacDuffie: It is a wonderful image from the book. As the surveys were being sent out to the consumers, your four kids are carefully taping the shiny quarter on each one for that extra bit of incentive to get a response.

Power: Face up.

MacDuffie: Face up. The head had to be square, I’m sure.

Power: Yes. We got perhaps the first double-sided Scotch tape, which was important, too.

MacDuffie: Exactly. It sped up the process.

Power: It did.

MacDuffie: You, of course, started with direct mail surveys…. I heard you say something about the response rate you got — something that would amaze most market researchers these days.

Power: The first few surveys that we did got close to a 50% response rate. It ran 30% to 50% consistently because people wanted to talk about their cars.

MacDuffie: Some of them sent back handwritten notes and copies of invoices with circles on them. They were so revved up about it.

Power: We collected those. About 10% of them included something like that — even photographs of the paint fading or the trunk lid leaking. We would send them on to the manufacturer, as we told [consumers] in our cover letter that we would do. We lost sight of what the manufacturers did with them. Some of them received more than others.

MacDuffie: Had you already resolved to publicly disclose the data on all the manufacturers from the surveys?

Power: No, not at that time. It was supposed to be confidential. But when we did the Mazda rotary engine survey, we found a problem with it…. The O-ring was failing once it hit 30,000 miles. The O-ring kept the cooling system from leaking out or leaking into the engine. It just started failing. They would have to take the whole engine out of the car to replace it.

MacDuffie: This was the Wankel engine, which was greeted as quite an innovation, and it also improved gas mileage.

Power: One of the car companies that subscribed to the survey results released it to The Wall Street Journal.

MacDuffie: Not you.

Power: No.

MacDuffie: A competitor basically.

Power: … We said, “How did you get a hold of it?” The competitor said, “We have our sources.” It was from Detroit, so I knew it was one of the Big Three [automakers]. They said they were going to do an article. I said, “I would like you to have the benefit of my balanced press release on this.” He said, “OK. Get it to us right away.”

MacDuffie: At the moment, there was no such press release, right?

Power: Right.

MacDuffie: But you set out to write it immediately.

Power: I sat down and immediately wrote it on a pad. We had to find a way of getting it right to Detroit. We ended up finding somebody with a Telex machine, and the gal sent it. We were on the front page the following day.

MacDuffie: That’s when you learned the power of the press to amplify your data and get the message across.

Power: Yes. It went viral. We were in just about every newspaper, radio and TV station for a week.

“The consumer has more information than the dealer. They control the market. It is going to be determined by them.”

MacDuffie: Looking at the present day and at the future a bit, let me ask you two questions. One is about new technologies. So often executives and engineers in the auto companies say, if we are slow with new technologies, the customers complain because they want the new functionality. But if we put it in and it doesn’t work perfectly the first time or it doesn’t work perfectly every time or we have trouble learning it, then they are really grumpy about it.

Power: Yes.

MacDuffie: Ford is in the news these days for quality complaints about SYNC and MyFord Touch. Mercedes has the issue with the S-Class. It’s a repeated story, and it would show up in your surveys, of course. What are your thoughts on the challenges from both the automaker and the consumer side of bringing in this new technology?

Power: There are about 5% or 10% of buyers who want that advanced information. The 90% that don’t are the ones who complain.

MacDuffie: Do you think the automakers are too responsive to those lead users?

Power: Yes.

MacDuffie: OK. So they get ahead of themselves. I guess another issue is that each company really does its own thing, right? There are virtually no standards for these things like we see in computers.

Power: Multiple-car households — which are very common now — have different brands. They have to adapt to the electronics in the particular car they are driving.

MacDuffie: Who wants to learn three different systems? It is an industry that has always been resistant to standardizing at the industry level.

Power: The handheld that they use all the time when they get in the car is better — at least now — than what is in the car.

MacDuffie: I know people say sometimes that the auto companies missed a chance to get people using car phones because they were slow to install them. But if you imagine how fast the technology moved and how infrequently you replace your car, you can imagine how quickly that car phone would have seemed very clunky.

Power: Yes.

MacDuffie: Let me ask you about the future of dealers again — remembering that dealers have been an important part of your business right along. You stirred some controversy in the early 2000s with a prediction that the days of the traditional dealership might be numbered…. As you look at what’s changed in the last 10 years, do you still predict a threatened future for the traditional auto dealer?

Power: Absolutely.

MacDuffie: Or have they adapted in good ways?

Power: The dealers are adapting in one way that is good, in that they are consolidating. There were 50,000 franchised new car dealers in 1950. Today there are 17,000.

MacDuffie: About a third [of the previous number] and, obviously, much higher sales.

Power: AutoNation, Group 1 Automotive and other consolidators are taking several thousand dealers into their fold. They aren’t truly dealers any longer when they do that.

MacDuffie: What about the whole issue of direct sales from the manufacturer to the customer through the Internet? There are state laws that mostly prohibit that now. Do you see those going away? Or is their lobby too strong?

Power: The lobbying is very difficult for dealers today. What has happened is the consumer has more information than the dealer. They control the market. It is going to be determined by them. It is going to determine what the manufacturers have to build to remain competitive. It is the customer in charge. The change has happened over the last 10 years, and it is only going to [intensify]. The customer gets instant information. It is amazing. They don’t want to sit down and haggle a price. They want it done. They are going to demand change.

MacDuffie: Do you support the efforts of Tesla’s CEO Elon Musk to break those laws and [move forward with] direct sales? He has challenged the law in Texas and in New York.

Power: Yes. I believe that the laws are not reasonable. They were developed in the 1950s when there were a lot of dealers, and it was to give the dealers some say with the manufacturers who were dictating everything. They got that covered, and now their value to the whole operation of selling the vehicles is diminished. Now they are saying they should still be enforced. I don’t think they are going to be able to hold up on it. We will see more changes coming down the route.

MacDuffie: My last question then is about another look into the crystal ball: At the conference today, we were hearing about autonomous vehicles and the self-driving car. Is this a trend that you think consumers will want? Like you say, maybe consumers don’t always want this latest functionality. But there are a lot of claims about better safety, of course, as well as some of the convenience of not having to give as much attention to driving.

Power: Maybe the average driver will accept it. But it takes the fun out of driving. That’s a different story for the automotive enthusiast. But I think it is going to be in our future. You will still perhaps be able to override the speed limit and so forth.

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