Summary of key issues, evaluation of key issues, proposed solutions, recommendations, and application of marketing concepts/theories.Case Analysis 1 Enterprise Rent-A-Car Instructions Please read the case: Enterprise Rent-A-Car and complete the case analysis. Question to be addressed in your case analysis: With the rise of ride-sharing services (i.e., Uber and Lyft), car rental companies are losing customers today. Use the information from the case study and conduct your own research to discuss what Enterprise should do in this competitive market. Please focus your analysis on Enterprise’s competitive advantage. Please make sure to review the grading guidelines and rubric prior to working on this case analysis. Please include the following in your case analysis. 1. Cover page 2. Summary of key marketing strategy issues. 3. Evaluation of key issues 4. Propose and justify your own solutions 5. Recommendations 6. References 7. Please apply marketing concepts or theories introduced in this course or you find from external sources. Note: please do not rely on the information provided in this case alone. When the case study was published, Uber and Lyft were not threats to the rental car industry. You need to conduct your own research on the current situation. Case write-ups should be at least 5 pages not including cover page and reference page, double spaced, 12 font size in Times New Roman. Please submit it in MS Word format. 5-311-508 Revised March 21, 2012 MEGHAN BUSSE AND JEROEN SWINKELS Enterprise Rent-A-Car History The American car rental industry was born on August 20, 1916, when Josiah Ellis “Joe” Saunders, an entrepreneur living in Omaha, Nebraska, ran a seven-line classified ad offering “Automobiles for Hire.” Saunders’s fleet consisted of one vehicle—a Model T Ford—that he rented for ten cents per mile. The industry Saunders created grew dramatically with the advent of commercial air travel after World War II. In 1957 in St. Louis, Missouri, Jack Taylor founded the company that would become Enterprise Rent-A-Car (named after the aircraft carrier on which Jack had served as a pilot in World War II). Jack, a successful sales manager at a Cadillac dealership, started the company to lease cars, but within a few years he discovered a lucrative market for short-term rentals. Jack focused Enterprise on the local rental market, setting up offices in neighborhoods rather than at airports. He believed that increasingly car-dependent Americans would welcome a local option for renting cars when their own vehicles were being repaired. This was the Enterprise way—“convenient local rentals right where customers live and work.” After court decisions in 1969 required American insurance companies to begin reimbursing for auto rentals while an insured owner’s car was being repaired after an accident, Enterprise began cultivating referral relationships with major insurance companies. This move brought in more business for Enterprise and enabled insurance companies to offer enhanced service to their policyholders. In 1980 Jack Taylor stepped down as president of Enterprise and promoted his son, Andy, to take his place. Under Andy’s management, Enterprise embarked on two decades of rapid expansion, frequently growing revenue and locations more than 15 percent annually (Exhibit 1). By 2004 the company claimed that 90 percent of all Americans lived within fifteen miles of an Enterprise rental office. In 2010 Andy was chairman and CEO of Enterprise Holdings, which was 98 percent owned by the Taylor family. Enterprise Holdings (comprising the Enterprise, National, and Alamo rental brands) was the seventeenth largest privately owned company in the United States, with more than $12 billion in revenue. Had it been publicly traded Enterprise would have ranked number 185 in the Fortune 500. Enterprise was not required to reveal its earnings because it was a private ©2012 by the Kellogg School of Management at Northwestern University. This case was prepared by Greg Merkley ’84 under the direction of Professors Meghan Busse and Jeroen Swinkels. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 847.491.5400 or e-mail firstname.lastname@example.org. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Kellogg School of Management. ENTERPRISE RENT-A-CAR 5-311-508 company, but an industry adage held that “there are two types of rental car companies: those that lose money and Enterprise.”1 The Enterprise brand had more than 6,000 rental locations in the United States and a fleet of 850,000 cars in service. Enterprise had been the largest rental car company in the United States since 1994, and by 2010 Enterprise Holdings accounted for nearly half of the rental market and was more than twice the size of Hertz, the number two competitor (Exhibit 2). Human Resources In 2010 Enterprise employed 68,000 people, virtually all of whom had graduated from college or university. Enterprise hired more university graduates than any other company in the United States; in 2011 it planned to recruit approximately 8,500 new graduates from 1,000 campuses. Forty percent of these new hires would come from employee referrals. An executive described the skills the company was seeking: “Enterprise is looking for individuals who are goal-oriented, and exhibit good problem solving ability, leadership and communication skills, sales and customer service skills, a strong work ethic, and flexibility.”2 Enterprise consciously did not target the “best and brightest” students, the usual targets for corporate recruiters. In the unvarnished words of another executive, “We hire from the half of the college class that makes the upper half possible. We want athletes, fraternity types—especially fraternity presidents and social directors. People people.”3 In the autobiographical words of one vice president, “Nobody ever went to college planning to go into the car rental business. . . . Then a time comes when that’s the opportunity that presents itself, and you grab it.”4 Enterprise offered these college graduates more than simply a paycheck—it gave them an opportunity to build a well-paying career, provided they were willing to work hard and learn. Pay for trainees was modest—in 2010 a new employee generally earned about $35,000 per year when overtime pay was included (trainees were paid on an hourly basis). Although the dress code was professional (white shirt and ties for men and business suits for women), the work was anything but: trainees spent their days waiting on renters, washing and cleaning cars, picking up customers, and handling paperwork. Despite these apparent drawbacks, the company consistently appeared on the BusinessWeek list of the 50 Best Places to Launch a Career. Enterprise dubbed its structured program of training and career development an “MBA without the IOU.”5 New employees typically had completed the training program and become management assistants in a branch by their one-year anniversary, and they could be eligible for promotion to assistant managers within two years. The program generated substantial turnover: 1 Gianna Jacobson, “Rental Car Giant Successfully Shuns Industry Shakeout,” New York Times, January 23, 1997. 2 Scott Shrum, “Looking for Amiable Jocks,” Hire Education (blog), Wall Street Journal, February 3, 2011, http://blogs.wsj.com/hire education/2011/02/03/looking-for-amiable-jocks. 3 Brian O’Reilly, “The Rent-A-Car Jocks Who Made Enterprise #1,” Fortune, October 28, 1996, http://money.cnn.com/magazines/ fortune/fortune_archive/1996/10/28/203910/index.htm. 4 Ibid. 5 Kirk Kazanjian, Exceeding Customer Expectations: What Enterprise, America’s #1 Car Rental Company, Can Teach You About Creating Lifetime Customers (New York: Currency Doubleday, 2007), 96. 2 KELLOGG SCHOOL OF MANAGEMENT 5-311-508 ENTERPRISE RENT-A-CAR 25 percent of new hires left within the first six months, and an additional 25 percent left within two years. Promotion to branch manager, a general management position with almost as much independence as a franchisee, took several more years depending on performance and the availability of branch manager positions. At this stage some employees opted to move into functional positions in the corporate division. Successful branch managers could be promoted to area managers (overseeing about four branches) and then to group managers (responsible for about five areas or twenty branches), and finally to vice presidents. Figure 1: Enterprise Career Path Source: “Enterprise Rent-A-Car: Recruitment and Selection at Enterprise Rent-A-Car,” The Times 100, Edition 14, http://www.thetimes100.co.uk/case-study–recruitment-and-selection-at-enterprise-rent-a-car–96-339-1.php. Enterprise filled its managerial posts exclusively through internal promotion. As a result, every employee—except for a few specialists in IT, finance, and legal—had started working as a trainee in a branch. “What’s unique about our company is that everyone came up through the same system, from the CEOs on down . . . 100 percent of our operations personnel started as management trainees,” said an Enterprise vice president.6 Even CEO Andy Taylor went through the same program. “We’ve all had our ties sucked into the vacuum,” he said.7 While individual performance was essential to advance within Enterprise, the company tied eligibility for promotions and corporate recognition to team performance: for example, even outstanding employees could not be promoted or given awards if their branch was below the corporate average in customer satisfaction. Managers could not succeed at Enterprise without learning to help others around them succeed. During their first year trainees began mentoring newer hires as a way to help further their own knowledge, but once they were promoted to 6 Paula Lehman, “No. 5 Enterprise: A Clear Road To The Top,” BusinessWeek, September 18, 2006, http://www.businessweek.com/ magazine/content/06_38/b4001609.htm. 7 Jacobson, “Rental Car Giant Successfully Shuns Industry Shakeout.” KELLOGG SCHOOL OF MANAGEMENT 3 ENTERPRISE RENT-A-CAR 5-311-508 managers their mentoring success was tracked, including who they promoted and how those employees performed in their new jobs. Performance-based compensation was standard for all positions beginning with assistant managers and continuing up the organization chart to the CEO. Enterprise used a range of metrics, including branch profitability and customer service scores, as the basis for awarding substantial monthly bonuses. Incentive pay accounted for up to 20 percent of branch managers’ pay, which made them keenly aware of even the smallest expense that affected the bottom line. As one company executive stated, “There isn’t a single Enterprise branch where the manager isn’t worried about whether lights are on that shouldn’t be because the money to pay the electricity bill is coming directly out of their paycheck.”8 For higher-level general managers, bonuses made up 80 percent of their total compensation. Some corporate officers received 99 percent of their pay in some form of variable compensation, which was based 75 percent on the performance of their operating units and 25 percent on overall corporate performance. For some at the top of the organization, total compensation was in the millions. Sales and Marketing Enterprise branches typically opened at 7:30 a.m. and closed by 6:00 p.m. The offices, which were generally not located in prime retail space, were staffed with five to seven generalist employees who managed a fleet of about 125 cars. Their small size was intentional and carefully maintained—once a branch’s fleet grew to more than 150 cars, Enterprise would establish a new office nearby and divide the sales territory. Branch managers ran their offices as profit centers and had the authority to determine fleet size, open branches, sell used cars, and—within limits—set rental prices, which were among the lowest in the industry. Andy Taylor was referring to the autonomy of branches when he described Enterprise as a “confederation of small businesses.”9 Many of Enterprise’s service innovations were developed by branch managers and then implemented nationally. For example, the door-to door pickup and drop-off service for which the company was known originated with a branch manager in Florida. Each branch office was responsible for increasing sales in its territory. All employees, including trainees, were given targets for establishing and developing relationships with people and companies in their territory that could drive business or refer customers. As a result, Enterprise employees actively sought out and called on insurance agents, insurance claims representatives, car dealership service managers, repair shop owners, and managers of corporations. Their visits often took the form of “donut drops” or pizza deliveries; after delivering the food, Enterprise employees would stay to discuss business opportunities, write rental contracts, or help serve customers. 8 Kazanjian, Exceeding Customer Expectations, 119. 9 Andy Taylor, “Top Box: Rediscovering Customer Satisfaction,” Business Horizons 46, no. 5 (September/October 2003): 5. 4 KELLOGG SCHOOL OF MANAGEMENT 5-311-508 ENTERPRISE RENT-A-CAR Enterprise did not do much national advertising compared with airport-focused companies like Hertz and Avis. Branches were charged for corporate overhead, which included advertising, so costly campaigns faced resistance from managers who were trying to maximize local profitability. This was the case for Enterprise’s first advertising campaign in 1989. Conceived as a way to reassure insurance companies that Enterprise was financially stable, the “We’ll Pick You Up” campaign—which introduced the now-iconic image of an Enterprise car wrapped in brown paper, traveling up a hill to pick up a customer—was implemented by then-chairman Jack Taylor over the objections of managers.10 Figure 2: “We’ll Pick You Up” Advertisement Image Culture and Values Enterprise’s corporate culture reflected the traditional Midwestern values and approach of its founder, Jack Taylor. “Our culture has really been key to our success as a company,” Andy commented. “There is an entrepreneurial spirit at Enterprise that truly is second to none in the industry. It’s been that way since the day my father founded the company, so I am really quite proud to have inherited this culture and to be able to grow and strengthen it.”11 In 2002 the company formalized the following statement of the Enterprise founding values: 1. Our brand is the most valuable thing we own. 2. Personal honesty and integrity are the foundation of our success. 3. Customer service is our way of life. 4. Enterprise is a fun and friendly place, where teamwork rules. 10 Ibid. 11 “Straight Talk From the Top: An Interview With Andy Taylor, CEO of Enterprise Rent-A-Car,” Black Collegian, February 2004, http://www.black-collegian.com/issues/2ndsem04/straighttalk2004-2nd.shtml. KELLOGG SCHOOL OF MANAGEMENT 5 ENTERPRISE RENT-A-CAR 5-311-508 5. We work hard . . . and we reward hard work. 6. Great things happen when we listen . . . to our customers and to one another. 7. We strengthen our communities one neighborhood at a time. 8. Our doors are open. Andy emphasized the importance of customer service among the company’s values: “This is a business of details, not brilliance. Our customers don’t care if we have the best computer system. They want someone to look them in the eye and ask, ‘How can I help you?’”12 Honesty was more than just a slogan within Enterprise. A company vice president observed, “The Taylor family believes you can live through any mistake, but you can’t survive a lie.”13 When Enterprise executives were integrating the employees of Alamo and National, who had not undergone the same training and socialization as Enterprise staff, they told the new employees they could expect straight talk and an open dialogue from their new bosses; topping the list of what the company expected in return was honesty and integrity. Enterprise trained its managers to identify and reduce “demotivating factors” such as poor organization, lack of feedback, misunderstanding a task’s importance, and lack of consequences for poor performance. To address these factors, Enterprise branches worldwide used a system of peer feedback known as “The Vote.” Once a week, all team members in a branch ranked themselves and their peers from best to worst based on the quality of their customer service during the previous week, providing specific examples of good and bad performance. The results—both good and bad—were shared with everyone in the branch to reward excellence and identify those who needed additional motivation. The names of the best and most improved employees were also communicated to the entire region as a way to recognize those who were delivering exceptional service. The former athletes and fraternity presidents thrived in the competitive Enterprise environment; managers were encouraged by the home office to place bets with each other on staff performance, with the loser paying for dinner or working extra hours at the winning branch. “We’re this close from beating out Middlesex,” said one area manager from New Jersey. “I want to pound them into the ground. If they lose, they have to throw a party for us, and we get to decide what they wear.”14 Many trainees liked the environment, too. “Even though you are dealing with a lot of angry customers and have to dress in professional attire, all the employees treat each other like family and the environment is quite nice,” wrote an anonymous commenter on a website describing the organizational culture of the company. “Enterprise is a family run business, and it treats the employees like family too. They want you to have a good work/life balance as well as career outlook.”15 12 Jacobson, “Rental Car Giant Successfully Shuns Industry Shakeout.” 13 Les Landes, “Cracking the Culture Code,” Communication World, November–December 2008, http://www.landesassociates.com/ pdfs/CWNovDec08_InsideOut_Landes.pdf. 14 O’Reilly, “The Rent-A-Car Jocks Who Made Enterprise #1.” 15 Anon., July 8, 2008, comment on “Enterprise Rent-A-Car (Culture),” FD Career, http://www.fdcareer.com/cache/view/2061/3/ heaviest/all/Enterprise%20Rent-A-Car/Culture. 6 KELLOGG SCHOOL OF MANAGEMENT 5-311-508 ENTERPRISE RENT-A-CAR However, the Enterprise culture was not a good fit for everyone. Another website discussing working conditions contained less laudatory assessments of the company; wrote one former manager, “Treat you great until you get into management, and then they work you into the grave.”16 Another former employee wrote: The employment atmosphere is horrible there. The culture is overtly sports, competition, alcohol, and sexist. Quite a bit of ageism there as well. They’re always hiring because they always have turnover. People quit right and left. If you’re a Type A hyperkinetic personality who thrives on beating out your opponent, even if that opponent is your coworker/teammate, then by all means, get the job.17 Markets and Competition The American car rental market in 2010 comprised two segments: the airport market and the local market. Industry and competitive sources estimated that each segment accounted for approximately $10 billion in revenue, for a total market of $20 billion. Airport Market The airport market included business and leisure segments, both of which were highly competitive. Airport rental companies competed on price; vehicle availability; brand reputation; and customer service, which drove innovations such as express rental, in-car GPS, and self service return. In return for the right to provide services at an airport, rental firms paid airport operators concession fees, which were generally calculated as a percentage of revenue (often around 10 percent) with a minimum guarantee. State and local taxes and facility use fees were also collected and passed on to customers with the concession fees; these fees could account for up to one-third of the total price of a rental. Rental companies also paid fixed fees for their customer service counters, which had to be staffed from early morning until late at night. A substantial number of airport rental reservations were processed by third-party distributors, who received fee payments, and travel agents, who were paid a commission (typically 10 percent). In 2010 Hertz was the number one airport car rental brand in the United States, followed by Avis (Exhibit 2). Although Enterprise was primarily focused on the local rental market, requests from customers prompted it to open its first airport location in Denver in 1995. By 2007 Enterprise had more than 200 airport rental offices (compared with more than 5,000 local branches) and a 7 percent share of the market; later that year it acquired National Car Rental and Alamo Rent A Car, which together had 13 percent of the airport rental market. At the time of the acquisition, Andy explained the rationale for the apparent shift in the company’s emphasis: “As the dynamics of our industry continue to evolve, it’s clear to us that the future belongs to the 16 Brad P., May 2008, comment on “What’s the Company Culture at Enterprise Rent A Car?” Indeed (forum), http://www.indeed.com/forum/cmp/Enterprise-Rent-a-car/s-company-culture-at-Enterprise-Rent-Car/t7861. 17 GataGorda, January 2010, comment on “What’s the Company Culture at Enterprise Rent A Car?” KELLOGG SCHOOL OF MANAGEMENT 7 ENTERPRISE RENT-A-CAR 5-311-508 service providers who offer the broadest array of services for anyone who needs or wants to rent a car.” 18 As Enterprise began expanding into the airport market, some analysts wondered how well its approach would meet the needs of business travelers. One frequent flier noted, “Their courteous and personal style at check-in usually takes an extra five or ten minutes . . . I just want to get the car and go.”19 Nevertheless, Enterprise was voted the top airport rental car brand for seven consecutive years (2004–2010) in the J.D. Power and Associates U.S. Car Rental Satisfaction Study. Local Market Enterprise dominated the local rental market (also called the “home-city” market), with its 6,000 branches covering all fifty states. For several years Hertz had been growing its presence in this market, too, through a division called Hertz Insurance Replacement Entity. By 2010 it had 1,930 local locations that generated $1.1 billion in revenue, which placed it a distant number two behind Enterprise. Avis had also expanded its presence in the local market. The local market served two distinct consumer needs: discretionary rentals and repair or insurance replacement rentals. As a result, the local rental business was less tied to the cyclical airline industry and less seasonal than its airport-based counterpart. Local rental prices were generally lower than rentals at the airport; one estimate put the price of a typical Enterprise rental at 30 percent below an airport rental. Discretionary rentals were occasional rentals for leisure and business purposes by customers who, in the words of an Enterprise slogan, preferred to “buy for the need and rent for the exception.” Examples of leisure discretionary rentals included a family renting a minivan for a driving vacation, or an additional car when relatives were visiting. A typical business discretionary rental was a salesperson renting a luxury car to entertain a client. Regardless of the circumstance, Enterprise offered door-to-door pickup and drop-off service to all renters. Unlike discretionary rentals, repair or insurance replacement rentals were unplanned and involuntary. Customers who had car trouble or had their car damaged in an accident found themselves at a dealer’s service department or repair shop with no car and a need to get home, pick up their kids, or meet a client. In these circumstances referrals from managers at these facilities were very influential. For their part, service managers wanted a reliable provider they could trust to treat their customers well. Enterprise branches often established onsite offices at nearby auto dealers and repair shops so customers leaving their cars for repairs could rent a replacement without leaving the dealership. One service manager at a dealership with an Enterprise onsite office said, “The Enterprise people are practically part of my staff.”20 18 “Enterprise Rent-A-Car to Acquire Vanguard Car Rental,” press release, March 30, 2007, http://www.enterpriseholdings.com/ PressReleases/ERAC-Vanguard_Acq_Mar07.pdf. 19 Gary Stoller, “Enterprise Muscles Its Way Onto Airport Scene,” USA Today, December 21, 2006, http://www.usatoday.com/travel/ news/2006-12-21-enterprise-usat_x.htm. 20 Ibid. 8 KELLOGG SCHOOL OF MANAGEMENT 5-311-508 ENTERPRISE RENT-A-CAR Insurance replacement rentals were a significant portion of the local market—approximately $4 billion.21 Insurance companies paid the cost of a basic rental while a damaged car was being repaired, but up to 90 percent of renters chose to pay more to upgrade to a larger or more luxurious vehicle. In 2010 Hertz had a 10 percent share of the insurance replacement business, and Enterprise accounted for the vast majority of the remainder. One-third to one-half of Enterprise’s total revenue was estimated to come from insurance companies.22 Enterprise was a preferred provider for many insurance companies and had full-time employees on site at its headquarters and local drop-in centers to facilitate bookings. Enterprise further streamlined operational processes by interfacing its reservation system directly with the insurers’ computer systems, allowing insurers to book rentals at any Enterprise location for their clients. As a result, a large insurance company like State Farm—for which Enterprise was a preferred provider—could book an Enterprise car every nine seconds during every business day in 2006.23 Enterprise was so dominant in insurance replacement rentals that insurers had to seek out alternate providers to ensure they were getting competitive prices. Even governments took action to balance Enterprise’s strong market position—the state of New York passed a law in 2009 requiring insurance companies to inform customers that they had a choice of car rental providers, a not-so-subtle swipe at the relationship between Enterprise and its insurance partners.24 Car Sharing In 2010 car sharing was an alternative to local rentals in some American cities. Car sharing enabled a customer to book a car online for a period as short as one hour, walk to a nearby parking spot, unlock the car by waving a membership card or special key fob in front of a scanner, and drive away. In addition to a nominal annual membership charge, renters paid an hourly rental fee that included gas and insurance. A four-hour trip cost between $20 and $45, depending on location.25 The concept encouraged drivers to save money and help the environment—not by giving up driving, but by giving up car ownership. Because car sharing offered the use of a car for short periods of time as opposed to the typical minimum car rental period of one day, it was attractive to people who generally relied on bicycles or public transportation but occasionally needed a vehicle. It also appealed to those who wanted occasional access to a different car than the one they drove every day. Car sharing also found early acceptance among universities and corporations—universities were looking for a solution to traffic congestion problems, and corporations wanted to avoid leasing and maintaining cars, logging miles, and tracking reimbursements. 21 Author’s estimate based on competitive information. 22 See Carol J. Loomis, “The Big Surprise Is Enterprise,” Fortune, July 24, 2006, http://money.cnn.com/magazines/fortune/ fortune_archive/2006/07/24/8381691/index.htm; Kazanjian, Exceeding Customer Expectations, 129. 23 Kazanjian, Exceeding Customer Expectations, 127. 24 “Rental Car and Insurance Industries Collide,” Crain’s Insider, August 4, 2011. 25 “Where Can I Find Car Sharing?” http://www.carsharing.net/where.html. KELLOGG SCHOOL OF MANAGEMENT 9 ENTERPRISE RENT-A-CAR 5-311-508 In 2010 Zipcar was the leading American car-sharing provider with 500,000 members and more than 8,000 vehicles. Zipcar competed against other for-profit companies (such as Ucarshare by Uhaul) as well as nonprofit organizations (such as San Francisco’s City CarShare and Chicago’s iGo). Zipcar’s revenue grew 42 percent in 2010 to $186 million, but its loss widened from $4.7 million to $14.1 million.26 Rental companies were also entering the car sharing business. Hertz on Demand, Hertz’s car sharing initiative, had announced deals with fifty-one universities and nine cities by the end of 2010. It offered free membership, one-way rentals, and in-car GPS. Enterprise introduced hourly car rentals in 2005, which effectively provided “virtual cars” to its individual customers. In 2007 Enterprise launched a business-to-business car-sharing initiative with a separate, loosely linked brand, WeCar. At the end of 2010 WeCar partners included dozens of universities, corporate campuses, and municipalities in seventeen states. Customer Service In the mid-1990s Enterprise spent more than two years and $10 million researching customer satisfaction and what its local customers valued in their car rental experience. The research revealed that Enterprise’s local renters cared about three things: the attitude and helpfulness of employees, the speed of the transaction, and the cleanliness of the car. If those three things were done well, customers were satisfied. More importantly, Enterprise also learned that there was a big difference in repeat purchase intent between customers who were satisfied and those who were completely satisfied. When asked, 70 percent of its customers who were completely satisfied said they would rent from Enterprise again; for customers who were merely satisfied the figure was only 22 percent.27 Enterprise used these findings to develop a metric called the Enterprise Service Quality Index (ESQi), which it used as a tool to help the company completely satisfy its customers and gain their repeat business. In its final form, ESQi was based on the responses of thousands of Enterprise renters to a weekly phone survey consisting of just one question: “Overall, how satisfied were you with your recent car rental from Enterprise?” A branch’s ESQi score was the percentage of its customers that answered “completely satisfied”; the company’s ESQi was the average of all the branch scores. Customers who were not completely satisfied were asked if they would accept a phone call from the branch manager to resolve their issues. If the answer was yes, the information was passed to the appropriate manager, who had the authority to do whatever was necessary to satisfy a customer. As one executive said, “No one has to stop and wonder if they should apologize to a customer or take charges off their bill to make things right. They just do it.”28 26 Zipcar had an operating loss in 2009 of $5.9 million; in 2010 the loss was $7.4 million. 27 Kazanjian, Exceeding Customer Expectations, 65. 28 Landes, “Cracking the Culture Code.” 10 KELLOGG SCHOOL OF MANAGEMENT 5-311-508 ENTERPRISE RENT-A-CAR Enterprise had always trained its employees to focus on customer service, but initially ESQi was used only as a diagnostic metric. That changed after an Enterprise officers’ meeting in 1996. The mood at the meeting was celebratory when it was announced that the company had just overtaken Hertz as the largest car rental company in the United States, but the ESQi data were sobering—despite the company’s two-year focus on the measure, customer satisfaction was not improving and there was still a wide gap between the best- and worst-performing branches. After the meeting Jack Taylor challenged Andy and the other officers to make Enterprise “the best company in America to do business with.”29 The first response to Jack’s challenge was to use ESQi to define eligibility for corporate recognition, including the company’s most highly coveted awards—only managers with ESQi scores above the company average were eligible to be considered. Next, a policy was enacted that no one in a branch with an ESQi score below the corporate average could be promoted. Finally, ESQi was featured prominently on every operating report so all branch managers could see how they—and their peers—were performing on customer satisfaction.30 Andy described ESQi as linking “our employees’ career and financial aspirations with consistent superior service to each and every customer.”31 Another executive said, “If your branch’s ESQi is below the mark, no one in that branch moves forward. If it’s above, everyone gets ahead. It’s simple. It’s equitable. And it has a big impact on teamwork.”32 Using ESQi for recognition and promotion also had some unintended consequences. Some promising managers left the company out of frustration that they were in “ESQi jail” due to low branch scores and thus could not be promoted. Some managers with good ESQi scores were promoted into positions they were not fully prepared for, and they required significant coaching and resources to succeed. Some managers were fired when it was discovered they were altering the phone numbers of unhappy customers so they could not be surveyed, or otherwise manipulating the system to improve their scores. However, within about a decade the percentage of Enterprise customers who answered “completely satisfied” climbed from 67 percent to more than 80 percent, and the gap between the best and worst groups in the company narrowed from twenty-eight points to nine points.33 Technology Enterprise made significant investments in technology to both facilitate and support its growth. The company’s IT department, which employed more than 1,400 people and had an annual budget in excess of $250 million, developed all key systems at Enterprise working closely with line personnel. One of these systems was the Enterprise Computer Assisted Rental System (Ecars), which supported the company’s reservations and operations.34 Developing its own reservations system 29 Taylor, “Top Box,” 9. 30 Ibid., 10. 31 Enterprise website, “Culture of Customer Service,” http://aboutus.enterprise.com/customer_service.html. 32 Landes, “Cracking the Culture Code.” 33 Kazanjian, Exceeding Customer Expectations, 69. 34 Heather Harreld, “Pick-Up Artist,” CIO, November 10, 2000, http://www.cio.com.au/article/75877/pick-up_artist. KELLOGG SCHOOL OF MANAGEMENT 11 ENTERPRISE RENT-A-CAR 5-311-508 not only enabled Enterprise to avoid paying fees to use a shared system, it also enabled the firm to develop features unique to its style of business. Originally designed in the 1980s, Ecars was upgraded in the 1990s to include sophisticated internal communication and customer relationship management features. The Automated Rental Management System (ARMS) addressed one of the company’s highest priority projects—connecting its Ecars system with the computer systems of its insurance partners and the repair shops that performed the work. The original patented system was described as follows: When someone gets in an accident and files a claim, the insurance adjuster can log on to the ARMS website and create a reservation for the client. Meanwhile, through the ARMS Automotive web application, the auto-body shop can send daily electronic updates on the status of car repairs. If the repair takes longer than expected, the insurance company is automatically notified through ARMS. Once the body shop completes the repair and the customer returns the rental car, ARMS automatically generates an invoice and sends it to the insurer.35 Enterprise used ARMS to connect Ecars with the systems of three hundred insurance companies, which helped it gain preferred provider status with many of them. Its head of IT called ARMS “the glue that put it all together.”36 The owner of a competing rental car company conceded that the ARMS connection “makes it very difficult for any other car rental company to hook up with an insurance company.”37 Offering free integration software and support convinced thousands of car dealers and repair shops to connect their existing business management systems to ARMS as well. The management and reporting capabilities of ARMS enabled insurance companies to more closely monitor the repair status of a customer’s vehicle and shorten the length of replacement rentals. This saved the insurance companies more money than a small reduction in the daily rental rate and built credibility for Enterprise. “We provide solutions and reduce the costs associated with the rental process,” Andy said. “We offer a sophisticated value proposition to our customers in what is otherwise a commodity-driven business.”38 Fleet Management Like every car rental company, Enterprise’s largest expense item was its fleet of vehicles, which represented approximately half of all operating expenses. Enterprise purchased more than 7 percent of all automobiles produced in the United States in 2010, making it the largest private buyer of new cars in the world.39 While other rental car 35 Eric Berkman, “Enterprise Rent-A-Car: Staying Ahead of the Curve with Automated Systems,” CIO, February 1, 2002, http://www.cio.com/article/30832/ENTERPRISE_RENT_A_CAR_Staying_Ahead_of_the_Curve_with_Automated_Systems. 36 Ibid. 37 “Rental Car and Insurance Industries Collide,” Crain’s Insider. 38 Kazanjian, Exceeding Customer Expectations, 139. 39 Loomis, “The Big Surprise Is Enterprise.” 12 KELLOGG SCHOOL OF MANAGEMENT 5-311-508 ENTERPRISE RENT-A-CAR companies had at times been owned by automakers and been their captive customers, Enterprise had always retained the independence to buy from whichever manufacturers satisfied the needs of its branches. Once Enterprise had negotiated a final price the cars were sold and delivered from dealerships near the branches making the purchase.40 These dealerships often were—or soon became—referral sources for Enterprise rental customers. With so much capital invested in cars, the preferred practice for most rental companies was to negotiate a guaranteed repurchase price at the same time the vehicles were purchased. These cars, called “program cars,” were returned four to sixteen months later, which relieved the rental company of the risk of used-car prices. Enterprise, however, decided it would assume the risk of selling its own used cars: its fleet was made up entirely of “risk cars” with no guaranteed repurchase price. By contrast, in 2010 risk cars made up 46 percent of the fleet at Hertz and 53 percent at Avis. Once a car was purchased, Enterprise’s computer system tracked its location and maintained a detailed service history. In conjunction with efficient operational practices, this helped the company keep a lean inventory and contributed to its ability to keep cars on the road six months longer than other rental companies.41 When it was time to dispose of its vehicles, Enterprise handled all of its own sales. About 60 percent of its cars were sold back to the dealers from which they had been purchased; 20 percent went to auto auctions; 12 percent (those that had been involved in accidents) were sold for salvage; and the remaining 8 percent were sold directly to consumers through 140 Enterprise car sales locations.42 Andy summarized the importance of Enterprise’s fleet management, saying, “Knowing how and when to buy, sell, and rotate our fleet has proved to be a tremendous source of economic strength for Enterprise.”43 Conclusion In just over fifty years Enterprise Rent-A-Car had grown from an accidental business to the leading renter of cars in the United States. Along the way it out-competed industry leaders, defied industry trends, and adapted its approach to changing market conditions by consistently following Jack Taylor’s founding philosophy: “Take care of your customers and employees, and the bottom line will follow.”44 40 In the United States, franchise laws prohibited manufacturers from directly selling new cars; all sales were required to be made by dealers. 41 O’Reilly, “The Rent-A-Car Jocks Who Made Enterprise #1.” 42 Kazanjian, Exceeding Customer Expectations, 53. 43 Taylor, “Top Box,” 4. 44 Kazanjian, Exceeding Customer Expectations, xiv. KELLOGG SCHOOL OF MANAGEMENT 13 ENTERPRISE RENT-A-CAR 5-311-508 Exhibit 1: Enterprise Growth, 1965–2010 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Revenue ($ Billion) Fleet (x00,000) Loca tions (000) Employees (x0,000) 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Authors, based on data from Enterprise Holdings, http://www.enterpriseholdings.com/siteAssets/Financial_Stability_2010.pdf. 14 KELLOGG SCHOOL OF MANAGEMENT 5-311-508 ENTERPRISE RENT-A-CAR Exhibit 2: Rental Car Revenue by Company, 2010 (U.S. Market) Source: Auto Rental News KELLOGG SCHOOL OF MANAGEMENT 15
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