Ratings ruler seeks subjects
If you've spent big money on it, chances are J. D. Power & Associates has rated it. The California-based market research firm, which made its name in the 1980s by ranking--to Detroit's dismay--the quality of automobiles, is fast becoming a ubiquitous presence in the consumer marketplace. The company now evaluates everything from bass boats to hospitals to Internet service, and the coveted J. D. Power award is a frequent sight in ads of those companies lucky enough to have earned top honors.
Expect to see more of those: J. D. Power is aggressively moving into new industries and strengthening its grip on old ones. But as the $130 million, privately owned firm branches out into unfamiliar terrain, its identity as one of America's classic mom and pop success stories is being challenged. A few of its ventures have flopped, thanks to bad timing or a mistaken read of a particular market. Expanding into product lines where it lacks the expertise it boasts in the auto industry has brought new scrutiny of the validity of its survey results. And company executives worry that the firm's increasingly unwieldy size could stifle the entrepreneurship that has been its hallmark. "It used to be I could shout down the hall and find out what's going on," says founder J. D. "Dave" Power, 72, who gave up day-to-day control over the company about five years ago but is still chairman. "Now I have to sneak around and poke into all these offices."
Most consumers know J. D. Power for its customer service and quality evaluations of various products and services. But that's just a sideline. The firm earns virtually no money on its product ratings, except for the licensing fees paid by companies that use a J. D. Power endorsement in their marketing campaigns. The bulk of the firm's revenue comes from the sale of detailed data culled from its consumer surveys. J. D. Power sells the comprehensive research to firms, then carves out small slices of data, say, a list of the top hotels, for public consumption. That helps build J. D. Power's brand image, but the profit motive limits the information the firm can offer the public. The company ceased rating airlines after the September 11 terrorist attacks, for instance, because cash-strapped carriers stopped paying for research.
But the company is clearly riding high on the information wave. Dave Power's particular gift, in fact, seems to have been grasping the value of data long before it was trendy. After earning his M.B.A. at Wharton in 1959, Power worked in finance for Ford Motor Co.'s tractor division, then as a market researcher for a Detroit advertising agency. At the time, the big carmakers had little interest in market research. Power found a more receptive audience at Case Tractor in Racine, Wis., but one brutal winter in a drafty duplex prompted him to seek greener pastures. The ad agency wooed him back with a job in Southern California, and for the next several years he worked on accounts for Borax, Carnation, and Ronald Reagan's 1966 gubernatorial bid.
Passionate about the ability of consumer data to transform a company and even an industry, Power opened his own research shop on April Fools' Day 1968. He had no clients, but a new car company, Toyota, had just moved in down the road. He eventually wrangled a meeting with a member of the founding family, who was interested in retaining Power but concerned that a tiny start-up might lack adequate resources. He asked Power one key question: Where are your files? "I tapped my head and said, `Up here,' " Power recalls.
Power's faith in research and his own judgment are still tangible at company headquarters in a tidy office park in Westlake Village, Calif. On Power's bookshelf is a dog-eared, 1952 textbook, Marketing in the American Economy, which Power refers to regularly (occasionally regaling his partners with readings on channel distribution or other esoterica). He counts as friends the futurists Alvin and Heidi Toffler. Though he has cultivated a fairly freewheeling culture for a 600-person company, he can be hard-nosed. "Dave is very strong-willed," says a former partner, "and rules as he sees fit."
Such moxie helped Power survive the inevitable run-ins with the powerful companies he was monitoring. Power's big break came in 1973 when his consumer questionnaires revealed that Mazda's highly touted new rotary engine had to be replaced after 30,000 miles about 20 percent of the time, a problem Mazda's senior management didn't know about. Power packaged the results and sold it to seven automakers. Mazda passed, but one of its competitors leaked the study to the Wall Street Journal, which led to a recall. Bingo. Power had hit a nerve and discovered a lucrative business, and by the 1980s, Power began systematically compiling survey data on customer satisfaction and initial quality. The car companies had long measured the quality of their own vehicles, but this was the first time an outside firm had taken a stab at it. Virtually every automaker today buys J. D. Power data. Yet auto executives routinely complain, albeit not publicly for fear of retribution, that the rankings oversimplify the quality issue. "Even the ones that do very well resent the fact that they're being whipsawed around," says Jeremy Anwyl, president of the car-shopping site Edmunds.com.
One gripe: In the new car quality survey, a car's basic attributes, gas mileage, and the placement of cup holders, for example, are lumped in with problems like rattles, buzzes, and broken equipment. Carmakers believe the survey should measure only the defects. In 2003, for example, Hummer scored the lowest of any car. The main complaint was poor mileage, something that presumably would be obvious to anybody buying the massive vehicles. Furthermore, some auto executives argue that outlets such as Consumers Union, which exhaustively test and evaluate cars, provide better information than opinion surveys. Yet the discomfort Power causes the industry clearly indicates a degree of success. "He's been a visionary," says auto analyst Stephen Girsky of Morgan Stanley. "The industry pays more attention to quality because of him."
Last year, Power spun off the Power Information Network, which gathers data on car purchases from 6,000 dealers to ferret out precise details on the models, options, colors, and other features that consumers prefer. The idea is to mimic supermarket scanners, which measure what consumers buy and manage inventory. The car business is antiquated by comparison, with manufacturers estimating demand and building a broad mix of vehicles that typically sit on a dealer's lot for 60 days or more. That mismatch forces carmakers to offer lavish rebates. Power figures he can solve that problem with enough data at his fingertips, which will require the participation of roughly 15,000 dealers. Already, he says, Ford and other automakers have been able to reduce incentives by using his data to better predict demand.
Since auto-related business has fallen from about 90 percent of revenue 10 years ago to about 70 percent today, J. D. Power is seeking out other industries to slice and dice. Not every one fits the bill. The industry must be mature, there must be a way to contact the buyer, the product must be a significant purchase, and there must be enough competition to propel firms to seek a marketing edge. "You'll never see a chewing gum study," insists Ron Conlin, J. D. Power's executive director of retail stategy.
Despite the careful planning, a few initiatives have fizzled. When the company began rating personal computers in the early '90s, a young firm, Dell Computer, topped its list. Established competitors questioned the high ranking of a virtual unknown, and J. D. Power backed out. Other efforts seem shaky, since the stakes are far lower than a $25,000 investment in a car. J. D. Power assesses long-distance and cellular providers, but so far hasn't had much of an impact, says Ken McGee, a research fellow at the Gartner Group. "I've never heard them raised once," he says. "Where's the evidence they have expertise beyond the auto industry?"
Still, J. D. Power has made unmistakable inroads in several industries. It evaluates new-home builders in 25 markets; 25 of the top 50 builders subscribe, and industry executives admit it has focused attention on quality and service. The firm conducts proprietary research for 30 hospitals and counting, and it sees big promise in home electronics. It sells research on office equipment, digital cameras, and high-end TVs, and it may return to PCs. While it usually muscles its way into a marketplace, occasionally the firm is invited. Some manufacturers ask J. D. Power to assess their industries, believing they'll nab the top score. The company has even turned down requests from makers of banal products like uniforms and tooth whitener, fearing they would sully its image.
The firm is also expanding overseas in China, India, and other burgeoning economies, and its consulting arm represents an additional pillar of growth. But the firm's real challenge may be keeping in touch with the little guy as it evolves into a global, multifaceted enterprise. "Our connection with consumers is the lifeblood of the company," says CEO Steve Goodall. "We need to build a better bond with them." That's one reason J. D. Power has resisted going public. A few of its research projects have angered clients and led them to cancel business, the kind of decision shareholder activists probably wouldn't tolerate. To keep faith with consumers, J. D. Power has started a Consumer Reports-style magazine. And it is recruiting 300,000 Americans for its PowerPanel, a group of consumers who will periodically fill out Internet questionnaires. Whether by mouse or by mail, J. D. Power will stay in touch.
POTENT POINTS
Car ratings and J.D. Power go together like peanut butter and jelly. Here's how the 2003 models fared on quality:
Best: Lexus; Cadillac; Infiniti; Acura; Buick; Mercury; Porsche; BMW; Toyota; Jaguar
Worst: Hummer; Land Rover; Kia; Mini; Saab; Saturn; Mitsubishi; Mazda; Subaru; Jeep
Note: Does not represent all manufacturers. Based on surveys sent to new-car buyers during the first few months of ownership. Measured by problems per 100 vehicles.
This story appears in the March 15, 2004 print edition of U.S. News & World Report.