Today’s post asks whether an organization’s long term financial health is best served when the organization’s main focus is to increase share price each and every quarter, or if more value is generated by putting the customer their needs first.
Recent literature on the subject implies that the popular trend of the last three decades may not be the best choice – prioritizing share price above all else may actually rob longterm shareholders of wealth that could have been generated with a customer first policy. In the January-February 2010 issue of the Harvard Business Review, Roger Martin (dean of the Rotman School of Management) took a close look at a few companies that put the customer first. Interestingly, many of these companies generated strong shareholder returns compared to the S&P 500 while creating customer loyalty (or because of it).
By focusing only on shareholder value an organization must raise shareholder expectations each and every quarter or the stock price will suffer. Unfortunately this kind of infinite expectation generation does not exist (even Apple and Google are not immune). So how do executives operate in this atmosphere? In order to maximize their own salaries (which are often based heavily on stock options with short vesting times) they work hard to increase expectation linearly and constantly – planning for stock price to top out at their time of retirement or shortly thereafter. This approach pays well and keeps the shareholders and board of directors happy during the exec’s employment with the organization. Unfortunately this does not provide shareholders the best long-term value as market capitalization often falls with the retirement of a CEO.
In contrast, organizations that make their customers a priority have a very different day-day operating atmosphere. By putting the customers first and the shareholders long after, executives at these companies take actions that may hurt stock prices initially, but will serve the customer better. Investigating actions by organizations such as RIM, Johnson & Johson and Proctor & Gamble tell a story of long-term shareholder wealth creation despite some short term stock dips. Customer serving companies tend to have a more linear (slower) growth pattern to their market capitalization than those serving the shareholder but they also tend to avoid the crashes associated with an inablilty to raise expectations.
There is no definitive data on whether customer-serving companies outperform those stock-driven organizations on average. Of course, there are customer-focused organizations whose stock under-performs or performs on par with stock-driven companies. However with the decrease of customer loyalty and an increase in informed shoppers in today’s consumer markets, serving your customers can hardly be considered a bad thing – even by your shareholders.
