the first is customers
“There is only one purpose that consistently wins,” writes management guru Fred Reichheld in his new book, Winning On Purpose: The Unbeatable Strategy Of Loving Customers (HBRP, December 2021). “The most resilient and sustainably successful firms consistently select one primary purpose: enrich the lives of their customers. Then they run their businesses accordingly.”
Yet this game plan is still rare: Reichheld cites a recent Bain & Company survey: “Only 10% of business leaders believe that the primary purpose of their firm is to maximize value for customers. Many companies still operate in the old-school financial capitalist mindset in which maximizing shareholder value is front and center.”
The power of customer primacy is not a secret. Many firms are trying to become more customer-centric. “But they aren’t willing,” says Reichheld, “to elevate customer happiness to become their primary purpose… The truth is that despite today’s profusion of customer-centric rhetoric, most business people still believe that the primary purpose of business is profits.”
In August 2019, in the face of increasingly severe critiques, the Business RoundTable (BRT) took a step away from shareholder primacy. More than 200 CEOs from major corporations signed a new BRT declaration renouncing the goal of shareholder value and embracing stakeholder capitalism. Yet in practice, little has changed.
According to studies made by Harvard Law Professor Lucian Bebchuk and his colleagues, there is no evidence that the firms in question have made any change in their actions since the 2019 declaration. Bebchuk concludes that the 2019 BRT declaration was “only for show.” In effect, we are dealing with a smokescreen: the goal of many major corporations has become undiscussable.
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“This is not surprising,” writes Reichheld, “given that we measure company success, pay bonuses, and determine career promotions based primarily on finance results.
Customer Primacy Delivers Stronger Financial Returns
The goal of customer primacy does not ignore the other stakeholders—staff, partners, shareholders and society. “Those firms that put customers first,” says Reichheld, “can deliver superior results—not just to customers, but also to all these other constituencies.”
The evidence as to which firms are best performers is public and unambiguous from multiple perspectives. The firms committed to customer value—Amazon, Apple, Microsoft, and Google—have the the most powerful brands.
Shareholders and investors agree. These four firms have the largest market capitalization and have the best growth prospects, by far. To put things in perspective, they are together worth some $9 trillion—equivalent to 43% of U.S. GDP. (See Figure 1)
Employees also agree: these four are among the top six firms to work for. Since talent drives strategy, the ability to attract top talent is another driver of performance.
Customer-driven Capitalism
As a result, the most valuable and fastest growing firms are paving the way for an era of customer-driven capitalism. This was foreshadowed by Peter Drucker in 1954 with his declaration that “there is only one valid purpose of a corporation: to create a customer.” For many years, his dictum was ignored.
Even today, the goal of maximizing shareholder value is still prevalent in many large corporations, along with all the attendant principles and processes that follow from it—bureaucracy, vertical hierarchy, autocratic leadership, backward looking strategy, sales and marketing focused on short-term profit, and control-oriented HR. Corporations run in this fashion cannot adapt fast enough to cope with the tumultuous digital-age marketplace and are declining into irrelevance, as illustrated by the rash of recent breakups at IBM, GE, J&J, and Toshiba.
In effect, until companies have a frank discussion of the currently undiscussable subject of what their primary goal really is, and transform their industrial-era management into customer-driven leadership, it will be hard for them to be successful in the rapidly evolving digital age.
The Challenge Of Changing Fundamental Assumptions
In any human endeavor, whether it be science, or sports, or medicine, it’s normal to learn from the best performers, so as to improve the performance of the less successful.
It is ironic that in the field of management, which lays claim to rationality, there is reluctance to learn from the best performers. In many firms, the goal of the shareholder value organization is so deeply embedded in processes, systems, habits, attitudes, and assumptions that it has become invisible to those within the firm. It is part of “the way we do things around here.” Silent acceptance and support of the goal can become almost a condition of membership in the firm and part of the firm’s culture.
As Edgar Schein points out in his classic book, Organizational Culture and Leadership (Jossey-Bass, 2010) “Cultural forces are powerful because they operate outside of our awareness. We need to understand them not only because of their power but also because they help to explain many of our puzzling and frustrating experiences in social and organizational life.”
For companies that have been pursuing shareholder value for many decades, it will often have become a taken-granted assumption as to how members of that organization should perceive, think about, and deal with situations and issues. By this time, it has gone deeper than the tangible artifacts and the explicitly espoused values and norms and become a non-negotiable assumption.
As Schein notes, “Values are open to discussion, and people can agree to disagree about them. Basic assumptions are so taken for granted that someone who does not hold them is viewed as a ‘foreigner’ or as ‘crazy’ and is automatically dismissed.”
The Role Of Top Management
When the basic assumptions of an organization have gotten out of sync with the context, as they have in firms being run with shareholder-value management, it is the necessary function of top management to initiate the actions and conversations that are needed to bring the management and the context back into alignment.
It remains to be seen how many top managements are willing to undertake such discussions. It seems unlikely that they will take place in corporations where generous compensation of the C-suite is tightly linked to the short-term share price. As Upton Sinclair pointed out many years ago, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
Yet if top managements don’t undertake such discussions, it is hard to see how their digital transformations will ever succeed. Success in the digital age requires a goal, and a type of management, that fit the digital era. Shareholder value is one of the assumptions that is obsolete and needs to be replaced.
This reluctance to discuss the undiscussable helps explains why the management problems of the weaker performers shown in Figure 1 are so intractable: the top level of management has difficulty in solving the problem because it is their own behavior that is the root cause of the problem. It is thus the role of management analysts to hold up a mirror and help them begin to discuss the undiscussable.
Figure 1: Financial landscape Nov 2021
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