Too many organisations lurch from passionately tending to their customers to becoming obsessed with pleasing their investors --- and when doing one, they completely ignore the other!
Managing for Shareholder Value means at a minimum the creation and extraction of value for and from customers, so that, over time, sustainable growth in total shareholder economic returns can be assured. Without that customer value management, focus shareholder value will be elusive.
Company valuations contain at least the Net Present Value of future customer revenue streams and a hard-nosed assessment of the ability of the organisations to create a margin. For many organisations the basic assumption of customer NPV may be misplaced.
Managers need to think carefully about the means available to create customer value - knowing when to invest in Customer Relationship Management (in segments where loyalty really means value) and when to focus on Quality of Service (the value of the customer experience).
Buying future business may be unwise
Organisations which spend current profits 'buying' a speculative future "relationship" with customers through loyalty schemes and CRM infrastructures (e.g. campaign management systems for structured cross-selling) still may be destroying SHV. All good sales promotion techniques, such as CRM, should only be used when the primary value proposition is already competitive! Volatile customers, who chase the deal not the relationship, make bad prospects for CRM.
This piece explores how managers need to sanity check what the marketing industry is promoting to them in the form of CRM systems--- shareholders are unforgiving of fads and 'enthusiasms' that go wrong!
Keeping most stakeholders happy most of the time - mission impossible?
MSV in its brutal simplicity ought to be in the interests of shareholders to the exclusion of all else. Evidence for this assertion is the charges laid by consumer interest groups in the UK at the door of the privatised utilities, including the notorious difficulties faced in 2000 by Railtrack plc. In such cases management actions appear to give more weight to delivering Total Shareholder Returns than to meeting the needs of other stakeholders, especially customers.
Apologists for such behaviours might say that these are 'young' companies that have yet to get the balance between stakeholder interests correct. In the meantime, whilst they reduce capital investment, drive operational efficiencies and generally cut corners, they fall victim to something, which may not be visible to the naked eye but is terrible in its consequences --- the destruction of brand value.
The results may be more than you bargain for
Consumers are not fools. They know a false economy when they see one. They may exercise their market power once they are satisfied that no other remedy will change the supplier's behaviour. In the case of the UK's rail network in 2000, large numbers of newly acquired passengers migrated back to road transport with a vengeance --- putting in jeopardy the future commercial existence of several Train Operating Companies.
Faced with this stampede of dissatisfied customers, managers throw caution to the wind and try to 'buy' customers back with low margin deals - setting a new low pricing benchmark from which recovery is very nearly impossible. Yet it is the margins from continuing operations (now reduced in the consumer win-back strategy) that must fund the infrastructure investments of the future. The remedy has both a direct cost and a deeper set of negative consequences.
The scale of risk can be massive
In the world of 3rd Generation Mobile telephony the same dilemma is now evident. Some $200bn of capital is at risk worldwide (and rising) and, in each market, the competing mobile operators are going to have to go "for broke" in winning market share to achieve an economic return on these massive investments.
There will not be a CFO or Chief Marketing Officer who will not be under massive pressure to "buy share". The fact that £4 out of every £5 to be spent in building that share will be wasted because of the 'substitution effect' between competing brands is not lost on the 'shareholder community' who (in early 2001) are negative in sentiment about the prospects for Telecom shares.
What then might the answer be?
A more intelligent approach might be to concentrate on securing existing 2nd Generation (GSM) customers' loyalty and leading them towards GPRS (2.5 Generation 'always on' services) so that the migration to 3rd Generation is orderly, lower risk and, emphatically lower cost. Focus on consolidating the best aspects of the customer experience may be the smartest investment.
Will this happen? I hope so, because at the heart of this extraordinary risk arena lies the MSV dilemma --- how much investment now for an uncertain future? Put another way, will shareholders understand that significant investment on quality of service for today's offerings might be the key to economic returns tomorrow?
Relationships built on the rock of quality service are more durable than a 'deal' culture
This concept of creating sustainable customer value first, as the bedrock on which to build sustainable shareholder value later is one which managers must increasingly come to terms with.
There have been waves of enthusiasm for Enterprise Resource Planning systems and, more especially in the consumer space, CRM and e-CRM systems designed to extract more value from finite market segments and transactions. Most of these investments have failed to produce the anticipated shareholder value and the question mark over their future grows larger.
Why should existing customers buy more? Earning the right to loyalty is key.
In many ways the enthusiasm has been naive. The CRM philosophy that loyalty can be managed through getting to know customers better is superficially sensible. Appropriate contact strategies based on observed behaviours are clearly a logical step. However, it is at marked variance with reality. Consumers are increasingly demonstrating that they want to be disloyal -- chasing the best deal. What is more they can be disloyal because they are increasingly better informed (through Internet-enabled information). They are also encouraged by Government ("Rip-off Britain"), the media ("shop around"), consumer bodies ("complain") and the instant-gratification preferences of Generation X to treat all offers with scepticism and to be loyal only to the single transaction.
When loyalty adds no value, its probably destroying it!
Of course, this too is a gross over-simplification, but the trend line is inexorably towards the "death of loyalty". Even the 'baby-boomer' generation (in their 50's) now understands that one of the consequences of near-zero inflation world-wide is that prices ought not to go up and, in many cases, actually go down, so "why bother to be loyal?"
Much CRM and e-CRM thinking is predicated on using today's margin to fund loyalty to tomorrow's offers. This is increasingly daft. What the volatile and increasingly well-informed consumer of today will do more and more is 'shop around' looking for value. That value will be a complex blend of factors of which price and experience will almost certainly be significant.
"Eat, drink and be merry, for tomorrow we die" - a cautionary motto
If this is true, then the MSV approach has to be to focus on quality of execution today so that when consumers go a-roving in pursuit of value they come back to the supplier who delivered distinctive quality of service. Too often 'loyalty' schemes are a thin papering over the cracks of poor value .The increasingly 'disloyal majority'' is exposing it for what it is - a cover-up of poor operational management.
In sum, MSV demands that managers think carefully about "are we doing the right things now?" or "are we focusing too much on doing things for tomorrow?" As the popular song puts it "tomorrow may never come" and then where will the shareholder value be?