Shareholder's Value Vs Customer's Value...

WARNING: Long blog entry ahead!

I'm currently reading this book written by Clayton M. Christensen from Harvard Business School. It was first published in 2000 but I just bought it last month.

'The Innovator's Dilemma' is a book about how outstanding companies can do everything right and still lose market leadership or worse, disappear completely. The author tells others how to avoid similar fate.

My timing of reading this book couldn't be any better. At the moment, the world is shocked by this latest financial meltdown in the US.

AIG, one of the worlds largest insurance company is being bailed out or took over for $85billion by the Americans while Lehman Brothers, the US investment bank has been declared bankrupt. I'm still in chapter one so this new spate of events would certainly push me to finish up the book.

The question in everyone's mind now is what really happened? What could have triggered this meltdown? It sent shockwaves to the world's stock market and it wiped out billions of dollars of share value overnight.

This latest financial tsunami had also created uncertainty in the investment world while many will be unemployed and many will be out of business (if you think about the SMEs supporting this industry).

More importantly, just think about the end customers. The company is in the business of managing risk and uncertainties. If they can't demonstrate this intrinsically, how can they assure their customers in the first place?

Was it a case of financial mismanagement? Lack of governance? Lack of prudence? Or was it just a case of being too greedy?

My take is simple. It's another fine showcase of capitalism rearing it's ugly face. Creating shareholder value is the main mantra for any public listed companies. The goal is always to create huge profit margin and reward the shareholders with high dividends.

Buy & Sell...I only see shareholder's value here....

Business models are engineered towards this target and KPIs are linked together to create shareholder value. It's true that products & services are developed to satisfy customers but ultimately, for a listed company, annual PBIT, EBITDA etc take precedent.

I ask you know these questions. Does any of these indicator points out to customer's value?? Does it mean all customer's expectations are met? Does high profit margin means customers are happy? Does it mean their standard of living has improved? Has poverty been addressed? Has it helped the needy and the poor? The answer is no.

Today, although we are slowly seeing companies adopting CSR reporting but still it's all done suspiciously for the sake publicity and popularity.

In the next couple of months or years, people will be looking high and low for the root causes. Many books and white papers will be written on this and everyone will be talking about structural failures.

Capitalist will always champion this 'survival of the fittest' model. To me survival of the fittest is the law for those living in the jungle. They don't want to see others to progress as it might eat up their 'territory'. If this continues we might see many more colossal collapses in the future.

So how do you expect this model to sustain when the rich gets richer and the poor gets poorer. The current capitalist model 'robbed' money out of people's misery. Our main motivation is always to create shareholder's value, most of the time, creating more wealth to the wealthy.

I believe that profitability should be a product of something more important which is customer's value. I would treat profitability as a by product. If you can continuously create and grow customer's value, profit will trickle through naturally. From stakeholders down to the lower organisation, meeting customer's needs and their affordability level should be the number one KPI, not profit.

When the customer's value (business of lifestyle) grow, so does yours. It's a logical way to ensure business sustainability. It's not only logical, it's socially viable as well. The aim is to help the customer's achieving their business or personal goals. That's the keyword, help. Not to overburden them with high interest rates when they really need to borrow money for example.

Don't exploit and commoditise their predicaments in the name of higher profitability. Don't just talk about business expansions, dividend policies, restructuring and passing business centric resolutions. What's more important is to discuss on the outcome towards the customers.

Even looking at newspaper report on this financial turmoil, it's all about structural collapses, investor's confidence and economic impact. Basically issues that affects the capitalist themselves. Nobody really reported on consumer's confidence and the impact of this event towards them. This is the problem when everyone cares only about their bottom line. I think everyone from stakeholders down to the line managers is answerable to customer's value first.

Customer value creation is not a new concept. It has been developed and practised for more than a thousand years ago. It's actually what the Islamic financing and business concept is all about. I think people will start to realise the advantages of adopting Syariah principles and Islamic economics. Not only the finance and banking sector should adopt it, but other industries as well.

The timing of this latest event couldn't be any better. Ramadhan is the month in which the Qur'an was revealed. God is telling us something here, especially the business community.

It's time we reflect back at the priorities, evaluate business and economic model as a whole, seek guidance and set new targets. And this new target should include generating equitable wealth and social dividends, a win-win concept that emphasises on honour, just and fair value not just maximising profits. So grow customer's value first, profit will follow suit. As they grow, so does your shareholder's value. It's common sense.