Exploit Customers and Employees at Your Own Peril

I always try to convey to my MBA students that a strong focus on customers and employees are the holy grail in the search for sustainable business success.  Should one research the vision statements and credo’s of businesses, they all (the most of them in any case) make the point that their people are their most important asset, and that they live to make their customers happy.  Forgive my cynicism!

Allow me to elaborate.

In the world of business, one can Google the Service-Profit Chain.  It is a further development of the value chain concept developed by Michael Porter, and was developed by Heskett and his colleagues.  Basically it states that in order to generate superior returns and profits, we need the following:

  • Loyal, satisfied and committed customers.
  • For this you need a customer value proposition that will get the customer excited.  This refers to a product or service that has great quality, a great image, great functionality, serving a psychological need at a great price.
  • This in turn requires a workforce that is loyal and committed.  People who are engaged, excited, enthusiastic, energized, and passionate.
  • And finally, for this you need an employee value proposition that will lead to an engaged employee.  It includes tangible benefits such as a good salary, great incentives, development opportunities, and a career filled with growth opportunities.

Based upon this, one would agree with the companies who do have the approach as explained in the first chapter.  But let’s go further.

Getting a loyal and committed customer and a loyal and committed employee requires value to be added to both.  However, the value to these two parties is inherently different at the practical level.  Let me explain what I mean.

A short while ago, a good friend of mine got a job offer from a rival firm.  He was quite happy and content at his current job, but the new job offer was way above what he had been getting up till then.  He agonized about the offer, but eventually decided to take the new offer.  At this point, the original offer by the new prospective employer had been improved due to him stating his views on what would be a decent offer.  Normally, at this point, the current organization comes up with a counter offer to match the rival offer.  I have a few issues with this state of affairs.

  • Why do organizations wait until their employee gets a good offer from a competitor and then try to match it?
  • Why do organizations not pay him/her a good market-related salary right from the start?
  • Why do they not pay him/her what the position is worth right from the start?
  • Why not update the package to keep the package market-related right from the start?
  • Why insult him/her by trying to update the package only when the competitor tries to recruit him/her?
  • I am not just referring to money, but to the whole remuneration package.

The second case is similar, yet vastly different.  A short while ago I had asked the Financial Director of a South African bank that was created 10 years ago to chat to a group of French MBA students.  This bank is doing exceptionally well and my only regret is that I did not buy its shares when they were at R1 about 8 years ago.  They currently trade at about R170!  This bank took the following approach:

  • They charge a fee that provides them with a margin that they are comfortable with.  They have determined what the margin is, and are happy with it.
  • They do not charge what the industry is charging.  As a matter of fact, they charge rates and fees that are way below the industry norms.
  • They aim at being different.
  • Their point of departure is as follows: if we charge what the rest of the market is charging, what makes us different?
  • In this, they are paradigm breakers.  The normal point of view is that we need to be market-related.  We charge what the industry will allow and the idea is to make as much money as possible as quickly as possible.  They are way below market-related.  And they are reaping the success.
  • Obviously, with low prices and small margins, they need volume.  And they are getting it!
  • They are therefore low cost and provide acceptable and comparable measures of quality.
  • As far as this situation is concerned, it flies against conventional logic.  My normal advice would be to charge market-related fees, but this company is forcing me to reconsider my point of view!

So, let’s check what we are dealing with.  We have the situation where you need to deal with the customer and employee in different ways to add value:

  • Provide the employee with the biggest/best possible remuneration package while still making acceptable levels of profit.  This means you are or should be in the highest bracket of remuneration levels.
  • Provide the customer with the lowest possible price while still making acceptable levels of profit.  This means you should be the provider of the greatest or equivalent quality of product or service, at a cost level that is way lower than those of your competitors.

What are the implications if you do not follow the above tenets?  They are quite simple:

  • Forget about having satisfied, loyal, and committed customers.  Forget about transforming your customers into consumer evangelists who drool about your service, who sell your company to their friends, and who come back for more and more!  They will not be loyal and will leave you for another who comes onto the scene at the drop of a hat.  If we take the banking scene in South Africa into consideration, the Big 4 are not loved – they are tolerated at best.  The new kid on the block, Capitec Bank, is way below the Big 4 in respect of costs, and is growing in leaps and bounds!  They are winning international accolades for being innovative and creative!  And customers have a good and long memory.  They will remember that they were ripped off and taken for a ride!  And they will hate your guts for it!

This is going to force the incumbents to reconsider their business model as it is going to become a major driver of change, should Capitec maintain their strategy!

  • Forget about having loyal, satisfied, and engaged employees.  You will have their bodies, and not necessarily their hearts and minds.  And they will leave the moment someone else offers them a better deal.  They too have a good memory and they will want to know why you are only offering them a better deal when a competitor has already done so!  They will know they have been ripped off and taken for a ride.  And they will be angry at you for it.

Again, this situation will force companies to reconsider their employee value proposition if they want to remain credible players in the war for talent that is being waged constantly.

Take these two elements out of the equation and you have nothing left.  Nothing worth sustaining in any case.

People are said to be the most important element in the organization.  It is time we acknowledge this and act accordingly.  Customers are equally important, and it is time we move beyond seeing them as a means to an end (profit) and acknowledge that we exist to serve the customer!  This is one of the paradoxes of business.

So, are you going to be greedy and be the lowest payer in the industry, or the highest price because the industry will bear it?  Or are you going to do the right thing, the clever thing, the sustainable thing?  Were you to follow the latter route, you will be remembered for all the right reasons!  If you don’t, you will not be remembered at all!

Make your pick!

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3 Responses

  1. Louw Burger says:

    Good article. Thanks.

    One issue. When you speak about “companies” you really mean the people in leadership in the company at the time. It underlines the critical importance of leadership in our companies. For all intents and purposes, the leaders of a company at any time are “the company”.

    The issues your article raised will not invite much contradiction. Why then, do leaders who are mostly intelligent and capable people, do such stupid things?

    Another article, perhaps?

  2. Julian Pick says:

    I totally agree with your comments. Linked to this I believe that companies should also give their employees the best tools, training, systems and support.

  3. Debbie says:

    Good article and I agree with Louw. Our management do set the tone and the policies, but they are often only accountable upwards and therefore their decisions are often one sided.

    In SA we seem to have a culture where interaction with management is reserved for management and a few others “brave” enough to tackle it.

    Very few individuals are putting their passion, knowledge and expertise into their jobs and even less are prepared to hold management accountable for poor decision making or even better yet, few are prepared to offer suggestions that could lead management to think differently.

    Management on the other hand have the age old human condition of “ego” and often they are so pressurised for either time or results that they “harden their attitudes”, stop listening and voila, we have misinformation and major misdirection.

    Add a couple of clients with no choice as to where to go, a workforce with limited authority and even less accountability, a world with materialism at the forefront of it’s agenda and welcome to 2011.

    Roll on the Capitec’s and other SA companies that are seeing the light and oh yes, remember your clients are getting more and more educated every day, so no backsliding once you feel you’ve “made it”.

    It’s time for 360 degree accountability in SA – a new era has dawned.