Piecing Together Customer, Company and Shareholder Value
Warren Buffett once said, "Intrinsic value is the only logical way to (manage) investments and businesses." It provides the strongest foundation to the enduring growth of companies.
We have seen so much downsizing in the Pharma industry lately that it does make one seriously deliberate the question, “Are You Really Adding Value?” Undoubtedly, with the sheer number of jobs cut, one has to face facts that there were bloated structures in place from the very start.
Furthermore, because downsizing continues year upon year within the same companies suggests to me that something else is going on...possibly a loss of focus on real value, and too much focus on share price manipulation.
Value creation must be the most important focus of a CEO, and that is not simply increasing share price value. If a company really wants to be successful, they need to put real value first. I read about two companies that achieved remarkable growth and found that both had made a conscious decision to focus on value creation - and have been doing so for over a decade. These were Lloyds Bank and Coca-Cola.
These companies made a conscious decision to focus on value creation and then made a thorough examination of where, how and why value is created…
When Lloyds Bank the CEO decided to put value creation first in 1983, this decision started them down a very different path from their peers. They spent time examining how and why value is created in the financial sector, then examined which of these were the most profitable sectors, invested in these and withdrew from some of the other segments. They subsequently organized their structure around their customer segments.
Coca-Cola was an already big and profitable company around the same time. It was achieving 14% annual growth but its profitability was declining and its shares were underperforming. The CEO decided, in 1981, to also put value creation first. They examined what value was created within each of their businesses and discovered that their mature core business was missing a major growth opportunity. They subsequently increased and refocused their marketing investment and rapidly expanded it into new markets. They simultaneously acquired, consolidated and spun-off bottling companies to create strong agents in their supply chain in order to assist the value of the business while reducing their participation in non-beverage businesses. The impact of these efforts resulted in the company achieving double their overall market share as well as a triple return in equity.
These companies made a conscious decision to focus on value creation and then made a thorough examination of where, how and why value is created in their sectors, and businesses, gaining an understanding of the sources and drivers of value creation in order to create a platform for sustainable and profitable ongoing growth.
How do Customer, Company and Shareholder Value Fit Together?
Many C-Suite executives have felt for many years that it is their primary duty to grow shareholder value. This was an accepted management belief which has more recently come under fire. In essence, one would think that if a company was doing a good job - keeping existing customers and winning over new ones - then the company would grow, the share price would rise, and both customer and shareholder value would increase in a directly proportional relationship. This makes sense. However, many executives have taken the concept a little too narrowly and appear to have an excessive focus on share price value at the expense of customer value. By focusing exclusively on share price value, the company loses sight of the business to focus instead on optimizing and manipulating short-term earnings and stock price.
In order for the value of the brand to create significant increase in demand, it must be much stronger than the competitors’ offerings…
Companies and brands should be managed in such a way that customer value is put first and managed expertly so as to create shareholder value. Shareholders are the final links in the chain, so to speak; hence, pleasing them over the long-term would suggest that everyone else involved (customers, payers, staff etc) would have to be completely satisfied first. Customer value is paid a lot of lip service in the Pharmaceutical sector, but is it being created? It has had many meanings over the years, but many marketing oriented managers perceive the meaning to be the benefits customers perceive to get from the product, whether it is the product itself or additional services that are provided with the product.
The linkage with shareholder value is clear: if the customers are feeling they get more benefit from the product than its competitors, they will choose it, which will mean an increase in sales and that, in turn, will lead to the products contribution to the shareholder value which the company creates. At least, that is what one would expect. In order for the value of the brand to create significant increase in demand, it must be much stronger than the competitors’ offerings and, at the same time, must be achieved by utilizing the resources available in the most optimal and cost-effective way.
To create a value strategy that starts with customer value, leads into company value and thereafter creates strong shareholder value, one needs to be equipped with the following:
- Superior Customer Intelligence.By having access to data and analytics that uncover what is really driving your customers, you will be able to utilize the drivers when planning your marketing. By ‘what drives the customers’ I don’t mean what they may say, but uncovering with analytics what will move them to seek your product. Steve Jobs at Apple discussed this aspect when discussing the original iPod. He said that if he had asked customers what they wanted, they would not have come up with this idea. However, by understanding what was important to them and working from this, he could create something that really drove unprecedented demand.
- Superior Competitor Intelligence.Similar to understanding the customer, you must also really understand your competitors. By understanding their offerings and strategies with the help of informative analytics, you will be able to predict how they will likely change their approach if you improve, and how you can stay ahead of their moves.
- Superior Product Marketing.By understanding the customers, competitors and all other key stakeholders, you can ensure that the benefits your product provides which fit with the drivers for these customer segments are aligned, and also that you are allocating your resources in such a way as to get maximum return from them.
- Superior Value. As marketers you need to understand the value of your product and ensure that it is providing much stronger perceived value than your competitors. When a company has a thorough understanding of its customers, the different customer and stakeholder segments, how they perceive value in the drugs on offer, and then use that knowledge to examine its cost structure, the resulting cuts are in alignment with revenue growth and profit and the company is in a far better position to grow profitably in this downturn (or at least volatile) economy.
Given there are ongoing pressures in the environment, and within companies, to cut costs and deliver more shareholder value, it is not a surprise that most companies focus on the quick win of cutting costs to get a short-term, quick shareholder value win. Unfortunately, cutting jobs is a very quick win on the balance sheet. Other areas that have been implemented are consolidating back office activities with a global business service department, shared services, outsourcing more areas, or creating supply chain or procurement efficiencies. These efforts have been useful in creating a cost reduction. CEOS and CFOs are expected to continue to consider more ways to reduce costs and we will, no doubt, see more job cuts, strategic outsourcing and enterprise rationalization in the near future. However, by cutting costs with an axe, instead of a scalpel, companies risk stunting profitable growth as a result, despite a short-term stock market win.
Companies should instead increase their focus on real value. Creating profitable value growth requires an understanding of where to focus (drivers) and where to cut back (non-drivers), and within the drivers which ones are more sensitive to action than others so that activities can be fine-tuned. By shifting resources to focus on the value drivers that improve growth and away from non-value drivers that are a drag on the company’s expansion and profitability, we can start to see sustainable, long-term, profitable value growth.
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