OPINION – Managers and investors are starting to understand that, in the long term, a company's success is built on value for the customer and not on marketing manipulations.
Words: Boaz Tamir, President, Israel Lean Enterprise
"Only when the tide goes out," said legendary investor Warren Buffett, "do you find out who is not wearing a bathing suit." When the first signs of an economic downturn emerge, the businesses that sell empty packages to their customers instead of sustainable value, with a short-term view of the "advantage" of the stockholders, are exposed.
The manipulation of customers is often concealed with pretty words like special deals or coupons, and with pumped-up superlatives like amazing, treats, or dreams – which at best do no harm, but often produce disappointment and frustration for those who were tempted to buy a discount instead of a product, or a benefit instead of a service. Building a business on temptation and manipulation means creating "bad money" – a momentary profit, a "sting" that just erodes value for the stockholders.
An investment advisor once tried to sell me a supermarket by saying, "In the capital market an investment without inside information is 'speculation...'" I thanked him and decided to sell my whole portfolio immediately, because trade in inside information is not only against the law and fair rules of the game, it can also easily turn out to be toxic for the user. We learned from the global crisis of capital markets that sometimes their contribution to economic growth turns negative, and that manipulations and tricks of imagination that supposedly control reality instead of adjusting to it are not only found among marketing people. Managing investments on the basis of advanced mathematical algorithms ("quants") – as in the case of an investment strategy like "toxic debenture" from which many made gains – is a matchbox on a raging river, and it was not for nothing that the whole capital market collapsed in the 2008 crisis.
A healthy capital market is one that supports businesses that create economic value and are a source of business development and growth with information transparency for all. A gas energy supplier that practices transparency and social and environmental responsibility (without making use of its monopolistic power), or an insurance company that tends to the needs of the insured without delay, deserves to be at the top of the analysts' recommendations. So does a cellular supplier that does not settle for selling "packages at a bargain price" (as a single product for the user), instead enhancing the value for its customers with tailored services and spontaneous assistance at any place and any time, or a bank that instead of pushing loans to "make dreams come true" knows how to protect its customers by avoiding irresponsible consumerism and supporting them even in time of trouble, or a credit company that creates a responsible expense-management service for its customers so they will not end up having to shred their credit cards. All these are businesses that create real value and are appropriate and quality targets for investment. Why do we need to imagine them?
How can one separate the wheat (the value creators) from the chaff in a business plan, or in one's investment portfolio? A business that evaluates itself according to the quality of the value for its customers will turn out to be beneficial to its investors. Managers, investment advisers, and analysts who closely follow the measure of customers' faithfulness to the business will provide a faithful service to their customers, to their businesses, and to the investors. The measure of customers' sympathy (Net Promoter Score), for example, reliably reflects a business' ability to retain its customers as a result of value-creating processes. Alert and active consumerism will support businesses that, instead of a manipulative marketing policy, pursue a business goal that is based on creating value for the customer by tailoring a product or service and building trust over time.
And there are other measures for spotting a value-creating business: a business whose goal is identified with a social mission is a creator of holistic, sustainable value and hence is a worthy investment target. Environmental responsibility – not as lip service of encouraging the employees to perform "good deeds for the community" but as a value that is built into the products and services – is also a key component of building economic value.
The measure of the employees' satisfaction (when an organization is in demand as a workplace) is important, since it is clear that satisfied employees create satisfied customers. And finally, the measure of transparency: there are no healthy relations without trust, and there is no trust without transparency. A sophisticated consumer market means moving from the sale of products and services to forming a trusting relationship over time.
Companies whose aim is to create value for their customers by developing a long-term relationship are an excellent target for investment. A strategy of building value for the customer provides an effective consumer stimulus that will affect development processes and growth directions. The quality of internal relations (morale and level of employee turnover) and of external relations (the relationship with the customers and the community) lays the foundations of competitiveness for those who aim to meet the test of the market, and to surmount an existential challenge when a downturn hits.
A business that operates in a competitive market cannot survive over time if it does not build its relative advantage by creating customer value (in price, in quality, and in timing), particularly during slumps when the war over the consumer's money is a challenge to everyone. Businesses that successfully build relations of trust with their customers will not panic in time of drought. Others, however, will not be able to rely on their customers' sympathy at such times. When the water level starts to sink, the management and the stockholders will be out in the cold.
Boaz Tamir is founder and president of Israel Lean Enterprise. He has extensive experience in entrepreneurship, turn around processes, company management, and academic research, and has contributed his knowledge to the business development and marketing of some of the largest and most successful organizations in Israel. Tamir is a founding and managing partner of Montefiore Partners Venture Capital Fund and has also served as founder and director of Romold Group, a multinational company specializing in environmental technologies and the development and production of infrastructure products for water and waste-water management and telecommunication. Tamir holds a Ph.D. in Political Science and Management from MIT