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Thursday 21 March 2002

The Wheels of Industry

The business pages lately have been filled with tales of woe, or of impending woe. Enron, Global Crossing, HP, XM Radio, the music industry, and many others are having their share of woe right now.

The remarkable thing is that the financial press, and presumably the financial and business community in general, sees all this as happening in a vacuum, in the hermetically-sealed world of Business. Nobody seems to suspect that these organizations are struggling because they think of their customers with contempt, if they think of them at all.

Take XM Radio as an example. XM’s service consists of beaming radio content to listeners via a satellite. This — building and launching spacecraft — is expensive, and so XM is seriously, perhaps perilously, in debt.

That’s what the financial press talks about: XM’s debt. The debt is sinking the company, and so Big Financial Moves are necessary to set things right.

Never mentioned is the fact that XM’s product — its radio programming — is terrible. For ten dollars a month, it offers its customers — what? Six channels of “urban” music, six of “country” music, five of “Latin” music (in addition to another six of “world” music), several channels not in English, and three of “Christian” programming.

There are a few channels of programming that is not available for free on radios the public already has: the BBC World Service (recently made unavailable on shortwave in North America) prime among them. But the over whelming bulk of the programming merely duplicates what’s already available on terrestrial American radio.

Now, if XM’s product were worth a damn, there would be more subscribers, the company would have more income, and the debt would not be a problem. This is not a fact you will find in the business pages.

As another example, we might take HP. Lately there’s been a battle over the future of the company, over whether HP and Compaq should merge.

The HP Board of Directors promises huge profits, in part by firing 15,000 employees. That makes sense; between Compaq and HP, there’s undoubtedly a lot of duplicated effort. By eliminating that effort, you can save a lot of money.

The profits they promise go far beyond that, though. And it doesn’t make any sense. Compaq and HP make money by selling products and services to customers. How will customers be helped if Compaq and HP become one company? What specific benefit will customers get from the merger?

They’ll be able to buy HP printers and scanners — HP’s only compelling products any more — and Compaq computers from the same company. That’s it. At the moment, customers can buy Epson, Canon, Lexmark, HP, and Compaq-branded printers from Compaq. But it’ll undoubtedly be better for them to be able to buy only HP/Compaq printers; this will clearly result in more customer satisfaction and more sales for the company.

But, when the HP/Compaq combination (doubtless to be called something stupid like ‘Ameripute’) is awash in red ink in a few years — and it will be — the business section will be full of moaning about debt and employee layoffs and restructuring and the like. There won’t be a mention of the fact that all the expense of this HP/Compaq merger had nothing to do with delivering better products and services to customers.

Because the customer is the great hole in the center of American large business these days. Here’s a simple recipe for success in business:

  1. Produce a product or service that people want.

  2. Offer it for sale for an amount of money that’s more than the product cost you to produce, but not more than the value of that product to the customer.

That’s it. Doing that will result in success. Doing anything but that, regardless of how complicated or how clothed in fancy language your alternative is, will result in failure. Every time. Even a child knows this.

This is all very naive, of course. You rarely, if ever, hear the executives of large companies actually talking about what’s good for the customer. In some cases, notably the music industry at the moment, you more often hear them talking about how to thwart their customers.

Maybe it’s because we’ve allowed “business” to put itself up on a pedestal, so that “businesspeople” can feel that there’s some fundamental difference between them and, say, someone who sells apples on the street corner. Few of them seem to understand that what they do is not leverage opportunities, or create new paradigms, or extend markets, or enhance relationships, or any other business bullshit. What they do — at least if they want to be successful — is offer value for money to their customers.

When you hear executives talk about “offering value”, they’re almost always talking about shareholder value. I haven’t charted this yet, but it seems that there is an inverse relationship between focusing on maximizing investor return, and actual investor return. Companies that focus on satisfying their customers, on the other hand, seem to have the highest rates of return on investment. “Maximizing shareholder value” as a goal in and of itself gives the company license to gouge customers, after all. If your sole goal is to squeeze as much money as possible out of your customers while providing as little as possible in return — this is “maximizing shareholder value”, after all — someone will eventually come along and take your customers away.

On the other hand, if your company sees its purpose as making a profit by satisfying customers, you’ll make money and be invulnerable. Seems obvious to me, but then I haven’t been to business school.

Posted by tino at 12:30 21.03.02
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I was hoping that the recession might improve customer service and provoke companies to actually focus on their customers.

Fat chance.

The only reaction I’ve seen in corporate America is to fire people and still not pay any attention to delivering value to their customers.

Posted by: Nicole at March 21, 2002 03:54 PM

Corporate America conned the consumer back in the 80s that the consumer could get better prices if they sacrificed customer service. So now Corp. America has not only forgotten how to provide good service but also seems to see it as an unnecessary cost affecting the bottom line.

Posted by: Paul Johnson at March 21, 2002 10:15 PM