Thursday, January 24, 2013

Penny Wise, Pound Foolish- Short Term Success, Long Term Failure

I love the game of tennis. The ATP (Association of Tennis Professionals) releases tour rankings of its players at regular planned intervals. There is formula which is used to calculate the rankings of the players. To keep it simple, the rankings are based on the quality of tournaments played and quite obviously on the quality of players.
The emphasis in ATP rankings are based on tenacity, longevity and consistency. Very clearly, the rankings are not based on the score sheet of each match i.e. the difference in points between players in a match. Interestingly rankings in all the sports are based on similar parameters. The key in giving rankings to such people/ teams are those who give a sustained performance (over a defined time period). Blemishes like losses are evened out as the scoring is based on a certain time period.  By that extension, players and teams, if they are to maintain or climb the rankings have to consistently perform and cannot afford to be short term winners or a flash in the pan.
Taking this principle to the world of business. Akin to the ranking, the emphasis is on the long term growth of a business/ organisation. Prolonged respect and success comes from performing consistently over a longer period of time.
However the quarter to quarter approach has taken a toll on the long term success of the business. Catering to the stock market seems to be more the norm. Quarter to quarter guidance seems to be the only benchmark which CEOs seem to acknowledge.
Since the stock markets define the parameters, the shareholders dictate the demands and expectations. Maximizing shareholder value is an idea which comes from short- sighted people and is probably one of the most stupid ideas I have encountered.  Maximizing shareholder value in the short term leads to disastrous results and this is exemplified by many companies for example - HP.
Using the tennis ranking analogy, the short term outlook of business implies that the rankings are based on the score-line of each match rather than the number of matches won. Otherwise a player can play on surfaces comfortable to him/ her and boost her rankings which the ATP rankings do not allow. Likewise businesses will have to navigate different seasons, competition and conditions over a long period of time.
What are the pitfalls of such a myopic outlook? They are multiple. Some of them are listed here.
  • Innovation
One of the first things to suffer is innovation. Once the question, “How do we make the most money?” is asked, whether it’s for the short term or the long term, decision-makers discover that innovations that add value to customers are inherently more risky than cutting costs. Everything becomes an immediate ROI based approach which also reduces the apparent value of even large, long-term benefits. Creatvity is stifled.
  • Risk Taking
With larger risk taking comes the possibility of larger losses. Risk taking can become a liability and a very cumbersome process. From an executive perspective, cost cutting is an easier tool to work with. There are very little qualitative considerations when slashing of costs are involved. It is important to note that most companies which have grown have been companies which have launched innovative products. The chances of the long term success of a ‘me to’ company are limited.
  • Cutting Corners
Toyota, has had to recall cars simply because they started focussing on costs rather than quality. With unfaling regularity,  every year they have  been  recalling cars. Cost cutting seems to be a disease and even the President Akio Toyoda has had to publicly apologise for the wrong focus. Customer focus has taken a back seat. This when personnel ask, “What’s in it for us” rather than, “What’s in it for the customer?”
  • Lack of Customer Focus
When any organization looks too much inwards and loses track of its customer then it is sounding it's own death knell. The top brass of any organization should take judicious calls and be aware that the customer is king. That is one gospel will not change. If customers are happy and satisfied then the finances will be taken care of. Profitability is a result of customer focus and not the only goal. As Peter Drucker noted, “the only valid purpose of a firm is to create a customer. “
  • Executive Compensation
Unfortunately the compensation of the C-suites is inextricably linked to the stock market. That itself creates an imbalance and this translates into the adoption of short term measures. Executives start taking measures which gets in the way of creating long-term shareholder value. Al Dunlap and even Hurd are typical examples of such CEOs.
  • Shift from Best to Biggest
Being “the best” is basically focusing on the customer. Being “the biggest” is essentially focusing on making money. There may be a slight dichotomy here but the point is that when an organisation is only focused on making money rather than being the best at what they do, there will be compromises. HP is a very clear example. From being the best at what they do, they focused on being bigger than being the best.
  • Real Market Vs Expectations Market
The “real market”, is the world in which tangible products and services are created, produced and marketed. Revenues are earned based the sale of these products/services. All expenses are paid from these revenues. There is a realism of sorts. Assuming that all the products/ services are sold, the executives can control this—at least to some extent.
The "expectations market' rides on expectations or conjectures, however scientific or mathematical they maybe . People asses the real market activities and form expectations on how the company will perform in the future. This expectation is traded by people in other words, investors in a venue called the stock market. What drives the expectation market is further expectations. 
Unfortunately if there is one person who is wrongly held responsible for the shareholder value/ expectation concept is Jack Welch; during his tenure as CEO of GE from 1981 to 2001, as a result of his capacity to grow shareholder value and meet his numbers. When Jack Welch retired, the valuation of GE had risen from $14 billion to $484 billion. Since Welch retired in 2001, however, GE’s stock price has not fared so well: GE has lost around 60 percent of the market capitalization. Contrary to popular beliefs, he has never been a proponent of focus on shareholder value. Infact he has rubbished it - “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal. … Short-term profits should be allied with an increase in the long-term value of a company.”
Not all companies are following a short term focus.
  • Starbucks had infact even refused to share year on year store sales. And needless to say Starbucks has been going from strength to strength.
  • Steve Jobs was very clear that shareholders didn't matter much and that they certainly wouldn't interfere with Apple’s pursuit of its original customer-focused purpose: ‘to make a contribution to the world by making tools for the mind that advance humankind.’ Infact Jobs detested shareholder meetings! Needless to say, I don't need to talk about the success of Apple.
That is why we all love a Borg, Federer or closer home Tendulkar. They are famous for their consistency, class and excellence over a long period of time. Was Pat Cash as famous as anyone of them? Not a chance.
There is only one valid definition of a business purpose: to create & nurture a customer. Stick to it.

Saturday, January 19, 2013

Keeping the Customer Relationship Going - Key Learnings from My Marital Life

This note was a very personal one when we completed a milestone of completing 20 years of our married life together.

7300 days ago, we had a traditional Malayali wedding in Trichur, Kerala. My grandmother (bless her), till her death insisted till that it was only because of her that we got married – (she got her thrills from it) – after all I was a favourite grandson (did I say only too?) and Latha was her only grand-daughter in law.

Latha is the scheming sort. Pretty soon she warmed her way into the hearts of my relatives. Infact she knew more of them than I did. They would rather talk to her than me. Forget relatives, she managed to swing my father her way. He actually thought that he had a great daughter in law much better than his own son! Poor me!

We are very different persons. I am the impatient one and Latha is just the opposite. My idea of a great time is to relax and chill, her idea of a great time is some action. She loves to party and I love to be at home and only party with a few friends; she loves to dance and I like 'not to dance'. Just when I decided to drop alcohol she felt that she would try to make up for it. I like to read the lighter books and she relaxes with scientific tomes (these typical intellectual Ph.D types!)

While I would call her in various terms of endearments like kutta, she called me eeah! (more like a goat’s bleat!). According to her, I am the old man and she is the young thing and goddam it, she has even convinced our son that I am old fashioned and she is the hip, cool one. This pretty much sums up what she thinks of me!

To use the cliché, opposites attract is perhaps a no brainer in our case. 20 years is a long time and I give Latha all the credit to navigate the turbulent times and come out of it. We have hit the lowest lows and she has been that one person who put everything into this relationship and made it successful.

When I thought life was unfair and faced extremely challenging times, Latha stood by me encouraging and cajoling me. It is with a lot of support from her (and ofcourse my close relatives and friends) that I am what I am.

Sometimes I do wonder why she loves me…..and I am still wondering! Anyway thank goodness for that. Latha, I love you and I am very grateful to you for loving me.

And now let’s move onto the best part of the rest of lives! But last but not the least, I am sexier than you….you know!

There are many learnings from this relationship and this can be extended to our relationships.

  • No two customers are the same.
  • There are ups and downs in any relationship. You need address each one of them separately.
  • Don't take your customer relationships for granted.
  • You have to invest in customer relationships.
  • Dialogue with your customer regularly. Monologues do not work.
  • Be thankful for your customer. 

The Age of Distrust and The Age for Trust

Loss of Faith The last few years have seen an increasing ‘loss of faith’ against politicians and media (because all communication happens ...