It Pays To Ask, “What Then?”

What happens to a business when the profit seeking behaviour in a business changes from customer value centered to something else? 

Eventually everyone loses.

A fundamental tenet of business is to discover what people want to buy and devise ways to give it to them profitably.  Today, Apple has been a user of that method.  Great product, great marketing, dedicated support and happy customers.  When the purpose changes from pleasing the customer to cost cutting, other things happen.

In the 50s, practitioners of efficiency based methods came out of the war effort and moved their skills to large businesses.  The effect on car companies is most instructive although they were not the only victims.

In the war, there was no customer in the consumer-oriented sense.  Value meant something different.  When those isolated methods appear in a consumer society, problems develop.

Car company management came to be dominated by finance people where they had previously been dominated by entrepreneurs or engineers.  Finance people make rational decisions, but sometimes in too narrow a space.  An engineer might try to save some money be making more efficient designs or by finding new methods to manufacture a part.  A cost accountant buys the part cheaper.  It is the price that matters and not the value. As it turns out cheap is expensive.

The logic is we make 5,000,000 vehicles a year and replacing a $5 part with one that costs $2 drops $15 million to the bottom line.  With a 10x P/E ratio the company is worth $150 million more.  Easy money.

The problem of course is that someone is going to pay for the $3 saving.  In this case the customer.  Their cost may be $300 because they must find someone to take out the old part and replace it.  I once asked a car company executive why they did not spend an extra 25% on parts so the vehicle lasted nearly forever and just add the 25% extra on top of the vehicle price.  Probably about a 10% increase to me.   I would get much better functionality for a small increase in price.  He offered that if they did, they could not sell me another vehicle because it would last too long.  I replied, “You can’t sell me another one now.”

This kind of cost cutting is about getting money, it is not about making money.  Which brings us to today.

Big data, data-mining, and the geeks that make it work, will be a menace unless there is adult supervision that deals with the idea that the customer matters.  Do you think that the crash in 2008 could have happened if people paid first attention to their customers and second attention to packaging? I doubt it.

The packages made sense with numbers, but they lacked meaning.  Numbers and statistics are helpful for decision making, but managers that lose the spirit guide of meaning will eventually destroy their business and some of their customers with it.

Do any of you think that investment dealers, banks, fund managers and governments are immune to the lure of the idea of following what the numbers say? Do they ask, “Okay, what then?”

Accept your common sense counsel.  Your gut is right.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com 

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