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Balancing customer and shareholder value.

In the 1970s, Schlitz was the number-two beer maker in America. But the company's management was dissatisfied with Schlitz's stock price, so it embarked on a financially driven strategy to improve the company's standing. After analyzing the income statement, management decided to cut expenses and increase margins by using less expensive hops in its beer. And after analyzing the balance sheet, it decided to reduce the assets tied up in the business by cutting the time Schlitz aged the beer.

Sure enough, profit margins increased, asset turnover went up and the stock price jumped. But then something happened in the marketplace: Customers noticed that Schlitz didn't taste as good anymore, and they deserted the brand in droves. The stock price plunged, and Schlitz destroyed both customer and shareholder value. The company never regained its number-two position.

The Schlitz story is a classic example of the danger of focusing on shareholder value while ignoring customer value. Current views about value creation usually fall into one of two categories. The first takes the position that customer value drives shareholder value. Translated: If an enterprise has an enthusiastic set of customers, shareholder value will fall into place almost automatically. The second takes the position, not surprisingly, that shareholder value drives customer value. Translated: Maximizing shareholder wealth almost automatically necessitates pleasing customers.

But we've found that neither value discipline automatically leads to the other. An enterprise must work with equal intensity on building value for customers and for shareholders if it hopes to deliver superior results to both. The building blocks of customer value and shareholder value differ. The building blocks of customer value are the quality the customer receives with a purchase compared to the purchase price. Those of shareholder value are revenue growth and profit margin.


We believe financial executives can balance customer and shareholder values by leading employee teams in using a practical, easy-to-use process to build strategies that will win both customers and shareholders. It's called the "market value process" because it measures and maps the value that an enterprise creates in both the product markets and the securities markets. This process transforms concepts like "customer value" from empty slogans to measurements as precise as profit and cash flow.

As part of the market value process, the customer and shareholder value map (on page 17) depicts the combination of customer value and shareholder value that a strategy creates. Here's how to use the map: First, measure the customer value you've created (the result of your marketing strategy) along the horizontal dimension. The measure of customer value created is the quality for the price that an enterprise delivers, relative to that of the competition. If this is above average, average or below average, it positions your enterprise in the right, middle or left columns, respectively.

Then measure the shareholder value you've created (the result of your financial strategy) along the vertical dimension. The measure of shareholder value created is the present value of the cash flow that a strategy generates. If this amount is less than zero, the strategy lands in the bottom row. The cutpoint between medium and high will depend on the size of the enterprise making the evaluation. The bigger the enterprise, the higher the cutpoint.

Of course, you want to develop a strategy that positions your firm in the upper right corner of the chart - in other words, a strategy that creates high value for both customers and shareholders. But what about an enterprise with a strategy stuck in the "does not work" corner? Obviously, it needs to improve its strategy. Ideally, the firm would go straight from the worst corner to the best corner - and many companies envision this happening, but it's more easily said than done. In practice, you often have to work your way along the perimeter instead.

Another temptation is to move straight up to the upper left corner, where shareholder value is high and customer value is low. After all, this takes your firm out of the bottom row, where all strategies result in shareholder value destruction. You can execute this move by cutting costs to improve margins and pruning excess assets to increase turnover. But unless you can then immediately put customer value in place, this strategy will work only temporarily. Soon you'll end up right back in the "does not work" corner because short-term, financially driven fixes that aren't coupled with customer value fixes are destined to fail. Remember Schlitz?


To make the trip from the worst to the best corner of the chart by going along the edges, it's always best to put customer value in place first, because it opens the way for the financial payoffs - revenue growth and profit margin - that build shareholder value. Temporarily, this leaves your firm on the right-hand side of the bottom row, with increasing customer value but continued low shareholder value. You still must turn on a dime and put in place the profit margins you need to create shareholder value. But this is easier to do when sales are growing as a result of high customer value than when sales are tumbling, as they did for Schlitz.

There are, however, many companies that fail to make this turn. The story of Bowmar Instruments is an equally classic example of temporarily creating customer value without shareholder value. Bowmar was the early leader in the handheld calculator market. In the late 1960s, these calculators sold for around $200. Prices tumbled, however, as they commonly do in high-technology markets, and within a short time, the price was $100, and eventually it dropped below $20.

In the face of this, Bowmar was never able to turn its market leadership into acceptable margins and move out of the bottom right corner. Market leadership passed to Texas Instruments, a low-cost producer of the semiconductors that powered the calculators.

The lesson: Wouldn't it have been easier for Bow-mar to enter into a strategic alliance with a semiconductor manufacturer to get low-cost componentry for the firm's market-leading calculator than for Schlitz to find an alliance to save a brand that had been fatally wounded in the customers' eyes?

Alan S. Cleland is president of Cleland Associates, Inc., in Palo Alto, Calif. Albert V. Bruno is the Glenn Klimek Professor of Marketing at the Leavey School of Business and Administration, Santa Clara University, and vice president of Cleland Associates. You can contact them at (415) 323-0953.
COPYRIGHT 1997 Financial Executives International
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Copyright 1997, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Bruno, Albert V.
Publication:Financial Executive
Date:Mar 1, 1997
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