1-843-602-9880

“The customer is always right.”

-Attributed to Harry Gordon Selfridge[1]

Content created by Darin Gerdes. Copyright Great Business Networking.

The Purpose of Business
If you’re like most people, you don’t spend a lot of time waxing philosophical about the nature of business. That is completely normal, but in this lesson were going to take a step back and consider the purpose of business. According to Peter F Drucker, “There is only one valid definition of business purpose: to create a customer.”[2]
The goal is not only to create a customer, but to keep the customer satisfied so that he returns again and again. This concept makes sense, but it gets complicated when we think about the multiple customers that the business has to please.
For instance, when a small businessman takes on debt, the bank becomes a customer that must be pleased. “The borrower is servant to the lender.”[3] If he sells equity in the business, the new owners are customers and they must be pleased. After all, shareholders invest because they want to see a return on their money. The manager’s first legal duty is to the shareholders. This is called a fiduciary responsibility. When the owners (shareholders) are different than the managers (agents), managers are legally obligated to run the business in a manner that furthers the interests of the shareholders.
The reality is that shareholders are customers not of the organization’s products, but of the organizations profits. They purchase their share with their original equity. We will call them owner-customers.
            When the business hires employees, the business acquires another set of customers. Employees should be thought of as customers in the labor market. They could choose to work for other businesses, but they chose to work with you. Do you show them that you value their contributions? If not, they can and should go elsewhere. Employers who recognize this and go out of their way to continue to woo their employee-customers, will have little trouble staffing their operations.
 
How to Please Your Customers
I can explain how to please your customers in a general sense, but I can’t tell you how you should do it in your specific business. While there are guiding principles, there’s no one right way to run a business.
Take a look at the mission statements of a handful of companies with which you are certainly familiar and note how they focus on pleasing their customers:

  • “Wal-Mart helps people around the world save money and live better.”[4]
  • “The mission of The Walt Disney Company is to be one of the world’s leading producers and providers of entertainment and information.”[5]
  • [Starbucks]: “To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.”[6]
  • “Facebook’s mission is to give people the power to share and make the world more open and connected”[7]
  • [Nike]: “To bring inspiration and innovation to every athlete in the world.”[8]
  • General Motors: “To earn customers for life”[9]
  • [Coca-Cola]: “To refresh the world… To inspire moments of optimism and happiness…To create value and make a difference.”[10]

Notice the differences between the mission statements. Wal-Mart helps people save money. Starbucks barely talks about coffee; they talk about an experience.  General Motors does not even mention automobiles. They just seek to earn customers for life. Coca-Cola seeks to refresh inspire and “make a difference.” If you did not already know what Coca-Cola did, the mission statement would not help you understand what they produce. Coca-Cola’s primary product is flavored water but the value is found in refreshing others and in moments of happiness.
Sometimes companies emphasize one customer over another. For example, FedEx mentions shareholders and Boeing mentions employees:

  • “FedEx Corporation will produce superior financial returns for its shareowners by providing high value-added logistics, transportation and related business services through focused operating companies.”[11]
  • [Boeing]: “People working together as a global enterprise for aerospace industry leadership.”[12]

Notice how these companies focused on owner-customers and employee customers. Some companies even include God as a customer.  For example:

  • [Coke Consolidated, the largest Coca-Cola bottler]: “To Honor God in All We Do. To ServeOthers. To Pursue Excellence. To Grow[13]
  • “TURBOCAM exists as a business for the purpose of honoring God, creating wealth for its employees, and supporting Christian service to God and people.”[14]
  • [Chick-fil-A]: “To glorify God by being a faithful steward of all that is entrusted to us and to have a positive influence on all who come into contact with Chick-fil-A.”[15]

What all of these mission statements have in common is a focus on customers—consumer-customers, owner-customers, employee-customers, even God as a customer.[1] Even if your mission was completely selfish (e.g., “to put as much money as possible in my own pocket.”) you would still have to please customers to do it legally. In order to get elected, even the president of the United States has to please a majority of the customers we call voters.
You need to please customers in order to be profitable. Your goal is to deliver products or services that people value more than they value the dollars they will spend. The more they value the item above the cost for you to produce and deliver it, the more you’re pleasing your customer, and the difference can be turned into profit.
 
Pleasing People Leads to Profit
When you please people, good things happen. Consumers get what they want. Jobs are created. Taxes are paid. And yes, profits are generated. Everyone wins.
Take Starbucks as an example. Apparently Starbucks pleases a lot of people. Today, there are nearly 24,000 Starbucks locations around the world.[16] Scott Quatro, a management professor at Covenant College, calculated where the money goes when you buy a Starbucks coffee. He wrote:
Let’s consider the operation of the local Starbucks store in Lookout Mountain, Georgia just 5 blocks from my home. This is my Starbucks—and I’m thankful for the fact that it’s so easily accessible. I’m a big fan and a loyal customer. And I gladly hand over $2.40 for a Venti Pike Place coffee—partly because it’s really good coffee, but also partly because of all of the prosperity that I know flows from that $2.40. Of course not all of the $2.40 is profit. But the fact that there is a profitable return available to Starbucks is what makes it willing to engage in its corporate activities. In short, every penny of the $2.40 is undergirded by Starbucks’ pursuit of profit making, and the money eventually flows to the major corporate stakeholders in virtuous ways because of that potential for profit making.[17]
Professor Quatro found that of that $2.40:

  • 94 cents went to suppliers
  • 78 cents went to employees
  • 25 cents went to the government to pay taxes
  • 4 cents was devoted to creating a better experience in the future
  • 11 cents went to capital investments
  • 28 cents was bottom-line profit and according to Quatro, “most of that $.28 is reinvested in the company.”[18]

Adapted from Sims, R. R. & Quatro, S. A. (2016). Executive ethics II. Charlotte, NC: Information Age Pub. (pp. 66-68).
 
By pleasing their consumer-customers, owner-customers, and employee-customers, Starbucks generates great results for all parties involved.  It appears that Starbucks is delivering on its mission: “To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.”[19]
Why has this not worked out for Kmart? Do they please their customers? If you can remember the last time that you were in Kmart, did you enjoy your experience? Were the employees motivated because they felt valued? How well do you think the shareholders have done over the last five years?
Kmart used to be huge. In the 1980s, Wal-Mart wanted to be like Kmart. By 1990, Wal-Mart and Kmart each held about 30% of the market share of discount stores and supercenters.[20] But Kmart failed to please its customers while Wal-Mart delivered on its promise to “help people around the world save money and live better.”[21] In 2002, Kmart filed for chapter 11 bankruptcy. It reemerged after a hedge fund bought its debt. In 2004, Kmart bought Sears and promptly renamed itself Sears Holdings.
 
Increasing Profit
If you were in charge of Kmart, what could you do to turn things around? You could increase profits in a number of ways. You could increase price, but this is a dangerous strategy. Ultimately, customers determine the price they are willing to pay for your product. If you raise it to high, customers are likely to find greater value with your competition—perhaps at Wal-Mart or Target.
Maybe you could sell things more quickly. This is called an increase in velocity. The price remains the same, but the number of units sold generates more profits. This is Wal-Mart’s secret sauce:
Some people use the term inventory turns to describe inventory velocity. How many times does the inventory turn over in a year? Wal-Mart has three hundred and sixty inventory turns in toilet tissue. That means the entire inventory of toilet tissue is sold almost every day. Each day Wal-Mart gets back the money it spent on its inventory of toilet tissue, plus some profit. That’s a terrific use of shelf space.[22]
Wal-Mart turns inventory quickly because it obsesses about low prices. Low prices draw in consumers and velocity naturally increases.
You can also increase profits by being more efficient in managing the organization. Every penny saved in efficiency can lead to greater profits. Often, the efficiencies are gained in through a better process (Remember Marcus Lemonis’s focus on People, Process, and Product?).[23] You must be careful, however. If you short-change your customer on quality, your efforts will backfire, and this part of Kmart’s problem.
Profits flow from satisfied customers and there is simply no substitute for listening to your customers. Sam Walton figured this out:
In the early 1990s, every Monday to Wednesday, some thirty regional managers went out to visit nine Wal-Mart stores and six of their competitors’ stores. They gathered a basket of goods and compare the prices. In 1991, Wal-Mart had a policy about having prices that were 8 percent lower than those of major competitors in the area, and this weekly visiting was their way of knowing that the strategy of lower prices was actually being executed.
What were the regional managers observing if they’re doing the job right? Not just prices. They’re seeing the merchandise, how it’s presented, what customers are buying, what the stores look like, what the ambiance is, what new practices competitors are using, and how employees are behaving.
Go back to the fundamentals. Remember consumers. Who are they and what are they buying? Is your business offering sustainable for the future? You assess this through competitive analysis, which for Wal-Mart was going on constantly.[24]
Wal-Mart’s efforts to listen to customers were wildly successful. Today, Sears Holdings is worth 1.57 billion dollars[25] while Wal-Mart is worth 228.45 Billion.[26] That means that Wal-Mart is worth 145 times the value of Sears Holdings.
 
No Margin, No Mission
All organizations need profits to survive. People need it too. You work for profits. So do I. I enjoy teaching, but I would not teach if they did not pay me. My 6 kids like to eat every day.  Even nonprofit organizations must turn a profit.
The phrase “no margin, no mission” is attributed to sister Irene Kraus of the Daughters of Charity. She was chief executive of the order’s National Health System. She ran 36 hospitals and 19 other facilities in 17 states and was the first to chair the American Hospital Association. As a nun running a Catholic charity, mission was paramount, but she also understood that if you don’t have the money to carry out your mission, your mission is unattainable.[27]
Nonprofit status does not mean that you do not make any money. It means that the organization exists for some greater mission beyond profit such as education, charitable activity, religious activity, or political engagement. Without profit, you will not be able to serve those who need your help.
 
Maligning Profit
We know that we need profit, but sometimes we think of profit as a bad thing. An undercurrent in our culture tells us that profit is bad. Watch any Hallmark movie at Christmas and you’ll see this theme played out again and again. The protagonist is dating a guy that the audience knows is all wrong for her because he’s a businessman. Over time she realizes that he’s uncaring, and the right guy for her was under her nose the whole time. She could tell he was the one because he was a woodworker, or he worked at a nonprofit, or he loved animals. In any event, a businessman is never portrayed in a positive light.
We have grown up with images of greedy businessmen such as Ebenezer Scrooge gouging the poor with an insatiable thirst for more. I will not defend Ebenezer Scrooge. After all, Dickens created a caricature designed to be an object of scorn. Scrooge was too selfish to think of pleasing his customers (including Bob Cratchit, his employee-customer, father of the dying Tiny Tim). He was only interested in profit, and that is the opposite of what I am teaching here.
Scrooge did not understand that if you focus on customers, the profits naturally follow. That last line bears repeating. Focus on customers, and profits naturally follow. As Henry Ford observed, “A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large.”[28]
Profits are not a sign of greed. They are the natural by-product of customer satisfaction. They are a reality check that tells you how well you are pleasing your customers. They demonstrate and intelligent and innovative approach to doing something better. Profits are the fuel that the organization needs to complete its mission. Profits are beautiful.
I find that when people have a negative association with profits, it is because they think that profits are just making the rich richer. That might be true, but it is also true that profits are used for research and development, to expand and create new jobs, to pay for benefits for employee-customers, and to increase the value of the stock in grandma’s retirement fund.
Focus on profits, and they will elude you. Focus on customers and the profits will come.
 
Actionable items:
 
What is it that you do to please your customers?
Can you see the connection between satisfied customers and profitability? Are you less profitable because you failed to satisfy customers? What could you do to fix it?
 
End Notes
[1] This focus on customers is materially different from stakeholder theory. Stakeholder theory includes anyone with a “stake” in the business, but I am not sure that PETA protesters should be considered to have a stake in McDonalds unless they order salads. Then they become customers.
[1] Mason, F. (2014). Selfridge: The life and times of Harry Gordon Selfridge. [Kindle Edition].
[2] Drucker, P. F.  The practice of management. Oxford, UK: Elsvier.  (p. 31).
[3] Proverbs 22:7b
[4] Our story (n.d.) Walmart.com. Retrieved from http://corporate.walmart.com/
[5] About (n.d.). The Walt Disney Company. Retrieved from https://thewaltdisneycompany.com/?ppLink=pp_wdig
[6] Our mission (2016). Starbucks Corporation. Retrieved from http://www.starbucks.com/about-us/company-information/mission-statement
[7] FAQs. (n.d.). Facebook. Retrieved from https://investor.fb.com/resources/default.aspx
[8] Nike mission statement (n.d.), Nike. Retrieved from http://help-en-us.nike.com/app/answers/detail/a_id/113/~/nike-mission-statement
[9] Our company. (n.d.). General Motors. Retrieved from http://www.gm.com/company/about-gm.html
[10] Mission, Vision & values (n.d.). The Coca-Cola Company. Retrieved from http://www.coca-colacompany.com/our-company/mission-vision-values
[11] Mission & Goals. (n.d.). FedEx Corporation. Retrieved from http://investors.fedex.com/company-overview/mission-and-goals/default.aspx
[12] A foundation of Innovation. (n.d.). The Boeing Company. Retrieved from http://www.boeing.com/principles/vision.page
[13] Our purpose. (n.d.). The Coca-Cola Bottling Co. Consolidated. Retrieved from http://www.cokeconsolidated.com/our-company/our-purpose.aspx
[14] Our mission. (n.d.). TURBOCAM International. Retrieved from http://www.turbocam.com/our-mission#
[15] How we give. (n.d.). Chick-fil-A, Inc Retrieved from http://www.chick-fil-a.com/Company/Responsibility-Giving-Tradition
[16] How many Starbucks stores are out there? (2016). Loxcel Geomatics. Retrieved from https://www.loxcel.com/sbux-faq.html
[17] Sims, R. R. & Quatro, S. A. (2016). Executive ethics II. Charlotte, NC: Information Age Pub. (p. 66).
[18] Sims, R. R. & Quatro, S. A. (2016). Executive ethics II. Charlotte, NC: Information Age Pub. (p. 67).
[19] Our mission (2016). Starbucks Corporation. Retrieved from http://www.starbucks.com/about-us/company-information/mission-statement
[20] Schoenberger, C. R. (2002, Jan 18). How Kmart blew it. Forbes. Retrieved from http://www.forbes.com/2002/01/18/0118kmart.html
[21] Our story (n.d.) Walmart.com. Retrieved from http://corporate.walmart.com/
[22] Charan, R. (2001). What the CEO wants you to know: How your company really works. New York: Crown Business.
[23] Why people, process, and product are the keys to success. (2014). Inc. Magazine. Retrieved from http://www.inc.com/idea-lab/marcus-lemonis-the-profit-people-process-product.html
[24] Charan, R. (2001). What the CEO wants you to know: How your company really works. New York: Crown Business. (p. 114).
[25] Sears Holdings Corp. (n.d.). Google Finance. Retrieved July 22, 2016 from https://www.google.com/finance?q=Sears+holdings&ei=_3SSV5n9J5a3mQG4mpyIDA
[26] Walmart Stores (n.d.). Google Finance. Retrieved July 22, 2016 from https://www.google.com/finance?cid=38230
[27]  Moore, P. C. (2014). No mission, no margin: Creating a successful hospice with care and competence. Charleston, SC: Advantage. (p. 33).
[28][28] Fischer, L. (2012). How knowledge workers get things done: Real-world adaptive case management. Lighthouse Point, Fla: Future Strategies. (p. 34).