October 10, 2011 6:05 pm

The importance of creating and keeping a customer

“The purpose of business is to create and keep a customer,” Peter Drucker, the legendary management guru, once said. No matter how de-layered, outsourced, virtualised or re-imagined businesses become, the company of the future will still need to remain focused on this simple fact.

Companies are formed for a reason. Sole traders are limited in what they can produce, and, if they are any good, unable to satisfy the growing demand for their services. So individuals – entrepreneurs – become employers, and companies grow.

Size then presents its own difficulties. Bureaucracy develops. Processes evolve and become embedded. Sometimes these processes seem hard to change even though circumstances demand that they do. Attitudes can become frozen. Tom Peters, the management writer, has suggested, cheekily, that most big businesses are actually dying – they just do not realise it yet. The creative destruction of free market capitalism cannot be held at bay and will see off any organisation that stands still for too long.

The company of the future may perhaps be saved by its customers – if it pays enough attention to them. When Mr Drucker was asked to talk to General Motors’ senior management team almost a decade ago, this was the thrust of his argument.

Speaking to the assembled corporate leaders from his California home via a squawk box on the table in Detroit, he asked a simple, but deadly, question: “Why should I buy a GM car?”

Several answers were forthcoming but, as one eye-witness to the meeting recalled: “Nobody actually had a good answer to the question!” It should have been clear back then that GM was heading for trouble. Customers should remain agenda item number one.

Senior executives and strategists worry a lot about whether they have the right business model to make sure they will hold on to (and acquire more) customers, thus giving their company a future. But, according to Julian Birkinshaw, professor of strategy and entrepreneurship at London Business School, they would do well to consider what their “management model” is too. The company of the future will need to take a view on that. Companies are made up of people, and their work has to be managed in one way or another.

But, argue Ed Lawler, Chris Worley and David Creelman in their recent book, Management Reset – Organizing For Sustainable Effectiveness, to understand the future of management you have to understand the past.

The authors set out a clear three-part summary of the history (and future) of management in their narrative. Stage one of modern management was the era of command-and-control organisations: the marriage of bureaucracy with “the scaleable technology of mass production”, they write. Henry Ford’s revolutionary production line remains the best-known symbol of this period.

Improved education and training of staff, allied to the increased sophistication of the work involved, led to their second era, that of “high-involvement organisations”. In this period, industrial relations and personnel management became more important as employees’ views and experiences had to be taken into account.

But the authors suggest that a “management reset” is now necessary for three reasons. First, previous approaches “wrongly assume that the business environment will be relatively stable.” They continue: “Buried deep in the managerial psyche is the belief that change is the enemy and that financial success can best be achieved by remaining stable.”

Second, thanks to rapid globalisation, the world for which “command and control” and “high involvement” businesses were constructed no longer exists. Businesses need to become far more flexible and adaptive. And third, the overwhelming evidence of climate change and environmental degradation requires management to be rethought, they say.

The goal now, for the company of the future, is to become a “sustainable management organisation”. SMOs are different. They set themselves up to be more flexible and fleet of foot than their competitors. They reject a stolid strategy development process in favour of something that is more reactive and imaginative, in part by drawing on the insights and experiences of employees at all levels in the business. Work is organised differently too: to a great extent it is controlled by employees and customers rather than tiers of management. And talented employees lie at the heart of the SMO: not being promised jobs for life, but a deal which makes sense to both sides.

Which SMOs do the authors like the look of? Cisco, the technology company, has ripped up traditional organisational charts to try and construct a business that can respond to the future demands of the market. PepsiCo, the drinks and snacks group, has taken on board sustainability as an idea that should inform management decisions and product development. The remarkably flat, almost non-existent hierarchy at W.L. Gore, the maker of Gore-Tex fabric, means that ideas have to live or die by the support they win internally from a highly intelligent and sceptical workforce. All these businesses are trying to build a healthier future for themselves.

Perhaps most radically of all, NetFlix, the DVD and online video subscription service, has chosen to ignore decades of human resources orthodoxy to introduce its own highly pragmatic approach to employing people: a one-year renewable contract for all. “Adequate performance gets you a good severance package” is the watchword.

Perhaps the company has been too smart for its own good, however. Its recent decision to bump up its subscription rates dramatically – in an attempt to move more customers to the online-only service – backfired badly, losing the company 800,000 subscribers. Sometimes, it seems, you can be too radical.

The future of the company may be uncertain, but not everything will change. Keeping customers happy will continue to be the chief task of business – just as Mr Drucker suggested.

The author is visiting professor of management practice at Cass Business School

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