I am writing this in CustomerThink because I want readers to think about the future. And not be like me, when I was in middle and senior management to think only about the well-being of the company rather than the well-being of those we were impacting, the world at large, ecology and sustainability. While many might think this is meant for CEOs (and it is), this is the right time to start thinking about serious issues like ecology, corruption, value destruction or being one-sided (the company must win, right or wrong)
In my forthcoming book Value Dominant Logic, I tell the story of my heading a team to bring out and commercialise the one piece PET beverage bottle. We were led by the desire to win, to be ahead technically, and to see our product dominate. We never entered the debate of whether what we were producing could damage the environment, or not be good or sustainable. Why were we like that?
Were we driven by our customers’ needs, or for us to disrupt glass packaging? Or for helping our company make profits for its shareholders? Or for the larger eco-system?
CustomerThink readers must start to think truly about the Customer (for most, it is what we can get out of the Customer). The Customer just not as a buyer, but the Customer representing us as a user, as part of society, as one who needs to improve the well-being of those around us.
Customer Value: Creation vs. Extraction
In this article, I wish to debate Customer Value creation (and value creation in general) versus value extraction. Too many people believe they are creating value whereas they are extracting value. The global financial crisis of 2008 makes us rethink the modern capitalist system which is far too speculative: it rewards takers over true makers or wealth creators. It allows the growth of finance, and greater rewards for speculative exchange of financial assets versus investment that leads to new physical assets and job creation.
In the recently completed First Global Conference on Creating Value at Leicester UK, organised by DMU and me, Ashok Ashta, an attendee wrote:
I personally enjoyed the blend with the practical as instantiated by the Fujitsu presentations. The three speakers I found the most thought provocative were: Chris Baker, Scott Sampson and Michael Shafer. If there is one line that will remain embedded in thought, and that I will perhaps reuse is, “students looking to work in financial institutions such as Goldman Sachs etc. are aspiring to work in criminal organizations!”
Debates about unsustainable growth are increasingly calling for reforms and rethinking of the financial system. We need the financial system to re-focus on the long term, and sustainable development rather than quarterly returns, and gaining exorbitant executive pay. This includes proper governance and thinking about the future of us, and our planet.
Mariana Mazucatto in her book, The Value of Everything argues that critics of the current financial system remain powerless – in their ability to bring about real reform of the economic system – until they become firmly grounded in a discussion about the processes by which economic value is created. It is not enough to argue for less value extraction and more value creation. First, ‘value’, a term that once lay at the heart of economic thinking, must be revived and better understood.
“Value has gone from being at the core of economic theory, tied to the dynamics of production (the division of labour, changing costs of production), to a subjective category tied to the ‘preferences’ of economic agents. Many ills, such as stagnant real wages, are interpreted in terms of the ‘choices’ that particular agents in the system make, for example, unemployment is seen as related to the choice that workers make between working and leisure.”
By losing our ability to recognize the difference between value creation and value extraction, Mariana argues, we have made it easier for some to call themselves value creators and in the process extract value, like the financial services companies.
Thus GDP and corporate annual reports must reflect the quality of life indicators, happiness, caring etc. versus just financial gains.
Value extractors in finance and other sectors of the economy get more emboldened. Here, the crucial questions – which kinds of activities add value to the economy and which simply extract value for the sellers – are never asked. In the current way of thinking, financial trading, rapacious lending, funding property price bubbles are all value-added by definition.
When price determines value, and if there is a deal to be done, then there is value. Therefore, a pharma company can sell a drug at a hundred or a thousand times more than it costs to produce, there is no problem: the market has determined the value.
The same goes for chief executives who earn 340 times more than the average worker (the actual ratio in 2015 for companies in the S&P 500). The market has decided the value of their services – there is nothing more to be said.
Second, Mariana continues the conventional discourse devalues and frightens actual and would-be value creators outside the private business sector. It’s not easy to feel good about yourself when you are constantly being told you’re rubbish and/or part of the problem. That’s often the situation for people working in the public sector, whether these are nurses, civil servants or teachers.
Mazucatto adds that when Apple or whichever private company makes billions of dollars for shareholders and many millions for top executives, you probably won’t think that these gains actually come largely from leveraging the work done by others – whether these be government agencies, not-for-profit institutions, or achievements fought for by civil society organizations including trade unions that have been critical for fighting for workers’ training programmes.
All of which serves only to subtract value from the economy and make for a less attractive future for almost everyone. Not having a clear view of the collective value creation process, the public sector is thus ‘captured’ – entranced by stories about wealth creation which have led to regressive tax policies that increase inequality.
This is not only true for the environment where picking up the mess of pollution will definitely increase GDP (due to the cleaning services paid for) while a cleaner environment won’t necessarily (indeed if it leads to less ‘things’ produced it could decrease GDP), but also as we saw to the world of finance where the distinction between financial services that feed industry’s need for long-term credit versus those financial services that simply feed other parts of the financial sector are not distinguished. You can think of other examples: poor road construction leading to increased repairs builds GDP. M&A fees add to GDP. The middleman making more than the producer
So think of becoming a value maker, a value creator and not just a value extractor, the role of many when they are in management. Maybe this is the time for you to think of your role.
Are you going to be a blind follower? Can you do some things at your level? Examples of what you can do are to be transparent, care for your employees and society, and not accept dishonesty from above. You can start to provide an island of ‘goodness’ in your department, and if many do this, the message will be heard at the top.
We call this the bottom-up approach, versus the top-down system we live in. The power is at least partially with you.