How the Pure Profit Motive Destroys Value

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For years we have been discussing Value destruction. A prime example of this is given in Francesca Mari’s brilliant article on the cover of New York Times magazine called “A $60 Billion Housing Grab by Wall Street”. You can see it on:

https://www.nytimes.com/2020/03/04/magazine/wall-street-landlords.html

“Hundreds of thousands of single-family homes are now in the hands of giant companies — squeezing renters for revenue and putting the American dream even further out of reach,” the article says.

Francesca describes a potential first home buyer. “When Ellingwood began speaking to lenders, he realized he could easily get a loan, even two; this was the height of the bubble, when mortgage brokers were keen to generate mortgages, even risky ones, because the debt was being bundled together, securitized and spun into a dizzying array of bonds for a hefty profit. The house was $840,000. He put down $15,000 and sank the rest of his savings into a $250,000 bedroom addition and kitchen remodel, reasoning that this would increase the home’s value.”

For a variety of reasons including a divorce, he was unable to make payments on the mortgage and had to sell the house. The buyer turned out to be a finance company (almost like a private equity company) who found this a lucrative market to invest in and squeeze higher profits from people who had meagre means.

Francesca writes, “Before 2010, institutional landlords didn’t exist in the single-family-rental market; now there are 25 to 30 of them, according to Amherst Capital, a real estate investment firm. From 2007 to 2011, 4.7 million households lost homes to foreclosure, and a million more to short sale. Private-equity firms developed new ways to secure credit, enabling them to leverage their equity and acquire an astonishing number of homes.”

You have to read the article to see the disregard for the customer in preference to make more money. The convenience of the company comes before the convenience of the customer. And sadly, this happens to a bunch of customers who mostly can barely afford to pay the rent and are not able to do any major (and often minor) repairs. The story is one of greed and making the purpose of a company to generate more money, and not worry about creating value for the stakeholder (the customer, the employees, partners and society).

Thus a society meant to be one where people can get affordable housing could not exist for all because of such greed.

The private equity model that Francesca talks about, in general prioritizes short-term earnings and harvesting as much money as possible even if it means destroying value rather than building a solid company that creates values and results in long-term earnings.

All this could be a repeat of the 2008 financial crisis, which damaged the economy and those who were marginal home owners. Her article is a wake-up call for companies and governments to create value for people in the marginal category who have no choice but to rent.

This greed is how the economy collapsed in 2008. And this is being repeated. The problem emanates from a business strategy that tells the companies they can make more money by playing out the strategy. There is no customer strategy to ensure the customer is focused on and his wellbeing is important.

One solution is building and following a Customer Strategy.

For a long time, I have been advocating to CEOs that the starting point of a good business strategy is a customer strategy. The customer strategy and the shareholder strategy should then be used to build a business strategy/business tactics. And in today’s age both the business and the customer strategy should be adaptive to the changing future.

To many, customer strategy can appear to be redundant. But it isn’t. It is crucial if organizations want to change and become truly customer-centric. A survey of 400 CEOs showed that 33% felt that the number one issue in preventing customer-centricity was a lack of a clear customer strategy. Twenty-eight percent felt it was internal silos. Customer strategy helps break silos and creates teamwork. This happens because CXOs are part of creating the strategy. They, therefore, are part of the customer strategy. They assign customer roles for themselves and their departments. They agree to lead certain customer-related strategies. They become part of the customer-focused team. And as KPIs include customer parameters, the customer strategy becomes a practical road map to build customer value and create value for the customer.

The customer strategy should become an integral part of the business or corporate strategy led by the CEO. It will help him think about how to change the organizational structure to become customeric and drive the business with the customer in the center. It will help the CEO implement the strategy and think through moving from selling to the customer to helping him buy to becoming an extension of the customer by building an inseparable and symbiotic relationship with him. Much of this has also become more complex and intense in the fast moving world and the customer focus is much more necessary for success and adaptability.

The company needs an inseparable and symbiotic relationship with the customer. What tasks will make this happen? To be successful, the company must be dynamic, understand its customers, and exercise its right to select the customers it wishes to serve. Often this is based on customer profitability (which includes margins, cost to serve, etc.). Sometimes companies want customers who can recommend them or become brand ambassadors. But having selected the customers, companies must serve them also.

We helped several companies create customer strategies. There was a palpable change in these companies in terms of customer thinking and focus. Much value was created and many customer-centric and customer-friendly programs were implemented. This resulted in reduced complaints, increased efficiency, higher sales, and higher business excellence scores (one company in the Tata Group went from being among the lowest in business excellence to the best in the group). Of course, proper implementation of the customer strategy is a necessity to get the benefits of the customer strategy.

Strategy must build competitive advantage for the firm by creating compelling Value for Customers. Articulating why Customers will buy requires managers to examine strategy from the Customer’s point of view. It encourages them to ask how the firm’s activities deliver superior Value to chosen Customers. The firm must choose the set of activities that serve target Customers better than competitors, and shun other segments that demand incompatible activities. This is what a customer strategy will do for a company.

Many people ask me the difference between a customer strategy and a business strategy. They cannot see the difference since the business strategy is based on the market place. The customer strategy looks at the customer, his needs, and the customer opportunity. The difference can be seen from what happened in the recent meltdown of the financial markets, starting with the mortgage market crash.

The typical mortgage customer was looking for a product that would keep him safe if the prices of homes went down or interest rates went up. The mortgage company should pay attention to the customer’s liquidity and ability to pay. A customer strategy would have revealed the customer’s needs and also suggested what products needed to be created to make the mortgagee safer if prices of homes went down or interest rates went up.

The market opportunity that arose was to bundle mortgages and sell them to a bigger financial institution, thereby getting money back to give out more mortgages. These new mortgages were then bundled and re-sold from a bigger financial institution to an even larger one. The buyer of these bundled mortgages bundled more of them and sold them on to the next larger financial company. The mortgagee was no longer the real concern of the original mortgager. The paper was held somewhere else.

As you can see, the business strategy of bundling mortgages was a great idea to make money.

No one was concerned about the quality of the mortgagee and the loan. They were too busy fulfilling their business strategy of bundling mortgages and offloading them to the next person.

And what was the result? The mortgage market collapsed, because everyone took their eyes off the customer and did not have a clear-cut customer strategy, though they had a business (market-based) strategy. Often the customer was not worthy of a mortgage.
To end, we have people like iKnowtion Senior Partner, Don Ryan and SunTrust Banks SVP and Director of Client Information, Greg Holzwarth, who are saying: Customers are changing. The recent financial crisis left many consumers soured on the state of the banking industry. They are now more empowered to demand better experiences and won’t hesitate to switch banks if they aren’t happy. In response, many banks are working to rebuild relationships by learning to speak their customers’ language, to act in the customers’ interests, and improve their reputation and financial well-being in the process.

Customer strategy, specifically data intelligence, is at the forefront of one bank’s effort to be customer-centric:

  • How can I stand out from competitors in a crowded and volatile industry?
  • Who are customers? Who are my target customers?
  • What do my customers value so I can provide them the value they seek?
  • Are we creating more value than competition? If yes, then where and how? How do we improve?
  • Should I concentrate on customer acquisition or focus on share of wallet?
  • What can I promise customers and how do I keep promises?
  • What additional value can I create for customers, and those that serve them?
  • How do I find actionable insights from internal and external data?
  • How do I organize to focus on customers?
  • How do I implement customer programs
  • Who leads specific programs?
  • What will the future be? How will our customers change, and how should we?

Customer strategy also allocates customer tasks to various departments, breaking silos and making all departments have a responsibility for the customer. This builds teamwork, builds the customer priority and focus in all departments. Key performance areas can then be customer-based and incentivized. This is an extremely important reason for the customer strategy being built.

The customer strategy can then be a precursor to the business strategy.

You can see none of this was part of the corporate thinking in Francesca’s article. And the state that was to monitor the wellbeing of the citizens, abrogated their responsibility to greedy landlord companies.

Companies and governments must have a customer strategy to take care of their constituents. All this might sound like wishful thinking by companies, but customers are in their long term interest and they should avoid short term money making schemes.

Do you agree this is value destruction, and not value creation.

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