Balancing customer and shareholder value.

• Author: Cleland, Alan S.

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.

YOUR PERSONAL MAP

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...