The Business Book

(Joyce) #1

238


This theory placed the wealth of the
corporation, rather than the needs
and wants of the customer, at the
core of a business. It held that
business should be run solely to
increase profits, which would boost
the value of stock prices and allow
the company to return value to the
shareholders—who, after all, own
the business. This way of thinking
had been introduced by economist
Milton Friedman in an article he
wrote for The New York Times in
1970, and it was later developed
further by business professors
Michael Jensen and William
Meckling in their paper, “Theory of
the Company.” As the title implies,
Jensen and Meckling’s thesis was
not generally concerned with the
world beyond the company—it
focused on the relationship between
upper management and shareholders,
rather than the relationship between
management and the market.


21st-century thinking
The concept of shareholder
maximization was a dominant force
in the last few decades of the 20th
century, but the importance of
understanding the market and of
customer-centered management
has gradually gained favor, partly


because the corporate-centered
strategy has proved no guarantee
of longevity. Business in the 21st
century has become more people-
centered with a number of huge
success stories helping to sway
management further toward
customer-oriented strategies.
In 2010, business professor
Richard Martin wrote an article for
the Harvard Business Review,
heralding “The Age of Consumer
Capitalism.” He claimed that we are
now living in an era in which
shareholder value is no longer the
primary goal. “For three decades,
executives have made maximizing
shareholder value their top priority,”
he wrote. “But evidence suggests
that shareholders actually do better
when firms put the customer first.”
An example of a serious failure
to prioritize the customer is that of
the British jewelry company, Ratners.
By the late 1980s, Ratners was the
world’s biggest jeweler, with 2,000
stores on two continents. The
stores sold jewelry at low prices
and were very popular—until the
disastrous speech by the company’s
chief executive, Gerald Ratner, at
the Institute of Directors in 1991. In
his talk, supposedly about the
company’s success, he instead

UNDERSTANDING THE MARKET


Skaterboarders are a niche market,
and have a specific set of requirements
from equipment and fashion brands.
Micromarketing can help businesses
reach niche markets such as this one.

insulted one of his own products,
joking that its low price was
possible due to its poor quality.
Offended customers abandoned
the store and $800 (£500) million
was wiped off the value of the
company, which nearly went under.
This notorious example shows how
businesses who treat customers
with contempt can pay a very
high price.

Knowing the market
Since Drucker’s initial proposition
that a business must get to know
the customer intimately, the market
place has matured, making the task
of understanding the consumer,
customer groups, and the market
as a whole, far more complex. One
of the reasons is fragmentation,
meaning that consumers are now
divided among many small markets
that are constantly in flux, and may
suddenly emerge from nowhere.
These micromarkets are defined by
the common aspirations, likes, or
needs of the consumers within
them. Each consumer is subject to

Whether it’s Google or Apple
or free software, we’ve got
some fantastic competitors
and it keeps us on our toes.
Bill Gates
CEO of Microsoft (1955 –)
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