Many C-suites struggle with budgeting and resource allocation, even after they have established that their primary objective is to help customers achieve their goals. Customer primacy doesn’t mean unlimited altruism. There are still choices to be made.
Thus, even where C-suites have adopted customer primacy and turned their former hierarchical silos into customer-focused collaborative networks, there remain key decisions. In finalizing business models, C-suites need to establish a balance between spending on customers, employees, shareholders, and social goals, such as the environment, and also between profits now versus future investment.
If the firm were to give everything to its customers, staff or the environment, and nothing for the company, it would quickly go bankrupt. If it were to invest all in innovating for the future, could it survive in the present? What is the right balance?
Moving Beyond Shareholder Value
Merely announcing that the firm will create value for all the stakeholders, as the Business RoundTable declared in August 2019, resolves nothing and risks leading to garbage can management—an approach that failed when it was attempted in the mid-20th century. “Stakeholder capitalism” has tended to become a subterfuge for what the firm is really doing—maximizing shareholder value. Studies by Harvard Law Professor Lucian Bebchuk and his colleagues have been unable to detect any change in behavior since before the BRT declaration and have concluded that it was just PR: shareholder value is still dominant.
Many firms run into trouble because they attempt to resolve resource allocation issues in the course of the budget process. That in turn generates a battle for funds among different units—a battle in which the broader interests of the firm often get lost. Such a battle will be even more problematic if the firm has unresolved conflicts as to whether the firm’s primary goal is really customer value or shareholder value.
Progress At Amazon
One large firm that has made significant progress on resolving these issues in a systematic fashion is Amazon.
Amazon began declaring customer primacy as its modus operandi from the outset in 1997 and by eliminating its silos in 2002 and setting up a network of interacting teams, each with a defined set of interfaces with other teams. Teams are largely independent of each other. Each team is governed by a kind of mandate included in set of documents comprising narrative/PR/FAQ/ and external measures. This mandate is reviewed and approved for each team at a regular high-level meeting. (“Teams” in this context can be quite large, not just two-pizza teams, and may involve, say, a hundred professional positions.) The documents embody a business model for that team. Once approved, it becomes the mandate for the team to proceed, essentially without interruption, so long as the external measures continue to show that the activity is proceeding as well as or better than the original plan.
Every six months there is a firm-wide review of all the teams and a firm-wide re-prioritization among all the teams.
This process obviously involves a consideration of the various overall goals that Amazon has and the tensions between them. However, the discussion takes place within a setting where the strengths and weaknesses of each individual activity have already been documented and evaluated. So although there might be disagreements, they take place within a context of agreed customer-related information about each activity. It is not a battle in which each unit is fighting for resources for “their own unit”, but rather an evaluation by a group of senior executives who are looking out for what’s best for Amazon, given all its objectives, not just shareholder value.
Once that prioritization has taken place, the budget process can proceed simply and quickly. The main question is: how much does Amazon want to invest? It already has a prioritized list of activities. The main question is where to draw the line between those activities that will be funded and those that won’t. There may be other questions such as: did we by accident under-invest in the environment? So the budget process is a rather brief process, compared to the arduous months’ long budget battles that occur in traditionally managed firms.
It All Depends On The Context
There are no rules of thumb as to how much value each stakeholder should receive. It will depend on the context, the current status of the firm, its goals, the risks, its access to finance, its marketing, its talent, and much more.
For instance, if the firm is in the early stages of growing a digital ecosystem, like Shopify or DoorDash, and already has venture capitalists on its side, it may need to sacrifice almost everything to grow a massive customer base as rapidly as possible.
If the firm is in the more typical situation of an existing big firm, it is likely to be perceived by the stock market as an industrial-era firm with no real growth plan, little digital talent to execute anything original, and an overcautious board that will not allow the C-suite to commit to real growth. If so, resources to invest in the future are likely to be major constraint. Here, the firm won't make any big bets on customer growth, until its own house is more in order. It may mean a digital transformation, including closing down losing business models, easing out traditional managers, hiring new talent, extending customer obsession throughout the firm, making Agile teams the norm, breaking down silos into networks, exploring possibilities for new businesses, learning about platforms and ecosystems and managing big data, A.I. and more. The firm will essentially be allocating resources to prepare for its next big move.
With some progress, of the kind recently demonstrated by Domino's Pizza, combined with progress in convincing Wall Street that the firm’s growth plan is for real, the firm may after a period be able to demonstrate sufficient success within its niche, so that it can explore the possibility of a multi-party ecosystem, say, like Haier. In this case, it would need to be allocating resources to assure the success of its ecosystem. Returns to shareholders will be lower priority in the short run. It will be carefully husbanding its limited resources to grow the ecosystem as rapidly as possible.
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