The Foundation

Business: The Art Of Creating Value
I have learned two things about business in the past ten years:

1. Everyone believes their business is unique.
2. Everyone is wrong!

I know it is easy to believe that your business is different. Perhaps you have an unusual product, or a special process for manufacturing. Perhaps you have a monopoly due to government regulation,' or maybe you trade with a unique sector of the market. But fundamentally every business is the same because the business of every business is creating value. Customers do not want your products and services, they want what your products and services can do for them. They do not want to know what you have to do to produce those products and services. They are not interested in the features of your products and they do not want service. They want value. Think of it this way: businesses do not so much make products and services as they buy customers by producing things that customers value. Harley-Davidson, for example, does not think of itself as selling motorcycles but as offering "a lifestyle, an experience, fun."

Business is the activity of creating value. Those who understand this best will succeed. Those who do not, will struggle.

Business Is Tough
Millions of people own businesses throughout the world, and hundreds of millions more rely on those businesses for their livelihood. Right now, most of these people are feeling nervous - and so they should, because business is tough. In 1995, more than 4000 retailers shut their doors in the United States alone and the death toll was expected to climb by another 7000 in 1996.

Business is tough because today people are trying to win in a crowded and competitive marketplace, where customers have choices they never had before. If customers want pizza for dinner, they can make one (from scratch or with a mix), buy one from the grocery store (frozen or fresh), order one from the local pizzeria (eat-in or takeaway) or get one from their local petrol station or convenience store. Customers have so many choices because it is a global marketplace. Thanks to modern technology and freer world trade, customers do not have to settle for the best in town anymore - they can get the best in the world. They also have more choices because the boundaries between industries are becoming blurred. Insurance companies sell mortgage and investment products, and banks sell insurance. The Canadian Imperial Bank of Commerce hopes to generate Can$500 million in insurance premiums by 1998 and has applied for membership of the Canadian Life and Health Insurance Association. Petrol stations sell groceries and in many countries food stores are selling petrol. In Britain, 25 per cent of all petrol is sold by grocery stores and in France the figure is 50 per cent. In Australia, the grocery chain Woolworths has recently entered the retail petrol market, and it will not be long before a similar company does the same thing in New Zealand. On the other hand, in the USA gas stations earn 40 per cent of their revenue from non-petroleum products such as tobacco and beverages.

The Internet allows shoppers to browse the markets of the world without leaving home. There is now an Internet shopping mall in Auckland with a full grocery store. Browse the aisles with your PC, fill your electronic shopping basket with delicious goodies, go through the electronic checkout and wait for the groceries to be delivered to your home. If shoppers do not want to go to the trouble of searching the Internet themselves, there are companies they can e-mail who will find what they are looking for and have it shipped to them within 24 hours.
Because they have so many choices, most customers see everything as a commodity Recently, I heard a senior vice-president of one of the world's largest companies tell an audience of law students: "You're not going to like hearing this, but the law is a commodity. We have lots of excellent law firms to choose from." Even the most sophisticated products have become commodity items and nearly all producers are finding profit margins falling as a result.
Not only is today's marketplace crowded with competitors, it is full of demanding customers who want everything for free by yesterday These customers shop with confidence because they know, as you know, that they have the power. Over the past fifteen years there has been a major shift in power in our society - not political or military power, but economic power. And this power has gone to the consumer.
Today's customers are better educated and more sophisticated than in the past. They are less forgiving, less tolerant and less loyal as a result. Excuses do not cut it with these customers. They want performance. It is these customers who dictate product quality, service standards and prices. They know they can fire anyone in the company from the CEO on down simply by withdrawing their business. And, they are prepared to do it.

In spite of the tough competition and the demanding customers, I am very positive about business because business creates winners. Private enterprise, more than government, liaise the potential to improve the quality of life for everyone. Conducted properly, business creates winners out of:

• customers who get the value they are seeking;
  

• staff who get rewarded for creating that value;
  

• suppliers who deliver the raw materials you need;
  

• the community which sees jobs created and services provided, all by a company which cares about the environment and the people living in it;
  

• shareholders who receive a good return on their investment;
  

• even competitors benefit because they are forced to get better just to survive.
  
  Succeeding In Business
  Lots of people have given advice about how to win in a tough marketplace. John Paul Getty, the oil billionaire, said that to succeed in business you must do three things:

1. Rise early

2. Work late

3. Discover oil

Successful business leaders also know that the only person who can determine whether all the hard work and skills have produced value is their customer. Your customers will define your business for you. They will tell you what to sell, how you should present it to the market and what changes would add even more value. Your customers will tell you whether you are different from your competitors and how. Basically, your customers will tell you everything you need to know to run a successful business. It is just a matter of listening to them. Listen to the questions they ask, the comments they make, the objections they raise and, if you are lucky enough to hear them, to the complaints they make. Businesses serious about creating value begin by focusing on their customers.

Create Value For Your Staff
But creating value for your customers is only one ingredient
for business success. If you are to succeed, those who work in your business with you must feel they, too, are getting value from your business. Turn your employees into winners.
One day I was chatting to a senior manager. "You know, Ian, I think you've got it backwards. This idea about putting your customers first is good but don't you think we ought to put our staff first. If we don't look after them, they won't want to look after the customer."
He has a good point. Indeed, a number of very successful CEOs, such as Herb Kellagher of Southwest Airlines, share this view But what is a "customer"? A customer is someone who uses the products or services we produce. So, according to this definition, the primary customers of business owners and senior managers are their staff who use the instructions, policies, systems and equipment that they produce. There is no conflict between the ideas of putting your customers first and looking after your staff because your staff are your customers. My colleague is right. You must look after your employees because your staff will treat their customers the way they believe you treat them.

Do not ignore the fact that your employees also want to receive value. If they are going to work to make your business successful, there has to be something in it for them. Fair and adequate compensation is essential, but there are also other aspects of value important to staff, such as meaningful work, recognition of achievement and the opportunity for personal growth. Astute business leaders endeavor to get to know their employees and to understand their needs. They also survey employee satisfaction as frequently as they survey their paying customers. They understand that their company's ability to compete flows from the firm's culture, values, management style and reward systems. They work hard to create an environment which encourages their people to work together in teams, to operate efficient processes to create value for their customers.

Create Value For The Community
Residents of the wider community also expect to receive value from your business. In return for providing you with the opportunity to gain financial success, they expect you to protect the environment, create employment, contribute to social causes and generally operate in an ethical manner. Today, businesses are responding to this demand.
"There is just more awareness generally of what is appropriate," says James Hunter, who heads the ethics practice at KPMG in Toronto (Canada). According to Hunter, "Corporations are responsible not only to shareholders but to a larger audience, so they want to do the right thing and be seen to do the right thing." Society is sending a very clear message to business people: Be a safe employer, be environmentally friendly, be socially responsible and give something back to the community in which you operate.

Create Value For Your Shareholders
Shareholders, of course, want value too. But they do not just want profit - although many CEOs behave as if short-term profits were the only target worth thinking about. Shareholders want the increased value that comes from growing the company's assets. Profit is just one means of creating this value. We all know that short-term profitability at the expense of sustainable growth can be disastrous.
Experienced shareholders also realize that value will come to them after it has been produced for the other key stakeholders: customers, staff and the community Even for small business owners, shareholder value is the result, not the cause, of running a successful business. Professor Jon Goodman, Director of the Entrepreneurial Programme at the University of Southern California, says, "I've worked with hundreds of entrepreneurs and I've never met one who said, 'I want to get rich,' who did. The successful ones say, 'I want to find a way to do animation faster,' or 'I'm really interested in adhesion."'
J.C. Hall, the founder of Hallmark Cards which has 44 per cent market share and produces 11 million cards a day in 13,000 different designs, agrees: "If a man goes into business with only the idea of making money, chances are he won't. But if he puts service and quality first, the money will take care of itself. Producing a first class product for which there is a real need is a much stronger motivation for success than getting rich."

Strategies For Creating Value
Knowing what to do, of course, is the easy bit. The real trick is in learning how to do it. Over the years, I have been impressed by the hundreds of articles saying that if you are competing to win you must provide better customer value than anyone else. But there is not a lot of practical information about how to do that.
That is what this book is about. The next six sections outline some strategies you can employ to increase the value you create for your customers and to improve your competitive advantage. These strategies can be used by one-person businesses, 'mom and pop' businesses, small owner-operated companies, medium-sized businesses, large corporations and even government departments. They can be used singly or in combination. The more of them you use, of course, the greater your chances of becoming second to none.

But Will They Work?
Just knowing about strategies for creating value is not enough. To be number one you must actually do something, change something, behave differently In short, you must act.
Will these strategies work? Will they help you to grow your
business? That is up to you. At some point you will put this book down and decide either to make these strategies work for you, or to continue with business as usual. There is no middle ground. If you cannot choose to act, you have chosen not to act. In that case, your future will be no better than your past and probably worse since the marketplace is becoming more demanding.
What worked for you last year can be your death this year. If you do not change, you will demonstrate "the triumph of hope over experience," as Dr Samuel Johnson, the English man of letters, once said of people who marry for the second time.
Read about these strategies and adapt them to your particular situation. But most importantly, act. One idea that is actually implemented is better than five that are only thought about. As Percy Barnevik, former Chairman of Asea Brown Boveri, says: "We don't need any more bright ideas. In business, success is 5 per cent strategy; 95 per cent execution."
Take a chance. Business is a four letter word spelled RISK.
Besides, in a global marketplace full of sophisticated customers who are demanding increasing value, what choice do you have?