Bridging the Gap Between Shareholder Value and Customer Value

Shareholder value is an increasingly controversial topic in the C-suite. More and more business experts point to the unanticipated risks of the shareholder value approach, arguing that the purpose of a company must be to serve the customer, not to maximize short-term profits for shareholders.

Even former proponents such as Jack Welch, the former head of GE, have declared shareholder value the “dumbest idea in the world”—an idea with disappointing consequences even for the shareholders themselves. But old habits die hard: most corporations continue to privilege short-term profits over the interests of their customers.

Does this mean that the C-suite has to abandon its own self-interest to please its customers? The answer is a resounding—if surprising—“no.” Thanks to new developments in technology, organizations can now connect what used to be two separate goals.

“Using big data analytics, today’s companies can manage customer delight to produce a direct impact on shareholder value.”

Today’s corporate ground is littered with the corpses of huge entities (such as Blockbuster, Circuit City and RadioShack) that could see customers vanishing and shareholder value plummeting but lacked any systematic, meaningful strategy to connect the two phenomena. By ignoring the pulse of the customer, these firms hung on to the false sense of being able to grow shareholder value sustainably, until they cut themselves to the bone and it was too late to recover.

Using big data analytics, today’s companies can manage customer delight to produce a direct impact on shareholder value, as we shall now see.

Making the connection between CLV and SV
Businesses are traditionally rated based on the value they generate for their shareholders (SV), a figure that’s calculated based on estimated discounted free cash flow. Shareholder value is essentially how much cash will be left at the end of the day to distribute to shareholders.

But there’s a weak link in the traditional SV formula—it doesn’t pinpoint the true source of value or identify the origin of the free cash flow. The formula allows companies to maximize shareholder value by managing major value drivers such as profit margin, tax rate, cost of capital, etc., but it doesn’t help them recognize or grow the true source of value, or accurately project future value.

Of all the ways to increase shareholder value as an outcome, the most effective is to identify and grow the true origin of the free cash flow. But what is this origin? The identity of the free cash flow is so simple that you may be surprised: it’s nothing other than the value of all your customer relationships projected through time.


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