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Customer Capitalism: Does It Pay Off?

A recent Harvard Business Review article suggests a new management paradigm is developing. In “The Age of Customer Capitalism,” Roger Martin provides a brief history of management theory; simply put, Martin calls out two periods of managerial capitalism to date:

1)      Management Capitalism This period, which started in the early 1930’s, created the notion of professional management, prompted by the work of Adolf A. Berle and Gardiner C. Means, whose book The Modern Corporation and Private Property made the case for management that was separate from ownership of the firm. This work ushered in a period in which management became a valued discipline by creating processes and roles that help to fuel the economic growth of firms. It could be said that by creating the division of labor between owners (who are, ostensibly, more entrepreneurially-oriented and therefore more focused on the vision of the firm) and management (who are more oriented toward building systems and infrastructure that facilitates the realization of the vision), firms leveraged the unique skills of individuals in a way that was not only scalable, but also increased the probability of firm success.

2)      Shareholder Value Capitalism The second period emerged in the mid-1970’s, when Michael C. Jensen and William H. Meckling  suggested in their article “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” that managers focused on their own financial well-being at the expense of the firm (and, therefore, shareholders). This work (along with other management-critical treatises such as The Peter Principle: Why Things Always Go Wrong, which posited that managers in a firm advance to their level of incompetence) created a skeptical view of management; Jensen and Meckling suggested that a better focus for the firm would be shareholder value maximization.

Professor Martin suggests that shareholder value capitalism is also a flawed theory, and provides some compelling evidence that the shareholder value paradigm did not pay off for shareholders (in short – between 1933 and 1976, when management capitalism was king, the S&P earned compounded annual returns of 7.6%; between 1977 and 2008, during which shareholder value capitalism has been in vogue, the S&P created compounded annual returns of 5.9%). Further, Martin argues that shareholder return cannot increase in perpetuity.

So, what is a firm to do? Martin suggests that the answer is Customer Value Capitalism – that is, the path to shareholder value creation comes by maximizing what we at Walker call customer loyalty. In Professor Martin’s words:

“…companies should seek to maximize customer satisfaction while ensuring that shareholders earn an acceptable risk-adjusted return on their equity.”[1]

Why can’t the firm focus on both customer value as well as shareholder value? Professor Martin provides two arguments. First, from the perspective of optimization theory, you can only maximize one variable while controlling for all other variables. While this is technically correct, the second reason cited is more compelling – shareholder value reflects the value stockholders place on the company’s future earnings, and it is impossible to any firm to continuously raise –and deliver on – expectations. If we assume that customers are the source of all future earnings, then logic would suggest that maximizing customer value would be the best way in which to maximize shareholder return in the long run.

Do the data bear this out? Professor Martin provides some anecdotal examples in support of customer capitalism; we can add several more from our work with clients (many of which we have previously discussed in this blog – see this entry and this entry for more information):

1)      We continue to see a statistical connection between what customers say they will do and what they actually do;

2)      We have witnessed the correlation between a customer’s loyalty and his/her revenue growth rate, profitability, willingness to buy across a firm’s multiple categories, etc.

3)      The Walker Index, a composite of Walker’s publicly-traded customers, continues to outpace the broader market indices in total (see this entry for more discussion on the Walker Index);

In addition, the academic literature provides analysis consistent with what we see in our client work.

However, the notion of Customer Capitalism is another example of easy strategy that is extremely hard to execute. In my next blog, I’ll look at some of things firms should be mindful of – and prepared to do – if they aspire to adopt the strategy of Customer Capitalism. In the meantime, what do you think – what has worked in your firm (or what have you witnessed as a best practice among firms, brands, or products that you use)?

Mark A. Ratekin
Sr. Vice President, Consulting Services & Resource Management



[1] Martin, Roger. “The Age of Customer Capitalism.” Harvard Business Review, Volume 88 (January-February 2010). 62.

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