Customer Value – an European Approach for the World

The concept of Shared Value by Porter/Kramer is a very practical approach for US-American companies. Yet the European Customer Value approach has the potential to improve the world economic system and contribute substantially to the well being in our globalized world. However, it lacks dissemination and up-scaling. 

When Michael Porter and Mark Kramer published their article Creating Shared Value in the Harvard Business Review in 2011, the Lehman Brother disaster happened just 2 years and 4 months before. Financial businesses were still under shock and the capitalist system has become a target for harsh and fundamental criticism from various sides. Porter and Kramer were quick to put together a concept addressing the systemic crises of the economic system.

The concept of Shared Value urges businesses to focus on the simultaneous creation of value for customers and for the society as a whole. Companies shall go out and look for social problems and try to tackle them by reconceiving their products, by redefining their productivity, and by building industry clusters. Economic value can and shall be achieved by creating societal value.

That was a pragmatic and practical answer to the crises as such, the widespread felt loss of trust into the business world, and also to the unease with theoretical and practical flaws of CSR concepts.

But – and that is my argument in this short post – it did not take into account realities outside the US, namely in Europe, and it did not address some basic causes which led into the crises.

In my view, we still have a basic misunderstanding regarding the societal purpose of business which lies at the core of the ongoing economic crisis in the West; and which turns this economic crises into a systemic crises. It is the idea that the maximization of shareholder value is the purpose of a company’s activities.

So, what is the purpose of a business or a company? Ninety-nine percent of the participants in my management seminars in African countries and, I guess, at least eighty percent of my European friends give a similar answer: gaining money and creating profit.

But, it’s not! It can’t be. If it were we would set up an auto-referential system without linkages to the outside world. And for sure, a business has linkages because it has customers, supplier, employees and all the like.

Peter Drucker has put it already in 1974: “There is only one valid definition of business purpose: to create a customer.”

It is the creation of Costumer Value which is the raison d’être of any economic activity and which turns a business automatically into an “organ of society” (Peter Drucker). Everything else – cash-flow, profit, salaries, investments, etc. – is a consequence of this basic value creation.

More than twenty years of leveraging a solely profit-oriented financial economy made us forget this basic notion. But despite all temptations and enticements of bull markets and windfall profits, the Customer Value thinking has survived: It is the business model of successful companies in the German speaking world.

While in the last 20 years many people and entities leveraged their income through newly upcoming financial products, in the Real Economy quite a number of medium-sized companies from Germany, Switzerland and Austria went global and became world market leaders. Meanwhile more than 1500 companies are either top-3 in their world market niche or number one in their continental market. They generate a yearly turnover of 900 billion Euro and employ around 5,6 million people. And they are remarkable unknown. They are “hidden champions” as the German Management thinker Herman Simon calls them.

Creating Customer Value, customer oriented entrepreneurship, and systems-based management have proven to be part of the successful (Central)-European approach. Today, companies following this approach are contributing to the well-being of the emerging countries in Asia, Latin-America, and Africa. The European approach with all its managerial implications is capable of re-shaping the globalized world economic system, capable of tackling our most pressing global challenges.

In contrast, Shared Value is an US-American concept responding to US-American problems. It is a very practical concept for changing short-term oriented American businesses. But it doesn’t give a systemically valid answer to re-think the flaws of the shareholder value-oriented capitalistic system.

However, despite all its success the European approach still misses worldwide dissemination and recognition. Yet it has no well-sounding and overall accepted title, no listed general principles and to-dos, no perfectly designed promotion and distribution channels. Apparently, to be globally really significant, it misses the US-American way of up-scaling.