More on profit drivers

How poorly understood the profit drivers are in Germany, and in Europe for that matter, is evident by the current discussion about the steel conglomerate Mittal acquiring Arcelor. Some people publicly insist that decisions like this are not to be made only by company owners or shareholders, who the company actually belongs to, but by all stakeholders including employees. The former French Prime Minister Michel Rocard goes even so far as to demand a change in the law to give employees a vote in these matters. 

Don’t these people understand the mechanisms of the market economy?  

First of all, there is the claim that Arcelor’s shareholders approved the acquisition based only on the short-term profit offered by Mittal. If that’s true and there are no long-term gains from this acquisition, the market will punish the company and its shareholders. Owners and shareholders need to consider short-term and long-term implications from such decisions, otherwise they may lose at the end. 

Second, some believe that the new Mittal will reduce the quality of its offerings. If Mittal does and quality is important to its customers, customers will switch to competitors and the company will lose over time. So here too, quality as a potential driver of customer satisfaction, which in turn is a driver of profits, needs to be addressed by a well-managed company to keep its owners or shareholders satisfied. 

Finally, the biggest complaint about this acquisition, like it’s the case with basically every merger or acquisition, is the impact on employees in terms of lower wages and reduced job security. This is probably the biggest misconception. Employees impact every aspect of a business and their job satisfaction is over long-term a driver of the bottom line. So, if Mittal’s acquisition of Arcelor will lead to lower job satisfaction, it will naturally then lead to reduced productivity, higher operating expenses, and higher employee turnover. These outcomes are not desired by any company since they lead to lower profits. Hence, management needs to keep employees satisfied in order to keep owners or shareholders satisfied. 

It’s of course typical for European politicians to demand even more laws protecting employees, but they clearly don’t understand profit drivers in a market economy. Unfortunately, this lack of knowledge is not common only to European politicians but also to some business owners and management, which leads to poor customer service.

Customer satisfaction drives profits

Most of the customer-facing employees don’t know that short-term and long-term profit of a company heavily depends on customer satisfaction. This is especially true in Germany.  

By not addressing customer satisfaction, company’s management doesn’t utilize the full financial potential of the company. The management may not provide the right incentives to its employees to foster customer satisfaction, like tying compensation to customer satisfaction. Or even worse, it doesn’t understand this dependency itself. So, if employees know about the relationship between customer satisfaction and profit, they may not care. 

But understanding profit drivers is not rocket science. Since the goal of every for-profit company is to make profit, as the name implies, every company should know its internal and external profit drivers and be able to control at least the internal ones. Since customers are those that through purchase of services and goods generate revenues for the company, making customer satisfied will drive revenues. This satisfaction doesn’t depend only on the services and goods sold to customers, but also on the overall experience they have when dealing with the company before, during, and after purchase. In the service industry it is especially this experience that drives customer satisfaction. 

Every company has processes in place for how to develop and deliver goods and services to customers. These internal processes are developed by company’s employees, as are the actual goods and services. While developing the goods and services and the processes behind them, employees need to keep customers in mind to ensure customer satisfaction. 

This concept of employees driving internal processes, these processes driving then customer satisfaction, and customer satisfaction driving at the end company’s profit is best captured by the balanced scorecard framework. The balanced scorecard framework has been developed in 1992 by two Harvard professors, Robert Kaplan and David Norton, and has been implemented in thousands of organizations worldwide. 

In addition to not realizing how customer satisfaction drives profits, most companies also don’t realize that poor service experienced by a customer doesn’t impact only the future life time business with that customer, but also may impact the business with other customers. A customer shares his or her service experience, especially the poor one, on average with seven other people within immediate circles of family, friends, and colleagues. Hence, a company not fixing a negative service experience is running the risk of losing life-time business with eight existing or potential customers. 

It is advisable for German companies to understand how customer satisfaction drives profit. And they should then pay attention to all drivers of customer satisfaction in order to fully utilize the financial potential of the company.