FEATURE | FALL 2010 EFFECT

New Rules for Business

by Sara Aase

After watching money vanish from the economy, the last three years would seem to have had a clarifying effect on our values. In the wake of massive fraudulent schemes, predictably, many experts have declared the death of an old era and business rules designed for the twentieth century.

In 2009, retired Harvard Business School professor Shoshana Zuboff wrote in BusinessWeek that old business models helped provoke the economic crisis by emphasizing the importance of shareholder value at precisely the time the country was encountering stagnant economic growth and increased global competition. To compensate, businesses cut wages and benefits, downsized, and sent jobs overseas. When those cost-saving measures weren’t enough to provide the desired returns, they turned to increasingly “creative” financial operations, which eventually collapsed.

At the same time that confidence in business hit an all-time low—10 percent in 2009, and still just 13 percent in 2010—the Internet and social media were profoundly reshaping customers’ access to information, their consumer savvy, and, most importantly, their expectations of the companies with which they do business. Trust is the new currency, experts predict. Wall Street fixes aside, businesses need to embrace the new rules that extend from this core concept in order to create real prosperity and long-term growth.

The new rules emphasize:

• building a business mission around adapting quickly and flexibly to customer demands,
• accepting ideas from and even collaborating with customers,
• contributing to the greater good of a community or communities as well as an increasingly vulnerable ecosystem, and
• acting with integrity and fairness regarding customers, partners, and vendors.

To be sure, these ideas aren’t so much “new” as a renewal of the principles that have always made business work—i.e., customers, customers, customers. But while principles don’t change, trends and practices do. Today, the more cautious climate of an economic recovery combined with the accelerated pace of technological change makes these “new rules” more urgent.

New rule #1: more mission

“The really fundamental change for businesses is that rather than defining yourself by your product, you need to define your mission and what you stand for in order to be flexible,” says Sherry Hoskinson, director of the University of Arizona’s McGuire Center for Entrepreneurship. “Because in three years, maybe there won’t be a market for the product you’re making today.”

For example, she recently advised local entrepreneurs that their software prototype would be obsolete by the time they took it to market. “Instead, I advised them to organize around the mission of providing a safe Internet environment for kids,” she says.

To Ruth Siegel, founder and owner of Serenity Hospice in Phoenix, providing the highest quality end-of-life care possible has always been her core mission. In practice, that has made Serenity, established in 2005, look a lot different from other hospice care providers, from providing a state-of-the-art luxury facility for in-patient care to establishing a not-for-profit foundation to cover treatment for those without insurance. It also means letting patients determine the services they want, instead of adhering to a list of services it will or will not provide. “We do so much more now than we used to, it’s such a competitive industry,” Siegel says, noting that there are more than 60 hospice services in Arizona. “We will do some radiation therapy with some patients, for example, which is unusual for hospice care. If they have an infection and need an IV line, we’ll do that—there are no hard and fast rules we follow except to provide the best care.”

Siegel walked away from another hospice care service she started in 1996, after it went public and changed its focus from patient care to shareholder returns. “They started cutting care staff to increase corporate staff,” she says. “And they grew so quickly in some places that the state told them to shut down because quality was so poor.”

Serenity Hospice has thrived during the recent downturn. Serving 250 patients with 85 employees, it had just under $11 million in revenue in 2010, and projects $13 million for 2011. In July of 2009, it set a five-year record for number of patient admissions and earned a Stevie award, referred to as the Oscars of business, for best overall company in its category. This year it will open a Tucson outpost, and Siegel expects to expand into Las Vegas, too—but only at the pace at which she can find qualified staff to do so.

Missions that include environmentally sustainable practices and social engagement have become significant factors in attracting and keeping potential customers. Those elements scored as “important” with 64 percent of respondents in the 2010 Edelman Survey, as opposed to just 33 percent in 2006. “We’re seeing this with our angel investor community,” Hoskinson says. “Two years ago it was all about returns. Today they’re more satisfied with a lower predicted return on investment if you’ve done a good job of explaining how your business will help solve a problem people care about, an alternative value.”

More consumers are backing up their beliefs with their wallets, even in the midst of a recession. According to a 2009 survey by Mintel, a London-based market research firm, four out of five people said they were still buying “green” products such as organic food, even though they cost more. Today’s business students, Hoskinson says, also are less concerned with defining a career than aligning with a much broader goal, cause, or issue. “It’s a generational alignment,” Hoskinson says. “More people are choosing purchases around values such as sustainable production and fair trade, and will pay a premium to support those values.”

New Rule #2: bare it—the importance of transparency

Consumer trust in companies was extremely low in the wake of bankruptcies, bailouts, and collapsed Ponzi schemes. Take results from the 2006 and 2010 Edelman Trust Barometer surveys. In 2006, “strong financial performance” was near the top of factors that inspired trust in customers, while a factor such as “communication with customers” was near the bottom. In 2010, the reverse was true. Financial performance dropped to last place, while factors such as “transparent and honest practices,” “communication,” and “fair pricing” had moved to the top.

In that same time period, it became possible to find out nearly anything about goods, services, and companies faster than ever before. If you couldn’t Google it, you might find it on Twitter, through a blog, or on a content aggregator like Pricewatch.

Once upon a time, businesses used to hold the information advantage, says Raman Chadha, executive director of the Coleman Entrepreneurship Center at DePaul University in Chicago. But not anymore. “Because our population is increasingly sophisticated and savvy, it behooves businesses to find a way to embrace that,” he says. “People are purchasing, armed with as much information as possible, so the playing field is leveled between consumer and business.” Take the way we buy cars today, for example. “Ten years ago we didn’t know how much that car really cost or how the funds were distributed, but today all of that information is readily available,” Chadha says. “The average educated consumer walks into a dealership already knowing what they want to pay.”

Companies need to accept the reality of transparency and leverage its strength, he says. Increased honesty can have a strong goodwill effect that actually smoothes negotiations. For example, Chadha himself expected to haggle over price with a vendor for a college fundraising event. “But that vendor immediately disclosed to me what his profit margin was going to be,” Chadha says. “Because I understood what it would take for him to be able to stay in business, that took price off the negotiating table for me.”

New Rule #3: embrace your customer as an ally

Say “the customer is always right” and you’ll get a well-deserved eye roll from your employees, just as the phrase, “our customers are number one,” will inspire the same in any potential buyer visiting your website. Let’s face it—the business-customer relationship is often an adversarial one. If you’ve just saved a bundle by outsourcing your phone-based customer support, you don’t want to hear about phone tree hell. Likewise, the customer on the other end couldn’t care less about your organizational challenges. He just wants his problem resolved quickly. This relationship is a natural byproduct of how companies historically organized in the industrial age—as closed organizations, possessing the product, the expertise, and the value. Boundaries between the company and the customer were clear. And as we’ve seen recently, it’s easy for a company with this type of organizational structure and culture to get caught up in serving its own interests instead of those of its customers.

Today’s successful companies will remove those boundaries, say experts such as Zuboff and Richard Edelman, president and chief executive of the Edelman public relations company, which publishes the Edelman Trust Barometer. Edelman calls the shift one from “shareholder capitalism” to “stakeholder capitalism.”

Without customers, of course, no business can exist. But what’s changed in the company-customer relationship is the unprecedented opportunity to make more customers your “regulars”—the ones you know and trust, and who in turn know and trust you.

In practice, that means companies have to take advantage of tools like blogs, online surveys, social networking sites, or custom-built databases that actively recruit customer input. Think of it as an extension of the concept of “hiring the best people.” People who want to work for you ideally believe in what you’re doing. But who believes more in what you’re doing than your best customers? Today you can easily tap that valuable talent pool. “The idea is, there are a lot of really smart people outside of my company, and the more I can engage with them, the better solutions we can come up with,” Hoskinson says. “That open innovation element is something that hasn’t existed in the past. It’s an obvious shift from the industrial to the knowledge-based economy. But it’s not an easy one—companies have to think through how they will act on the information.”

Thanks to the increasing ability of technology to personalize the customer experience, today’s customers increasingly want to be seen and treated as individuals—especially younger consumers. They are wired with the expectation that businesses are interested in and actually care about their needs, and companies that understand that will thrive where others fail.

Phoenix Solutions Group, an auto body marketing and consulting firm based in Hoffman Estates, Illinois, learned this lesson after a two-year study found little connection between the results of a customer satisfaction survey and actual repeat and referral business.

The study discovered that the customer survey wasn’t asking the right questions. Its questions skimmed the surface of the experience—“Overall, how satisfied are you with your service?”—but didn’t ask about things that mattered to customers, such as wait time, warmth of the initial greeting, whether the car was repaired correctly the first time and delivered when promised, and whether or not it had been washed.

Phoenix Solutions overhauled the standard survey it offers to auto body shops to make it much more detailed, and open—each section invites the customer to write in comments. Acting on that information, in turn, has required body shops to shift their focus away from simply processing cars to actively managing customer relationships, including rewarding those referrals. The results for shops that have adopted the Phoenix Solutions approach have been dramatic: they log sales that are 3.1 times greater than the average shop, and have a 70 percent referral rate as opposed to the industry-standard 5 percent.

Caring, listening, and acting are the keys. “We are definitely finding that companies that are best coping with this recession are the ones who are very connected to their customers’ needs, wants, and feedback,” says George McAllister, regional director of the North Carolina Small Business and Technology Development Center in Charlotte, North Carolina. “They are the ones always looking to improve, to innovate, and to jump on more opportunities. It’s being in touch.”

Looking ahead

Experts agree that now is the perfect time for entrepreneurs to capitalize on a great idea and lock up some resources shed by failing companies in anticipation of the coming recovery. “See this time as an opportunity and not a threat,” says Ram Mudambi, professor and Perelman Senior Research Fellow in the Department of Strategic Management at Temple University’s Fox School of Business in Philadelphia. “A recession is the best time for smaller firms to snatch up buildings, office space, equipment, or people you need. If you take some chances instead of battening down the hatches, you will grow faster during the recovery.”

But trust is fragile and memory short. As the economy recovers, the Edelman survey shows, 59 percent of customers expect companies to return to “business as usual.” The further we get from this most recent downturn, the easier it will be to survive and even thrive. When that happens, as we’ve seen, it’s easy to turn attention elsewhere and forget the “why” of business. It’s easy to endure when there’s plenty of money around, experts say, but when it disappears, it leaves only the most valuable companies still standing. Adopting new rules, they hope, will buoy companies in good times and bad.