The customer/employee trade-off:
The new role for leaders

When the customers and employees have all the power, what’s the role of the manager?

I love this story about Brian Clough, the legendary football manager.  He was with a number of people who were talking about famous singers. Cloughie interjected by saying: “You know that Frank Sinatra; he’s met me.”

While making me laugh, it reminded me of how arrogant companies used to be.  Let me explain with an example.  About 25 years ago I was working as a salesman in the computing industry when one of my customers told me how he had received a call from IBM asking if he would like the Chief Executive to visit them while he was on a tour of Europe.  (Not if he could visit, but whether they would like him to). 

He said ‘yes’ as they were a major IBM customer and had some issues to discuss.  They were then contacted by someone from the CEO’s office who wanted to visit them in advance to discuss arrangements.    The most amazing thing was that they asked him to have the reception area tidied up and “ideally redecorated”!

The fact of the matter was that in those days consumers had less choice and companies really could get away with being that arrogant.

Today the world is a radically different place.  Globalisation has resulted in competition emerging from every corner of the planet and the Internet has provided consumers with a means of comparing prices and purchasing from any supplier, anywhere in the world.

The power has moved from the supplier to the buyer.  Here’s an example of “people power”:

In 2006 the Texas power company TXU announced plans to build 11, CO2-belching power stations.  Fred Krupp, the president of an organisation called Environmental Defence wrote to the CEO of TXU to request a meeting in order that he could explain the impact an additional 78 million tons of CO2 emissions would have on the environment and global warming.

Since TXU had the political support of the Governor of Texas, they didn’t see why they should waste their time talking to an environmental lobbyist, so they refused all requests to meet.

Fred therefore set up a web site called stopTXU.com and issued regular newsletters to politicians, opinion leaders and activists.
The effort paid off when two large venture capital firms made an offer of $45b to acquire TXU.  It was to be the largest leveraged buyout in history, but there was a catch. They didn’t want to purchase a business in the throws of a dispute with environmentalists.  They therefore opened talks with Krupp as they wanted him to sanction the deal.

As a result of the negotiations the number of new coal-fired power stations was cut from 11 to 3, they agreed to support a federal cap on carbon emissions and committed to spending $400m on energy efficiency programmes and to doubling its purchase of wind power.

So what is the role of the business leader in this world where the customer is king? 

Business consultant Michael Hammer describes the situation in the following way:
“In the nineteenth century the great conflict was between labour and capital.  Now it is between the customer and worker, and the company is the guy in the middle.  The customer turns to the company and says ‘give it to me for less.’  And then companies turn to employees and say. ‘If we don’t give it to them for less, we are in trouble.  I can’t guarantee you a job and a union steward can’t guarantee you a job, only a customer can.’”

In this world only two parties have real power; the customers have ‘purchasing power’ and the employees have ‘production power’.  The role of the company is therefore to balance the trade-off between the two.  Let’s look at two examples; retail giants Wal-Mart and Costco.

Wall-Mart places the emphasis on the customer.  It has a reputation for being tough on keeping labour costs to a minimum and for resisting any attempt by employees to push back.  Wall-Mart even has a ‘Union Hotline’ for store managers to call if they even sense that anyone might be talking about joining a union.  Having called the hotline, Wall-Mart has a team that will descend on a store to deal with the problem.  Indeed, when the meat-cutters in one Alabama store voted to join a union, Wall-Mart closed the meat-cutting departments in all of their stores within two weeks. This may have been coincidence or it might have been a shot across the bows of employees – who knows?

At Costco they take the opposite view.  They focus on their employees and deliberately pay above the going rate for wages and benefits.  As a result, Costco has a fantastic reputation as an employer and enjoys excellent employee loyalty and low staff turn-over.

However, Wall-Mart has an average pre-tax profit margin of 5.5% while Costco manages just 2.7%.

So which approach is best? 

The answer is that it depends whether you are the customer, the employee or the shareholder.  Yes the customer wants the lowest possible prices, but the employee in us wants the staff to have decent pay, a pension scheme and health-care benefits and, for the sake of our own pensions, we also want decent profits and dividends.

The new role for business leaders is therefore to decide between these conflicting options, recognising that in a recession, it will be impossible to please all of the people all of the time.

About the author
Alistair Schofield is Managing Director of Extensor Limited.