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Relationships: The Art of Business
by Ronald C. Lazof

 
   
 
   

All businesses are heavily dependent on the ability of their agents (officers and employees) to build and maintain, at a highly competitive level, multiple relationships with their stakeholders. It is not only the quantity of these relationships, but their quality that will ultimately determine an enterprise's success or failure.

Relationships in a business environment, as in all other venues, are built and maintained by constant and continual attention to the other party's, "your partner's," perceived self-interest as well as the delivery of unmatched superior assistance in the attainment of your partner's goals and objectives, in a manner consistent with his values.

As shown in early behavioral studies, habits or patterns of human action are first built by frequent repetition of a stimulus event immediately followed by a reward event. And, they [these behavioral patterns] are best maintained by intermittent reinforcement. When applied in a business environment to one of your stakeholders, i.e. a customer, you will wish him to perceive the stocking of your product, or the offering of your service as the stimulus event and the profit realized to his business as the reward event. Obviously your customer's primary goal is sales, at a price that will result in maximizing the customer's gross profits, i.e. maximum sales units multiplied by the maximum achievable price, while recognizing as the applicable constraints market size and conditions on both the macro (total market) and micro (customer unit) levels.

However, when building a new customer relationship, (or for the matter maintaining an existing relationship) special attention must be paid to both the stated and the unstated goals of your customer. For example, in a retail environment the customer may indicate a need for maintaining no less than a 30% "maintain margin" and may say nothing about "turns," however your knowledge of his business should lead you to inquire of his objectives in this related but oft times unstated and inversely varying goal. In other words, if selling more units at a lower price is more advantageous to him than selling fewer units at a higher price, in each case where price exceeds the 30% minimum margin level because of the customer's manner of going to market and niche creation and marketing approach, then perhaps products of lesser quality, with fewer included features, or a less inclusive service component can be developed and offered to meet his objectives of greater turns and unit sales.

Customer relations, of course, come immediately to mind. Although it is the function of your sales staff to develop and maintain these relationships, I believe the entire company must participate in their development and maintenance, including at the highest levels their maintenance must also fall to the company's chief executive and operating officers. Furthermore, I believe it is a primary function of every single employee and agent of your company, to keep each of your customers in a state of total delight with your products and services. The so called "customer service" department, as a practical matter, must include your company's total staff.

Many businesses today function on a "man to man" basis with key customer personnel being matched up against functionally related individuals in the supplier's organization rather than on a "zone" or office to office level. The difference is oft times in the quality of the relationships. By having individuals in all disciplines and functionalities match up with those charged with the same although oft times reciprocal tasks, e.g. distribution and transportation matches with distribution and transportation people or reciprocally shipping people match up with the customer's equivalent of a receiving department, you guarantee a common vocabulary as well as common interests and hopefully common measures of excellence.

By encouraging these common functional cross company relationships at every level of both organizations (yours and the customer's) you: a) multiply the inter-connectiveness of the companies; b) create new opportunities for problem solving at the lowest possible organizational level - (to help prevent little problems easily cured from becoming big problems discussed at decision levels in either organization); and c) lastly, but probably of the most primary importance, allow the establishment of long term personal relationships between individuals early in their respective careers who as they advance to greater rank, responsibility and authority, over time in their respective organizations will maintain their connection, relationship, and continue to build trust!

Trust, of course, cannot be feigned or given and must be earned by repeated and reliable performance within established expectations over time. This trust established between people and organizations, over time, at all levels, is in fact the best relationship cement.

The individual who acts as the lead buyer for a multi-billion dollar customer may not always have the "yes" power, but he almost always has the power to say "no." Accordingly, if the buyer is the only point of organizational access to a key customer account it may be appropriate to have your President and C.E.O. be your point of contact rather than a sales representative or a Vice President of Sales. If however, you are in a "man to man" sales approach, you will be creating and actively maintaining many independent contacts with your customer at all levels of the customer's organization.

For example, on any given day in a company with which I am intimately familiar, the president and chief executive officer might talk to or meet with a key customer's chief executive officer and chief financial officer respecting a proposed change in pricing or terms, while at the same time the company's sales training personnel might be running sales training classes for the customer's employees, and the company's sales and service teams would be matched up to assure everyone that the customer's shelves are full and that no costly out-of-stocks occur. Concurrently, the company's logistics and distribution teams might be coordinating the set up of six to ten new stores for the customer and be jointly planning promotional and advertising campaigns with the marketing staffs of both companies. Each of the players, in each position, throughout the whole company, is aligned with and focused on keeping his opposite respective staff or team member informed and engaged. Consequently, no one person on the customer's team could, or would, at least at an operational level, be able to derail the relationship.

In all relationships bumps in the road occur, and present either obstacles or opportunities. They will always be opportunities if you follow the following four step program:

  1. Acknowledge the issue promptly - if the customer is unaware of the issue, inform him immediately.

  2. If the issue has been caused by a failure of your team, accompany the acknowledgment of the event with an immediate acceptance of responsibility for the correction, and the cost of correction.

  3. If the issue is not attributable to a failure of your team, but can be easily and quickly remedied by your team, immediately accept responsibility for the correction and promptly make arrangements to discuss the cost of correction.

  4. If the issue is not attributable to a failure of your team and can not be easily and quickly remedied by them, then determine all of the available alternative courses of action which may lead to the remedy, and promptly propose them together with your recommendations to your customer.

Your customer must always see you as proactive, positive, acting in the customer's best interest, and accepting of all appropriately assumed responsibility. Always go the extra mile - always exceed expectations.

A large part of always exceeding your customer's expectations is determined by your continuing efforts at managing the customer's expectations. If you always under promise and over perform, your customers can not help but to be impressed and supportive of your requests (whether for justified price increases, scheduling flexibility or new product listings) - when you need to make them. Of course, this does not mean that I advocate the practice of "sand-bagging." But I do not believe that it is "sand-bagging" to be conservative in your appraisals of your own capabilities. Nor does a conservative self-appraisal of your capabilities in any way imply that you owe your customer less than your best 110% effort. It does however require that even under performance pressure you never commit to what you cannot deliver.

Clearly, from a pure quantity and risk standpoint, you would rather have 1,000 customers each purchasing $1,000,000 in products and services per annum than 1,000 customers each purchasing $100,000 in products and services per annum, assuming equal profitability per dollar of sales i.e. 100% pure variable costing. But, what of the more difficult permutations and combinations i.e.:

Products and Services Customers
$100   10,000,000
$1,000   1,000,000
$100,000,000   10
$1,000,000,000   1

Each of these examples, of course, has its own challenges. Even in a fully variable cost structure (never present in the short term and always present if you consider a period that is long enough), you would in general feel more secure, i.e. less at risk, if you have more rather than fewer customers. With each customer representing a small share of your total business, sales, and profits, each is therefore less able to cause your company damage if they should elect to eliminate your company as a supplier. However, in the real world there is a cost of customer contact. In other words, it is more expensive to deal with, sell, ship to, communicate with, service and collect from 1,000,000 customers than 1. Therefore, at least in theory, having fewer large customers rather than more small customers should be more profitable and make your business more manageable, unless of course unequal bargaining power operates to erode not only achieved economies of scale, which in general should be shared, but also the supplier company's underlying cost structure.

On the one hand, customer concentration is classically deemed to be a factor meriting a discount in the value of a business, since the loss of a customer could destroy a large portion, or even all of the company's sales and profitability. On the other hand, by having fewer customers you should be able to make the loss of any customer a rare event since each customer will be significant and will therefore be prized and serviced with an increased focus. There is, of course, a trade off, and classical business doctrine would suggest that your business chooses to serve the most profitable, the industry leaders, and the innovators - but this assumes a choice which is rarely, if ever, present.

If one of your small customers grows to dominate his industry, do you terminate your relationship because your customer base would become too concentrated? Assuredly not! You "ride the wild horse" as long as possible! After all, if the customer is dominating the industry, you have fewer alternatives for new customers, and your competition, who are being dispossessed by the shake up in the portions of the industry not controlled by your successful customer, will out of loss of opportunity and desperation, become intensely competitive - and jealous of your supplier status - even if it means increased customer concentration. Should not this envy in the marketplace translate into increased value for your business enterprise despite the concentration?

What has been stated above for your customers is in every way and at all times equally the case for your relationships with each of the other stakeholders in your company including your suppliers, lenders, employees, shareholders, and community. Suppliers (and lenders, who are after all, just suppliers of credit and financial products and services) require, the attention of their functional cross organizational partners.

Just as you partner with your customer you must partner with your suppliers and encourage them to follow your example with their suppliers in turn. Your shareholders are no different, they require that you inform them of your expected performance and then at a minimum achieve their expectations. Hopefully, by managing their expectations, you can always exceed the levels of expected performance without creating a psychology suggestive of "sand-bagging" (generally avoidable at the shareholder level if your company's performance also exceeds that of its industry peers and competitors.)

The process must always be seen from the stakeholder's viewpoint. The rules of creating and monitoring all stakeholder relationships,(as well as those in any non business setting) may be distilled from the above example and our common experiences and are stated as follows:

  1. Always view the relationship through the eyes of your stakeholder:

    • Constantly critique and recharacterize, with as much independence as possible - (including the potential use of outside third party consultants to gain new "eyes" and viewpoints )- the relationship and its features, benefits, and detriments to the stakeholder and your company.

    • Be flexible and be prepared to continually improve both the reality and the stakeholder's perception of your value to the stakeholder -( appraise your company's performance in terms of products, services, information and value not only in your own terms, [i.e. against standards and historical or industry norms, but also using the same "yardstick" and measurements used by your stakeholders R.O.E - return in equity, R.O.I-return on investment, R.O.I.C.- return on invested capital, turns, G.M.R.O.I.- gross margin return on investment , or whatever measure of performance the stakeholder desires to use as its appraisal tool -. Ask them for these appraisal tools as well as for their collected information on your performance both to verify accuracy against your own records, and also to see how your stakeholder really sees you - you must perform in areas important to the stakeholder - not those only important your company!)

    • Determine from the customer both their stated and unstated goals and objectives and how they measure their own achievement and success -( then continually check and double check, with all levels of contact with the customer, that these are accurate and still in use, have not been replaced and that you are doing everything you can to help them achieve their own goals and objectives.)

    • Apply these performance standards via market research and intelligence to your competitors and the marketplace - (you know your customer will always be looking for a better, cheaper, smarter, hungrier competition.)

  2. Manage your stakeholder's expectations of your performance:

    • Never promise what you cannot deliver.

    • Under promise and over perform.

    • Be conservative in your commitments.

    • Always perform at your maximum 110% level.

  3. Divide your time, money, effort, and resources among the building, developing monitoring and maintaining of your stakeholder relationships:

    • It does no good to acquire stakeholders by overstating your expected performances only to lose them to your under performance of excess expectations.

    • It does no good to have a great sales staff and world class products if all of your time and money are spent in the acquisition of the client relationship and none is left for its maintenance.

In other words always follow the "golden rule", exceed expectations, be proactive, act in your stakeholders' best perceived long term interests. Place your stakeholders' interests at least on a parity with your own, and most importantly see the world through their eyes and 'walk the walk" in their shoes.


     
   
     
   

The Author

 

Ronald C. Lazof currently serves as a managing director of Prism Advisors, LLC, a management advisory and consulting organization. Prism focuses its attention on the entrepreneurial, emerging growth and mid-sized privately held corporate markets. Mr. Lazof served as President and Chief Executive Officer of Behr Process Corporation from 1996 to August 2001, playing a key role in the company's move from a private family held business to a publicly held multi-plant manufacturer and distributor of paints and coatings. Visit http://www.prismadvisors.com/ .

     
   
     
   
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Copyright 2004 by Ronald C. Lazof. All rights reserved.

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