1.4 What are Some of the Strategies to Achieve One or Both Goals?

There are three primary strategies (or logics) a company can pursue to obtain either shareholder or stakeholder objectives. These strategies have influenced decision makers over the past three decades and are 1) competitor dominant, 2) profit dominant, and 3) customer dominant logics.

Strong advocates of each camp will actually argue that the logic in and of itself is the reason the firm exists. For example, advocates of the profit dominant logic will argue that firms only exist to maximize profit (which can be loosely interpreted as the shareholder paradigm). Or, advocates of the customer dominant logic argue that the only reason firms exist is to serve customers. Things like profits, employment, and taxes are considered externalities. In the discussion below, we focus on the logics as means to an end and not the end itself.

Competitor Dominant Logic

The idea of the competitor dominant logic is that in order to have the strongest firm possible (defined by either the shareholder or stakeholder paradigms), firms should focus on beating their competitors at any cost. The idea is to monitor what the competitors in the industry are doing, do it better, and maximize market share. In this logic, the goal is to be the "market leader" and to make sure none of your competitors take market share from you.

There are three primary potential hazards of focusing too much on a competitor dominant logic. First, if managers are overly concerned with the competition, they may lower their customer focus and lose touch with the market. If the firm is creating a product better than the competition, but it is a product that the customers no longer demand, it doesn't matter how well the firm is beating the competitor at making the obsolete product. Second, a competitor dominant paradigm promotes me-too thinking and value creation through paralleling whatever the competition is doing. This reactive mindset can stymie out-of-the-box internal thinking among firm members. Third, a competitor mindset leaves the company vulnerable to innovative disruptions. When a firm is in a reactive mindset, it not only may miss out on chances to be disruptive, it may not be prepared to compete against innovative newcomers with disruptive technologies.

Profit Dominant Logic

It is important to understand that the profit dominant logic differs from the maximization of owner wealth company goal. You will learn in the accounting topic of this text that profit is the end result of the financial statement known as the income statement. The income statement begins with the dollar amount of sales the firm earned over a certain period of time (like three months or a year). All of the expenses for that period are then subtracted from the sales amount and what is left over is the profit. It is this "profit" that we are talking about. Maximizing profit differs from maximizing shareholder wealth because share prices reflect much more than just profit and are estimates of the future value of the firm in today's dollars.

The three principle strengths of the profit logic are that success is easy to measure (look at the bottom line of the income statement), it can motivate management (who often have their personal bonuses tied to profit), and it provides a structure for management to set goals (maximize sales while minimizing expenses). Along with the strengths though, there are three main weaknesses. First, like the competitor logic, the profit logic can diminish the focus on customer needs. Second, because profits are reported quarterly or annually, they can lead to short-term decision making at the expense of long term success. Third, the allure of profits can sometimes produce unethical behavior as the world saw with the great Enron fraud of 2001.

Customer Dominant Logic

The final logic relies on a focus on the customer. Advocates of the customer paradigm argue that customers are the only ones who actually put money into the value chain—everyone else in the chain simply recycles it. This infusion of customer money they argue should thus be the overriding focus of the firm. Like the other logics, the customer logic has its strengths and weaknesses.

The major strength is that managers stay focused on the true source of revenues—the customer. By observing customer behavior, management can determine customer demand via their real needs. This estimated demand then helps delineate what their products really are and what they do for the customer. The end result is that the firm is in the position to innovate and disrupt with products and services. It is also less likely to miss important trends or allow a rival to change the competitive rules. As the old saying goes, the best defense is a good offense.

The customer paradigm also has three primary weaknesses. First, by focusing too intensively on customers, the firm may not develop products the customers need, but don't know how to vocalize they need. As Desi DeSimone, one-time CEO at 3M, commented, "The most interesting products are the ones that people need but can't articulate that they need." Second, research has shown that some firms focus so much on their major customers that they do not give enough attention to their smaller customers, which often can become more profitable for the firm in the future. By focusing on the current big accounts, the firm often loses greater long-term profits. Third, the mechanics in place to track and focus on customer needs can create excessive complexity thereby hurting efficiency and raising costs.

Bringing the Three Logics Together

In the business world, the reality is that all three primary logics are critical (see Table 1-1). The question is actually one of priority, not a "choose-only-one" option. The bottom line: If companies meet customers' needs efficiently (customer logic), and better than the competition (competition logic) then they will make profits both now and in the future (profit logic).

The rest of this text is designed to help you learn the skills and intuition necessary to do just that. As this is a general business text, it will show you the tip of each iceberg in the business process—marketing, accounting, finance, sourcing, operations, logistics, human relations, et cetera—and hopefully open up the wonderful world of business. Whether your own personal goal is to become the next entrepreneurial bazillionaire (shareholder paradigm) or to work for a non-profit to help alleviate suffering in the world (stakeholder paradigm), or something in-between, the topics covered in this text are the foundations of your business education. Now let's consider social responsibility of the firm.

^* Table from "Mitigating the Myopia of Dominant Logics: On Customer Experience, Value Systems, and Competitive Advantage," by S.E. Fawcett, et al.