Journal of Business & Economics Research – November 2006
Volume 4, Number 11
Building Customer Value And Profitability With Business Ethics Robert C. McMurrian, University of Tampa Erika Matulich, University of Tampa
ABSTRACT Firms assume ethical business practices only add costs to the firm. However, business ethics actually add value for customers and result in increased profitability and performance for the firm.
ue to constantly changing competitive environments, business organizations must find new methods to meet competition other than the traditional ways of better products (most consumers believe that competitive products are fairly equal in terms of quality), more services associated with a sell (more companies are finding that providing more and more services negatively affect profitability), or lower prices (competing on price results in erratic market share and unstable profits). Business organizations are responding to these challenges today by establishing partnerships and more collaborative relationships with their customers (Dertouzos, Lester and Solow 1989). Relative to these relationships there has been much discussion in the last several years regarding ethical practices by business organizations. For the most part, it has been assumed that organizations would do what was right for both their customers and their employees in the interest of long-term positive relationships. Unfortunately, we have learned the difficult lesson that such behavior is not always the norm. Unethical – and illegal – activities by such companies as Enron, WorldCom and Adelphi have shaken the foundation of trust that has formed the basis of marketplace relationships between companies and stakeholders. While there has been a greater focus on business ethics as a result of these companies’ activities, questions are still asked regarding the financial return related to developing processes that insure absolute adherence to high ethical standards in organizations. Ethics could be seen as a constraint on profitability. This view indicates that ethics and profit are inversely related (Bowie 1998). There are probably times when doing the right thing reduces profits. A more positive view, however, is that there is a positive correlation between an organization’s ethical behaviors and activities and the organization’s bottom line results. In fact, a reputation for ethical business activities can be a major source of competitive advantage. High standards of organizational ethics can contribute to profitability by reducing the cost of business transactions, building a foundation of trust with stakeholders, contributing to an internal environment of successful teamwork, and maintaining social capital that is part of an organization’s market-place image. The importance of business ethics to an organization has been discussed from differing viewpoints. Some managers consider ethics programs in their organizations to be very expensive activities that are only societally rewarding. Examples from the business community, however, suggest that companies viewed as ethical by the companies’ stakeholders (i.e., customers, employees, suppliers, and public) do enjoy several competitive advantages. These advantages include higher levels of efficiency in operations, higher levels of commitment and loyalty from employees, higher levels of perceived product quality, higher levels of customer loyalty and retention, and better financial performance (Ferrell 2004). The link between ethics and profitability has been studied for several years. A study summarized 52 research projects examining the correlation between ethics and profits (Donaldson 2003). The results were encouraging for those supporting a positive linkage between the two variables. Of the 52 studies examined, 33 studies indicated a positive correlation between corporate ethics programs and profitability, 14 studies reported no effect or were inconclusive, and five...
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