The era of shareholder value maximization, which arguably started in the early 1980s when Jack Welch pronounced that General Electric’s primary purpose was to maximize returns for its investors, seems to be reaching its final days. Welch himself said in 2009 that optimizing a business for shareholder returns is the “dumbest idea in the world.”
A true revolution is stirring in business – cogently captured in Steve Denning’s description of the emergence of what he calls the Creative Economy. Embrace your organization’s humanity. Make 2014 the year you begin to move your organization from the mindless management of numbers to the creation of customer and employee value, organized around a clarifying and motivating purpose.- by Philippe Mora
[ Thank You HBR | by Scott Anthony 01.13.14]
In 1960, marketing legend Ted Levitt provided perhaps his seminal contribution to the Harvard Business Review: “Marketing Myopia.” The article castigated companies for losing sight of the essence of their business, setting themselves up for challenges from competitors and, ultimately, for obsolescence. To avoid that, Levitt exhorted leaders to ask themselves the seemingly obvious question – “What business are you really in?” Posing that question continues to be a powerful way to catalyze important strategic conversations.
And yet, more than 50 years later, companies have become worse, not better, at answering it correctly – far worse.
Peter Drucker famously said that the point of a business was to create a customer. Levitt agreed, noting that the trouble starts when over time companies come to define themselves not by what they do for customers but by the products they sell or the categories in which they compete. Back in the 1950s, for instance, the railroad companies defined themselves as, well, railroad companies. But had they looked at themselves from the point of view of their customers, they would have seen that they were really in the transportation and logistics business and would have better understood the challenge, and the opportunities, represented by the growing airline industry.
Things have gotten worse today because now if you ask most companies why they exist, it isn’t even to sell a particular product or service, much less to serve any customers. No, it’s to maximize shareholder value. As Clayton Christensen likes to note, the primary job of leadership today is to “source, assemble, and ship numbers.” And short-term numbers at that. Worshipping at what Christensen calls the “church of finance” hollows out a company’s competitive advantage, as it loses the capacity to invest in innovation that drives the perpetual reinvention so necessary in today’s world of temporary competitive advantage.
Happily though, the era of shareholder value maximization, which arguably started in the early 1980s when Jack Welch pronounced that General Electric’s primary purpose was to maximize returns for its investors, seems to be reaching its final days. Welch himself said in 2009 that optimizing a business for shareholder returns is the “dumbest idea in the world.”
Thought leaders like Christensen, Roger Martin, Michael Porter, and Steve Denning have all argued that shareholder value has been exposed as a flawed paradigm. Even Michael Jensen, whose seminal 1976 article (with William Meckling) helped kick off both the focus on shareholder value as the measure of top executives’ success and the incentive of extensive stock grants (which was somehow meant to encourage them to act like owners), now rues the unanticipated impact of some of his contributions.
It’s time to make business human again.
A human business has three components. The first is a true “consumer is boss” mind-set, which recognizes that the only path to sustainable competitive advantage is to create customer value. To cultivate that mind-set, even in a fiercely competitive world, means investing the time it takes to really comprehend both today’s and tomorrow’s customers at a fundamental level, so you can understand the things they want but cannot easily articulate.
Its second component is reframing our view of employees from costs that need to be kept in check to assets that need to be nurtured. The uncertainty that increasingly characterizes our world means that companies need to attract, retain, and develop motivated innovators who can help to imagine and realize new growth opportunities. It’s hard for employees to feel like they are doing more than managing numbers when they, too, are treated like numbers to be optimized.
That means decreasing these use of outdated performance systems that measure employees based on outcomes like revenue growth or market share, which are in many cases beyond their control owing to increasing complexity and market turbulence. Instead, we should measure and manage behaviors like spending time in markets and designing and executing smart experiments and the values to which employees adhere. When these are in sync with the creation of customer value, beautiful things will happen.
Finally, a humanized business has a motivating purpose. Increasing return on invested capital from 10.2% to 10.8% might be a useful target, but it is not a statement of purpose. What problem does the company exist to address? Johnson & Johnson’s famous credo puts the needs of the people it serves – doctors, nurses, patients, mothers and fathers – first; employees second; the communities it serves third; and its stockholders last. As it notes, “When we operate according to these principles, the stockholders should realize a fair return.”
A true revolution is stirring in business – cogently captured in Steve Denning’s description of the emergence of what he calls the Creative Economy. Embrace your organization’s humanity. Make 2014 the year you begin to move your organization from the mindless management of numbers to the creation of customer and employee value, organized around a clarifying and motivating purpose. In the end, your shareholders, the real ones—the ones who care about long-term performance — will thank you for it.
Read More: http://blogs.hbr.org/2014/01/in-2014-resolve-to-make-your-business-human-again/
Scott Anthony is the managing partner of the innovation and growth consulting firm Innosight.. His most recent books are The Little Black Book of Innovation and the new HBR Single, Building a Growth Factory. Follow him on Twitter at @ScottDAnthony.
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