Tag Archives: purpose

The Shareholder Value Myth

The Principal-Agent Problem

Every business seeks to make a profit. Ones that do not achieve that basic requirement do not stay in business for long. However, that doesn’t mean that the only reason a business exists is to make money. Clearly, in order to earn a profit over the long term, you need to provide value for others. Anybody who has ever run a business knows this.

Yet a large corporation is very different from an ordinary business in that there is what’s known as a principal-agent problem. The shareholders are a dispersed group that have relatively little information, while the managers of the business are a small group with an asymmetric informational advantage.

So you can see how the concept of shareholder value can be attractive. If you can reduce performance down to a single metric, such as stock performance, then the principal-agent problem is solved. Shareholders, as principal owners of the company, can hold managers, as their agents, accountable.

Yet this is a fantasy. There are many things that a manager can do, such as reducing investment or making a lot of sexy acquisitions, that can increase short-term financial performance, but hurt performance in the long run. So the concept of shareholder value has always been a murky one.

From Value Chains To Ecosystems

For decades, the dominant view of strategy was based on Michael Porter’s ideas about competitive advantage. In essence, he argued that the key to long-term success was to dominate the value chain by maximizing bargaining power among suppliers, customers, new market entrants and substitute goods.

Yet there was a fatal flaw in the notion that wasn’t always obvious. In an industrial economy, where technology is relatively static, value chains are stable. However, in a fast moving information economy, firms increasingly depend on ecosystems to compete. That drastically changes the game.

Ecosystems are nonlinear and complex. Power emanates from the center instead of at the top of a value chain. You move to the center by connecting out. So while an industry giant may possess significant bargaining power, exercising that bargaining power can be problematic, because it can weaken links to other nodes in the ecosystem.

So the increased emphasis on stakeholders is not merely some newfound socialistic altruism, but a realistic strategic shift. In a networked-driven world you need to continually widen and deepen links to other stakeholders within the ecosystem. That’s how you gain access to resources like talent, technology and information.
Building Power Through Gaining Trust

In a famous 1937 paper, Nobel Prize winning economist Ronald Coase argued that the function of a firm was to minimize transaction costs, especially information costs. For example, it makes sense to keep employees on staff, even if you might not need them today, so that you don’t need to search for people tomorrow when a job comes in.

Another way to minimize transaction costs is through building trustful relationships. If the stakeholders within ecosystems that you operate trust you, you gain greater access to information and decrease the amount of resources you need to spend on enforcing formal and informal norms. In fact, a study from Accenture Strategy recently found that building trust with stakeholders is increasingly becoming a competitive advantage.

In The Good Jobs Strategy MIT’s Zeynep Ton found that investing more in well-trained employees can actually lower costs and drive sales in the low-cost retail industry. While the sector is often thought of as highly transactional, her research indicates that a dedicated and skilled workforce results in less turnover, better customer service and greater efficiency.

For example, when the recession hit in 2008, Mercadona, Spain’s leading discount retailer, needed to cut costs. But rather than cutting wages or reducing staff, it asked its employees to contribute ideas. The result was that it managed to reduce prices by 10% and increased its market share from 15% in 2008 to 20% in 2012.

In other cases, competitors collaborate to improve their industrial ecosystems for customers. So it is should not be surprising that firms are increasingly investing in structures that are focused on ecosystems, such as Internet of Things Consortium, Partnership on AI and the Manufacturing Institutes. Again, power in an ecosystem resides at the center, not at the top, so to compete you have to connect.

Clearly, it could be argued that by investing in these partnerships, business are increasing shareholder value. However, to do so would be to essentially argue that investing in stakeholder ecosystems and pursuing shareholder value are equivalent, which reduces the debate to one of semantics rather than substance.

Manage For Mission, Not For Metrics

Perhaps one of the most interesting lines in the Business Roundtable statement was the assertion that “each of our individual companies serves its own corporate purpose,” because it acknowledges that the notion of purpose can’t be reduced to a single concept or metric.

Historically, the lines between industries were fairly clear-cut. Ford competed with GM and Chrysler. Later, foreign competition became more important, but the basic logic of the industry remained fairly stable: you produced cars and sold them to the public through a network of dealers.

Today, however, industry lines have blurred considerably. A company like Amazon competes with Walmart in retail, Microsoft, IBM and Google in cloud computing, and Netflix and Warner Media in entertainment. The company itself is much more than simply a bundle of operations competing in different value chains, but a platform for accessing a variety of ecosystems of talent, technology and information.

In much the same way, automobile manufacturers are making investments to transform themselves into mobility companies. To do so, they are building ecosystems made up of technology giants, startups and others. They are not seeking to “maximize bargaining power,” but rather to prepare for a future that hasn’t taken shape yet.

That’s why today, business leaders need to manage for mission, not for metrics. Building trustful relationships among a diverse set of stakeholders may not be as simple or as clear cut as “maximizing shareholder value,” but it’s increasing what profit-seeking businesses need to do to compete.

— Article courtesy of the Digital Tonto blog
— Image credit: Pixabay

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America is in Desperate Need of a Shared Purpose

The Racial Divide

The recent incidents involving Amy Cooper and George Floyd outraged people across the world. In the former, a white woman leveraged her sense of privilege to threaten a black man in the most despicable way. In the latter, a black man was senselessly murdered at the hands of a police officer, while his colleagues sat back and watched.

What was notable about both incidents is that they were filmed and that the subjects involved knew they were being filmed but proceeded with their behavior anyway. How many times have they acted similarly off camera? There’s no way of knowing, but given the air of confidence they had in their actions, it’s hard to believe it was the first time for either.

At the same time, life expectancy for the white working class is actually declining, mostly because of “deaths of despair” due to drugs, alcohol and suicide. For those struggling and who see their friends and families undergoing similar travails, assertions of “white privilege” fall hollow. In fact, the very idea of “white privilege” intensifies the feeling that they are under attack.

The racial divide in America is wide and encompasses gaps in economic circumstances as well as values and attitudes. It doesn’t show signs of closing anytime soon. Yet until it does it’s hard to see how we can move forward as a nation.

The Urban-Rural Divide

In addition to the racial divide in America, we have a stark urban-rural divide that seems to keep widening. While having some gap between city and country dwellers is quite common all over the world, in America that gap is almost uniquely vast and encompasses a number of political and economic forces.

Politically, the fact that each state has two senators gives rural states with small populations an advantage in determining federal policy. On the other hand, because capitals tend to be in cities, those who work in government tend to be more liberal than their rural counterparts. Voting data has long shown that the urban and suburban areas tend to vote Democrat and exurban and rural areas tend to prefer Republicans.

On the economic side, cities wield enormous power. Most major corporations are headquartered in urban areas and large industries tend to agglomerate around specific cities, such as finance in New York, entertainment in Los Angeles and technology in San Francisco. Some observers have also noted that, as housing costs in key cities rise they are beginning to hemorrhage mid and low skill workers who tend to be less educated.

Much like the racial divide, the urban-rural divide is heavily rooted in values and attitudes. While city dwellers often dismiss rural areas as “fly-over country,” those who live in rural areas feel disrespected and unrecognized. They often complain that their communities are being dictated to by people in other places who live other kinds of lives, which leaves them angrily seeking political redress.

The Demographic Divide

In addition to the racial and urban-rural divides, we are also beginning to see a massive generational shift. Over the next decade, baby-boomers, many of whom came of age during the Reagan revolution, will be replaced by millennials, whose experiences with the Great Recession, debilitating student loan debt and rising healthcare costs, have very different priorities.

The main drivers of the Baby Boomer’s influence have been its size and economic prosperity. In America alone, 76 million people were born in between 1946 and 1964, and they came of age in the prosperous years of the 1960s. These factors gave them unprecedented political and economic clout that continues to this day.

Yet now, Millennials, who are more diverse and focused on issues such as the environment and tolerance, are beginning to outnumber Baby Boomers. Much like in the 1960s, their increasing influence is driving trends in politics, the economy and the workplace and their values often put them in conflict with the baby boomers.

However, unlike the Baby Boomers, Millennials are coming of age in an era where prosperity seems to be waning. With Baby Boomers retiring and putting further strains on the economy, especially with regard to healthcare costs, tensions are on the rise

A Problem of Identity and Dignity

In 1989, standing on Kosovo Polje, in a ceremony commemorating the Battle of Kosovo, in which the Serbian army was annihilated by the Ottomans in 1389, Slobodan Milošević told his followers, “No one should dare to beat you again!” Since then, we have seen a wide array of leaders, from Vladimir Putin to Donald Trump, leverage our innate need for recognition and collective identity to whip us into a frenzy.

Amy Cooper threatened a black man because he refused to recognize her privilege and she immediately called the police, with whom she obviously felt a shared identity. The Tea Party was driven, in large part, by older Americans who felt that younger Americans, who they did not feel a shared identity with, wanted to “freeload” off the country they worked their lives to build.

We can expect that as long as these divisions remain, there will be politicians and others who will seek to exploit them for personal gain. If we were still a white, Christian country in a simpler world, things would be easier, but we would lose all of the incalculable benefits that come with diversity, including more dynamism, innovation and culture. Much like IBM in the 90s, we cannot move forward until we heal our internal divisions.

Nothing about a multi-ethnic, multicultural society is simple. Building anything worthwhile takes work and no small amount of pain. Still, we need to try harder. We need to rebuild our society, culture and values based on a new basis of shared purpose. Until we do that, nothing else will really matter.

— Article courtesy of the Digital Tonto blog
— Image credit: Pixabay

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Driving Change Forward Requires a Shared Purpose

Start with Shared Identity

When Lou Gerstner first arrived at IBM, the company was going bankrupt. He quickly identified the root of the problem: Infighting. “Units competed with each other, hid things from each other,” he would later write. Huge staffs spent countless hours debating and managing transfer pricing terms between IBM units instead of facilitating a seamless transfer of products to customers.”

The problem is a common one. General Stanley McChrystal experienced something similar in Iraq. As he described in Team of Teams, his forces were split into competing tribes, such as Navy SEALS, Army Special Forces, Night Stalker helicopter pilots, and others, each competing with everyone else for resources.

We naturally tend to form groups based on identity. For example, in a study of adults that were randomly assigned to “leopards” and “tigers,” fMRI studies noted hostility to outgroup members. Similar results were found in a study involving five-year-old children and even in infants. So, to a certain extent, tribalism is unavoidable.

It can also be positive. Under Gerstner, his employees continued to take pride in their unit, just as under McChrystal commando teams continued to build an esprit de corps. Yet those leaders, and President Kennedy as well, expanded those tribes to include a second, larger identity as IBMers, warriors in the fight against terrorism and as Americans, respectively.

Anchor Shared Identity with Shared Values

Shared identity is the first step to building a true sense of shared purpose, but without shared values shared identity is meaningless. We can, as in the study mentioned above, designate ourselves “leopards” or “tigers,” but that is a fairly meaningless distinction. It may be enough to generate hostility to outsiders, but not enough to create a genuine team dynamic.

In the 1950s there were a number of groups opposed to Apartheid in South Africa. Even though they shared common goals, they were unable to work together effectively. That began to change with the Congress of the People, a multi-racial gathering which produced a statement of shared values that came to be known as the Freedom Charter.

Nelson Mandela would later say that the Freedom Charter would have been very different if his organization, the African National Congress (ANC) had written it by themselves, but it wouldn’t have been nearly as powerful. It not only gave anti-Apartheid groups a basis for collective action, by being explicit values, it formed a foundation for those outside of South Africa, who shared the same values, to share the anti-Apartheid purpose.

Perhaps most importantly, the Freedom Charter imposed costs and constraints on the anti-Apartheid movement. By committing itself to a multi-racial movement the African National Congress lost some freedom of action. However, constraining itself in that way was in itself a powerful argument for the viability of a multi-racial society in South Africa.

One of the most powerful moments in our Transformation and Change Workshops is when people make the shift from differentiating values, such as the black nationalism that Mandela favored as a young man, to shared values, such as equal rights under the law that the Freedom Charter called for. Of course, you can be a black nationalist and also support equal rights, but it is through shared values that your change effort will grow.

Engaging in Shared Action

Shared identity and shared values are both essential elements of shared purpose, but they are still not sufficient. To create a true sense of a common mission, you need to instill bonds of trust and that can only be done through engaging in shared action. Consider a study done in the 1960s, called the Robbers Cave Experiment, which involved 22 boys of similar religious, racial and economic backgrounds invited to spend a few weeks at a summer camp.

In the first phase, they were separated into two groups of “Rattlers” and “Eagles” that had little contact with each other. As each group formed its own identity, they began to display hostility on the rare occasions when they were together. During the second phase, the two groups were given competitive tasks and tensions boiled over, with each group name calling, sabotaging each other’s efforts and violently attacking one another.

In the third phase, the researchers attempted to reduce tensions. At first, they merely brought them into friendly contact, with little effect. The boys just sneered at each other. However, when they were tricked into challenging tasks where they were forced to work together in order to be successful, the tenor changed quickly. By end of the camp the two groups had fallen into a friendly camaraderie.

In much the same way, President Kennedy’s Moonshot wasn’t some obscure project undertaken in a secret lab, but involved 400,000 people and was followed on TV by millions more. The Congress of the People wasn’t important just for the document that it produced, but because of the bonds forged in the process. General McChrystal didn’t just preach collaboration, but made it necessary by embedding his personnel in each other’s units.

Becoming a Transformational Leader

Times like these strain any organization. The Covid-19 crisis alone forces enterprises to change. Put racial and political tensions on top and you can quickly have a powder keg waiting to explode. On the other hand, much like the boys in the “Robbers Cave” experiment, common struggle can serve to build common bonds.

When President Kennedy gave his famous speech in 1962, the outlook didn’t look very bright. The launch of the Russian satellite Sputnik in 1957 had put America on its heels. Kennedy’s disastrously failed Bay of Pigs invasion was only compounded by his humiliation at the hands of Khrushchev in Vienna.

Yet instead of buckling under the pressure, Kennedy had the grit and imagination to conceive a new project that would “serve to organize and measure the best of our energies and skills.” He pledged that we would go to the moon before the decade was out and we did, putting America back on top of the world and imbuing the country with a sense of pride and ambition.

We can do the same. The Covid pandemic, while tragic, gives us the opportunity to reimagine healthcare and fix a broken system. The racial tensions that George Floyd’s murder exposed have the potential to help us build a new racial consciousness. Revolutions do not begin with a slogan, they begin with a cause.

That’s what makes transformational leaders different. Where others see calamity, they see potential for change.

— Article courtesy of the Digital Tonto blog
— Image credit: Unsplash

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Innovation Practices Need a Compelling Purpose

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Innovation Practices Need a Compelling Purpose

BMNT Editor’s note: This is the second in a weekly series that will explain the common beginner-steps needed to get an innovation practice off the ground or improve an existing innovation practice. Find our first post, explaining the goals of implementing a structure to guide innovation and training workers how to use it, here.

GUEST POST from Brian Miller

Private capital investors are clear about the purpose of their investments, and it’s written down in the form of a thesis or mandate. This thesis explains where they plan to invest and why. It’s used to attract capital to a fund and deploy it for a future return. Consider Not Boring Capital, a small multi-stage fund that invests in founders and companies executing on complex, non-obvious strategies aimed at huge visions.

Innovation vs Execution Government organizations seeking alignment between innovation and execution can borrow from this common practice in order to increase confidence in their investment decisions. Recall from the last post that innovation projects are not simply smaller versions of existing programs. Resources are first invested in validating a project (explore). Only after validation are significant investments made in deploying a new capability (exploit). Government leaders feel comfortable making investments in the former, but not the latter. The common risk management approach is simply avoidance, because the rewards of innovation projects seem distant and uncertain. This is magnified in the national security community, where lives are on the line and no-fail missions are prevalent.

A carefully constructed innovation thesis will help to manage this risk and focus limited time, energy, and resources. It is what key stakeholders rally around. Yet it must be detailed enough for leadership, key partners, and even skeptics to understand how developing a disciplined process – an Innovation Pipeline® – will address the significant challenges facing the organization. Above all, it helps to build consensus and commitment. Otherwise, capabilities that emerge from an innovation practice will become orphans, never to be adopted by the enterprise.

What an innovation thesis consists of

Like the private sector, a public sector innovation thesis defines where to invest and why. It helps to filter out “nice to have” projects from the “must have.” It consists of two major parts:

1. A unique perspective on where relevant fields are going and the sorts of challenges that lie ahead. For example:

Emerging surveillance technology and the evolution of tradecraft for an intelligence service
Leaps in healthcare delivery for the Department of Veterans Affairs
Advanced manufacturing for the Department of Commerce
Commercial space investments for the U.S. Space Force and NASA

2. The types of ideas the organization will (and will not) invest in, informed by their desirability, viability and feasibility.

Desirability Feasibility Viability

How to create one

Designing an innovation thesis takes four general steps, which can be accomplished in a single day with the right stakeholders and a trained facilitator.

1. Map the organization’s current “mission model”

The organization’s approach to satisfying customers and partners
The various ways it does so (e.g., capabilities, products, services)
The senior leaders, end-users, subject matter experts, saboteurs, and enablers whose buy-in and support is needed to see results (e.g., legal, contracts, policy, IT, security)

2. Map the key trends and consequential forces affecting the organization’s mission. For example:

Emerging technology
Budget forecasts
Policy development
Political shifts
Availability of key resources

3. Identify the gaps or misalignment between 1 and 2

4. Consider how to best fill them by changing the mission model (in theory) and what innovations must be realized to do so (in practice)

Output

Such an exercise will easily generate an artifact to communicate updated direction and guidance from senior leadership to the rest of the organization and its partners. It does not need to be anything more than a short memo or a succinct slide deck. All that is required is that it yields a clear idea of how the world is changing and how the organization intends to counter or take advantage of the momentum.

Next, a minimum viable team can begin to execute the strategy.

Image credits: BMNT

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Human-Centered Change and Innovation

Innovation, change and transformation thought leadership, lovingly curated by Braden Kelley

Tag Archives: purpose

The Shareholder Value Myth

The Principal-Agent Problem

From Value Chains To Ecosystems

Manage For Mission, Not For Metrics

America is in Desperate Need of a Shared Purpose

The Racial Divide

The Urban-Rural Divide

The Demographic Divide

A Problem of Identity and Dignity

Driving Change Forward Requires a Shared Purpose

Start with Shared Identity

Anchor Shared Identity with Shared Values

Engaging in Shared Action

Becoming a Transformational Leader

Innovation Practices Need a Compelling Purpose

What an innovation thesis consists of

How to create one

Output