Posts Tagged ‘Real Market’

Why are we in the business?

August 30th, 2012

Someone said it brilliantly, what keeps us apart from all our competition is not what we do but why we do it.  The “why” has everything to do with our value as a company.

In his book, “Fixing the Game”, author Roger Martin talked about how businesses have gotten confused about their priorities and values as a result of over-practicing Capitalism

For decades, we have been indoctrinated to believe that our business goal is to maximize shareholder return.  This becomes a short-sighted game we play.

Actually if we put customers first, we will be able to make our shareholders happy.  But often we get our mission backwards.

Martin described two kinds of markets:  Real and Expectation.  In the real market, businesses strive to find a way to satisfy customers’ needs, solve their problems and delight the customers with solutions.  Real market represents our real performance.  When customers are happy, they are willing to pay for the goods and services.  As a result, businesses will grow and be able to share their profit with their shareholders as a reward for their investment in the business.

In the expectation market, shareholders buy shares with an expectation that the share price will go up.  Often, their expectation does not take into consideration the business cycle, which can cause the ups and downs of stock performance.  So in order to make shareholders happy, businesses need to constantly show that they can offer the kind of returns that are expected.  To do this, they end up cutting expenditure in areas such as capacity building that will hurt the business in the long run.

Peter Drucker said, “There is only one valid definition of a business’ purpose:  To create a customer.

In Martin’s book, he cited stories about two CEOs who made very different decisions.  In 2010, after the BP oil spill crisis in the Gulf of Mexico hit the news, its CEO Tony Hayward took quite a long time to finally apologize for and acknowledge the severity of the disaster as a result of the blown-out oil well.  By that time, almost 5 million barrels of oil had been released into the Gulf.  The damage was done on several fronts.  What was his reason for the delay?  Perhaps by downplaying the problem, he intended to minimize the impact on BP’s share price.  What was the result?  It cost so much more money not just to clean up but also pay for the multiple lawsuits that followed.  Human and environment tolls were beyond calculation.  What did it do to the morale of the company?  What did it do to its reputation among customers?  At the end, was he able to make the shareholders happy?  Was he able to keep his own job?

Comparing to BP, Martin pointed out a different case where Johnson & Johnson had a Tylenol poison crisis in 1982.  CEO James Burke immediately ordered to halt all Tylenol production and advertising, distributed warnings to hospitals and announced a nationwide recall.  He made a very difficult choice in facing this crisis head-on.  In the short run, it cost Johnson & Johnson quite a bit of money to recall its product and their shares did suffer.  However, from this experience came their temper-proof packaging that has since become an industry standard and won the loyalty from the healthcare industry and its customers.  Their share price came back higher than before.

Martin asked: What was the difference between these two leaders?  You can say it has something to do with their personal characters.  But looking closely we noticed that the two leaders were merely carrying out their companies’ mission.  BP is in the business to be competitive and performance-driven that generally is interpreted as protecting shareholder value.   J&J believes their first responsibility is to the doctors, nurses, patients, mothers and fathers who use their products and services.  In a word, they put their customers first.  On the surface, both missions are legitimate.  But in practice, their priority can either uphold or compromise the company and its leaders’ value and integrity.

Being overly concerned with shareholders’ interest, leaders and companies might try too hard to appease the stock analysts.  They might cut corners and withhold spending on capital investment for research or capacity building for the long run just so that they can make their profit look good for the next quarter.

On top of it, executives are compensated by stock options.  If they can show profit, their own portfolio will look better too.  This has very little to do with satisfying customers’ needs.  When leaders try too hard to make Wall Street happy and in turn fatten their own pockets, they run the risk of sacrificing their personal authenticity.   Their tenure maybe short but they get paid well on the way out.  Everytime top leaders make a decision, it impact the people at the bottom.  Imagine turning the center of the wheel just an inch, the spokes that are on the far outside of the wheel will have to move a few feet just to keep up.  When leaders make a wrong choice, the “rank and file” will suffer greatly.

Then we have the hedge fund crowd that is there to gamble on the up and down of the stock market.  Sometime they even create artificial volatility just to profit from it. When the real market gets hijacked by the expectation market, it is like professional athletes playing for the bookies.  Where is the integrity?  Where is the value?

The United States has had 11 economic crashes since WWII.  These economic meltdowns came more frequently and more deeply as the years went by. Why is it?  All the government regulations and safety measures have not prevented these disasters.  Out of many complicated reasons, one has to do with the fundamental agenda of many businesses.  If we are here to make money for our shareholders by any means necessary, we might decide to withhold spending on upgrading the equipment, hiring more people or training and developing more talents, so that in the short run, our company value looks really good for Wall Street.  At the extreme, some leaders and companies even fixed their books or used illegal accounting practice to make their numbers look good.  The underbelly of the extreme capitalism is the moral decay.

In the last few decades, many smart people chose careers on Wall Street because they felt they could make much more money and faster than working in a field of building something.  But how do you feel by just manipulating the money game? Did you contribute to the real performance of the market?  Did you make a difference for the consumers?  Did you do any good for mankind?  Did you build anything? Did you save any lives?  Is money the only measurement you have for your hard work? Is there any soul left in this game of money?

When a business loses the true meaning of its mission, the customers will experience the lack of care for their needs.  The employees will detect the hypocrisy in the espoused mission and lose their faith and commitment.  This game will not sustain itself.  Eventually the shareholders will leave you too.

We need authenticity in our leadership and our corporate culture. When we put in an honest day’s work improving people’s lives with our products and services, we feel whole and complete.  We feel proud to be working.  When a company is doing the right thing by really trying to make a difference for the people they are serving, then the company is aligned with its authenticity.

The truth is:  If businesses focus on making sure they provide the best value to their customers, they will have happy employees who are willing to give their best to make sure the company continues to innovate and turn out the next generation of products that will keep their customers happy.  By improving its performance in the real market, they will reward their shareholders with a decent return on their investment.

Leaders are flesh and blood human beings just like the rest of us.  So, the question is:  Are we courageous and do we have enough honor to stand up and do the right thing even if it will cause pain in the short run?  Are we willing to put our personal integrity on the line?

Right now, it seems that many leaders in politics and business have lost their value compass.  We all have been talking about the problems of working for short-term gains.  Our culture has been measuring its progress in three months increments for years.  Just knowing this reality does not make us shift to long term thinking and actions. There seems to be real shortage of courage to reform the way we run a business or our country.

Most of us who go to work just want to contribute our ability, make a difference and raise a family.  However, when we have a small percentage of people who play the zero-sum game and win big while the rest of us watch our life’s saving dwindle and end up having nothing to show for it when we retire.  What kind of world are we living in?

I don’t believe in the Darwin theory of “survival of the fittest”.  I believe we human beings should have more compassion than animals.  And even animals take care of their own kind.  When did the world become obsessed with making money only?  When did we measure ourselves only by the dollar amount we accumulate?

It does not matter who our next president will be, this capitalist system on steroids cannot continue without some calamitous consequences.

 

 

Celia Young helps her clients reconnect with their true purpose to be in the business and restore integrity for sustainable business success.