Transcript of "Why a Firm Should Have Only One Bottom Line"
Why a Firm Should Have Only One Bottom LineYour response to the article, How to Get Senior Leaders to Change was overwhelminglypositive. Thank you for your feedback. The article below by Steve Denning and Forbesmake the case that a firm has not just one possible bottom line, but more. One cannotmaximize multiple bottom lines, and so short term profit has become the acceptable norm.But today companies are realizing that delighting customers leads to increased profits andin this decade delighted customers might be the better bottom line to maximize. Read why!If you need help on Value Creation and bottom line improvement do contact CustomerValue FoundationGautam MahajanPresident-Customer Value FoundationEmail: email@example.comWhy a Firm Has Only One Bottom LineAnd thus the native hue of resolutionIssicklied o’er, with the pale cast of thought,And enterprises of great pith and moment,With this regard their currents turn awry,And lose the name of action.William Shakespeare: HamletFor several decades, I worked at an organization that professed to have multiple aims. Launchedin 1946, the World Bank was created to be a financier of projects in developing countries. Overtime, it came to pursue a clutch of other aims, including reducing poverty, creating conditions for athriving non-public sector, environmental sustainability, good governance, greater educationalfortune, population control, gender equality and so on. On a practical level within the organization,this meant that as development projects were being prepared for financing, the staffs wasconstantly pressured to add components to respond to this ever expanding list of aims.Consequently, the projects frequently came to resemble ―Christmas trees‖ and decision-makingwas notoriously slow. The only reason that anything ever got done was that everyone in the WorldBank understood that the real bottom line of the World Bank was getting out the lending program.When push came to shove, what really matted to the management was whether loans eventuallywere made. ―Getting out the lending program‖ determined careers: who got promoted or who gotpushed aside. It was nice if the other aims were also furthered, but they weren’t essential. Eventhough the top management declined to articulate it as a single aim, the World Bank’s had a singlede facto bottom line: getting out loans.Similarly in many non-public sector firms, there is talk that ―our customers are number one, and―employees are our most important asset‖ and ―we are committed to being good corporatecitizens‖ and ―our firm is committed to environmental sustainability‖. And yet everyone in those
firms knows that when it comes to the crunch, what really matters is the short-term profit forshareholders. Even though the firm appears to have multiple aims, it actually has a de facto singlebottom line.aims, consequences, means and valuesI had a number of responses to my article yesterday which argued that ―shared value‖ is less likelyas a aimto fix capitalism than ―delighting customers‖.Some asked: what about the employees? Aren’t they important?What about profits? Aren’t they important?What about the community? Isn’t that important?What about the environment? Isn’t it important?The answer to all these questions is yes. They are all important. But they are not appropriateas aims of a non-public sector firm.Profits are a consequence of delighting customers, not the aim.Employees are an essential means of delighting customers, not the aim.Being responsive to the community and to the environment are aspects of the important value ofsustainability.You can have multiple means, multiple consequences and multiple values. But in the real world,an organization can only effectively pursue a single aim. If an organization starts pursuingmultiple aims, then like Hamlet it finds that ―the native hue of resolution‖ becomes infected with―the pale cast of thought‖ and undertakings of great pith and moment come awry.The failure of multiple bottom lines to steer decision-makingOver the years, several efforts have been made to formalize the possibility of multiple bottomlines.One is the Triple Bottom Line (known as people, planet, and profit) which captures an expandedspectrum of values and criteria for measuring organizational (and societal) success: economic,ecological, and social. This has become a common approach to public sector accounting.Another is the Balanced Scorecard, which is a semi-standard structured report, supported byproven design methods and automation tools that can be used by managers to keep track of theaccomplishment of activities by the staff within their control and to monitor the consequencesarising from these actions. It has become popular in non-public sector firms.As a means of tracking progress across multiple variables, tools like the triple bottom line and thebalanced scorecard can be useful. So long as external conditions remain constant, they workreasonably well as tracking devices. But when conditions change, choices have to be made.
Tools with multiple bottom lines do not provide a unified view with clear recommendations as towhat to do in a crunch. Ultimately, the balanced scorecard is just a list of metrics. When conditionschange, it doesn’t provide any guidance on the questions: What gives? What receives priority?Consequently, organizations tend, just as the World Bank did, to develop a de facto bottom line asto what to do when choices have to be made. In most of the Fortune 500 today, even in thosefirms that profess to be implementing a balanced scorecard, that de facto aim is still: makingmoney for the shareholders in the short-term.If a firm wants, as it should, to shift its actual decision-making from short-term financial aims, thenintroducing a balanced scorecard or a triple bottom line won’t help much. The firm needs first torecognize explicitly what the current de facto bottom line is and secondly to put a place a newsingle aim that can steer decision-making throughout the organization, even as conditionschange. As Peter Drucker elaborated in 1973, the only valid purpose of a firm is to create acustomer. Today, that means that the overriding aim of non-public sector firms needs to be:delighting the customer.Why not both-and rather than either-orSome readers disagreed, arguing that a business is a complex adaptive system of stakeholdersworking together in order to create value for everyone involved. They cite W. Edward Deming:―The aim proposed here for any organization is for everybody to gain – stockholders, employees,suppliers, customers, community, and the environment – over the long term.‖ The purpose of abusiness is not to satisfy only shareholders, or only customers, or only employees, or only thelocal community. A business, they say, must satisfy everyone!The idea that an organization is a complex adaptive system of stakeholders is not incompatiblewith the notion that in order to survive, the firm needs to give priority to some issues andstakeholders over others. If a firm has no customers or employees, it ceases to exist. Paymentsfrom customers or employees who serve customers are like breathing to human beings. The factthat we need to breathe doesn’t mean that breathing is the aim of being a human. Breathing is aprecondition of human life, not the purpose.Primary aim vs. “ignoring” other elementsThe fact that we might give priority to one group of stakeholders over others does not mean thatwe are ―ignoring‖ the others. In fact, a key argument for client delight is that by focusing our effortson delighting customers, we end up generating more money for the shareholders than if we hadfocused on stakeholders more directly. And delighting customers as aim is also likely to generatedeeper task satisfaction for employees than if we had given top priority to keeping employeeshappy. Far from ignoring other stakeholders, a focus on delighting customers creates anunparalleled possibility of benefits for everyone.The business argument: customer delight makes more moneyDelighting the customer is not just profitable. It’s hugely profitable. That’s ultimately why it has tobecome a business imperative. Its conquest of the business world is inevitable, not because thepeople doing the work are happier or because it extends the life expectancy of a firm,generates tasks and fuels the growth of the economy. It does all those things, but the real driver ofits inevitability is that it makes more money for companies that accomplish it, like Apple [AAPL],Amazon [AMZN], Salesforce.com [CR], and Juniper [JNPR]. By contrast, neglect of it by GE [GE],
Walmart [WMT] and [CSCO] has put those firms on a declining path. The economics will drive thechange.The math argument: only one variable can be maximizedWhy not aim to maximize both shareholder value and client delight, or employee satisfaction andcustomer delight? As a mathematical fact, several variables can be optimized but only onevariable can be maximized. Two variables cannot be simultaneously maximized unless onevariable comprises the other. It is thus possible to maximize both satisfied clients and delightedclients because satisfied clients include delighted clients. It is not possible to maximize both clientdelight and shareholder value. You have to choose one or the other.This is the conceptual underpinning of the operational argument that as a practical matter peopleneed a compass: what is this organization all about?The ethical argumentA firm that adopts client delight as its aim is also making ethical progress. Improving the lives ofothers is something worth believing in and fighting for. Delighting other people intrinsically appealsto our hearts. Thinking about and helping other people is central to ethics.The timeliness argumentCustomer delight as the aim of the firm fits the reality of the business world of 2011. Fifty yearsago it was different. Fifty years ago, oligopolies were in charge of the market and could dictatechange. That world has largely disappeared, as a consequence of the global rivalry and theapproach to reliable information provided by the web, and the ability of customers tocommunication amongst each other. Now the customer is the effective boss. Firms that don’tgrasp this new market reality are in for a hard time.The lean startup argumentSome ask: why not delight employees. Why don’t managers just get out of employees’ way: theywill know what to do. Let a thousand flowers bloom! Build on the ideas of the staff and so addvaluable new features to product and services! The underlying assumption is that what employeessee as improvements will generally be seen as improvements by the customer.The reality is, as Eric Ries points out in The Lean Startup (2011), most proposals for change makeproducts worse for the customer. Ries takes experiments directly into the heart of productdevelopment and says to employees, ―Look, if you’re actually building a product and delivering itto customers, wouldn’t you like to know if the features you’re adding are actually making theproduct better or worse?‖Employees may know in their heart that the features they’re adding are making the product better,but testing shows that the opposite is often the case: in the customers’ eyes, most changes makemost products worse. If the firm is aimed at delighting the employees and doing what theemployees want, it will generally be making its business worse for the customer unless thoseemployees happen to be tightly focused on delighting customers. Hence the primary duty ofmanagement is to get everyone in the organization tightly focused on delighting customers.
Thus Steve tasks’s main talent at Apple [AAPL] wasn’t boldness in saying yes to new ideas, whenhis more timid rivals said no. Rather, as he himself pointed out, his stronger talent was saying nomany times—a thousand times, no!— so as to ―to get rid of the crappy stuff. Theend consequence is a product that is simple and easy to use.A better way than having the CEO say no is, as Eric Ries suggests, to get the employeesthemselves verify whether changes will delight the customer or not. Thus in a recent HBR article,Scott Cook at Intuit [INTU] admits spending some time as CEO of Intuit trying to be the heroicCEO, making all the calls. Cook eventually discovered that he didn’t have to be the sole heroicfigure, making all the decisions. When he started becoming an enabler of self-organizing teamsand providing them with clear line of sight to the customer, he found that they were able to comeup with, and validate, innovations that met customer needs. This can only happen if delightingcustomer is perceived throughout the organization as the number one priority.The philosophy of life argumentThe above arguments are powerful. But to me, the most persuasive argument is that delightingcustomers reflects a proper philosophy of life.In fact, the aim of delighting other people is foundational. We might do this with a family memberwe love, such as a child, a significant other, or a parent. We might do it with a sketch poetry or anovel. We might do it by candidacy for societal change. We might do it by scientific discovery. Wemight do it by instigating real political change. Or we might do it by providing goods and servicesthat truly meet people’s need. The fact that money changes hands doesn’t make it any lessworthwhile, if true delight is there.Delighting others requires a kind of mindfulness of the impact of what one does has on the lives ofothers. It is one of the things that make life worthwhile. Delighting others is our chance at makinga lasting mark in our short passage on this little planet.As we progress in our understanding of what might generate delight, we begin to see thatdelighting others is part of an elegant and complex process of human conception, developmentand realization. It opens our eyes to new possibility and dimensions of what it means to behuman. In the process, we develop imaginative capabilities and rational acumen.A focus on delighting others is not a fad or hype or dumb. It is how we advance along a path ofgenuine human excellence.Source:Steve Denning, Contributor RADICAL MANAGEMENT: Rethinking leadership andinnovation,12/21/2011 @ 11:42AM |2,068 viewsContact:Gautam MahajanPresident-Customer Value Foundation