Discovering The New Age Of Value Creation
CEOs of fast growing firms: Schmidt; Barra, Nadella, and Amin
For several centuries, businesses sought mainly to make money. But some 25 years ago, a different idea began spreading. 'What if,' some said, 'instead of aiming to make money, we set out to create value for our customers?' When they did that systematically, they found that customers responded positively and, to everyone's surprise, they were usually much more profitable. So why don't all firms commit to creating value for their customers?
The shift is key for many reasons:
The shift is still under way. We thus now live in two different, concurrent worlds. One world is still dominated by autocrats, sharks, and self-interested businesses who are doing what they can to extract profits for themselves and their associates at considerable cost to society.
The other world comprises businesses and many other kinds of organizations and individuals who are intent on creating value for others. The result here is an emerging Age of Value Creation.
The idea that businesses must be primarily self-interested has a long and difficult history. Self-interest in business was assumed by the founder of modern economics, Adam Smith, in Wealth Of Nations (1776). It was presumed by the father of 20th century management processes, Frederick Taylor, in The Principles of Scientific Management (1911).
It was explicitly pursued by the movement led by Nobel Laureate Milton Friedman and his colleagues to maximize shareholder value (1970 and beyond, even though the idea was eventually labeled by former CEO of GE, as 'the dumbest idea in the world.'
It was endorsed by the U.S. Business Round Table (1997), until that endorsement was declared politically unacceptable in 2019. Leading management journals still publish and praise articles about self-interested businesses focused on making profits for the benefit of the firm, its executives and its shareholders.
The management of self-interested corporations tends to be hierarchical, bureaucratic, mechanical, process-driven, inert, and inhuman, stifling creativity and innovation, and more. In the relatively stabler context of the 20th century, large self-interested firms made financial profits, even as staff engagement moved steadily lower and business returns gradually declined.
What has led to change? It wasn't a sudden moral epiphany on the part of business leaders. It was recognition by businesses that the world itself had changed. Thus the internet (and now AI) gave rise first, to firms, new possibilities for innovation, and then to customers, more choices, and finally to firms again, the potential of new business models that can generate exponential network effects. The old way of running things couldn't keep up. Smart executives saw they had to do something different.
While each firm is unique and uses its own language, the underlying management patterns have much in common. Thus Apple talks of a different 'culture'. Microsoft speaks about 'mindset', 'empathy' and 'values.' Amazon focuses on 'leadership principles' and 'works backward from the customer.' Some firms talk of 'mental models' and 'narratives.' The Agile Manifesto spoke of valuing 'individuals and interactions' more than 'processes and tools.' Despite the differences, they are all about putting people ahead of processes.
This new breed of firm generally uses subjective concepts to drive their objective business processes. These mindsets, goals, values, and narratives are the very things that traditional management dismissed as having only second importance. The result has been an upheaval in every aspect of business practices. It can be called a paradigm shift in management, although probably no more than 20% of public firms have yet made the transition.
The fastest growing firms have transformed almost every aspect of the enterprise so as to form an integrated, complex, multi-dimensional organism. These multiple but integrated changes require that everyone thinks, perceives, speaks, and acts differently from work in a traditional organization.
Methods, processes and tools don't disappear. But in these firms. it is the mindsets, values, and narratives that drive and transform the methods and processes, rather than vice versa. The result is a culture where people can see meaning in what they do.
Table 1: Self-interested Organizations and Value Creating Enterprises.
Summary of prevalent differences between self-interested organizations and value-creating ... More enterprises
This is not to suggest that all fast-growing firms do all these things all the time or that fast-growing firms are without flaws. All such firms need to make continued progress towards creating steadily more value for stakeholders. and avoid backsliding towards self-interest.
Understanding how these fast-growing firms are being managed is the first step for those firms that are still being managed by yesterday's methods and processes. Unless they begin making similar shifts, most will not survive, at least in their current form.
And read also:
How Creating Value For Others Has Become The Key To Business Success
Why Peter Drucker Got Customer Value Right
Table 2: Firms with a track record of sustained fast growth
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