Peter Drucker asserted that the purpose of business is to create and keep a customer. He was right at the time in offering previously inward-looking firms a more appropriate beacon. His dictum is, however, wrong for our time.
The assertion is insufficient in sustainability terms; ie, being concerned with the health and resilience of living systems such as organizations, society and the environment. A customer-centric outlook is too simplistic, simply failing to recognise complexity, and therefore at threat from business that has progressed beyond Drucker’s heuristic.
For the avoidance of doubt — a focus on creating and keeping a customer is no longer sufficient for continued business success, however you might define success.
We offer up an alternative meaning of business and defend it against some pertinent questions from an esteemed individual aligned entirely with Drucker’s perspective.
While academics grapple with such questions, the answers must leap from theory to practice to inform competitiveness and make work more rewarding for everyone involved.
For this very same reason we keep our justification here grounded in everyday terminology. The more accessible the expression of the potential here, the faster and broader the adoption.
Complex systems exhibit multiple interactions between many different components. They bridge the gap between the individual and the collective, and exhibit emergent behaviour characterised by a complicated mix of order and chaos.
Understanding of complexity remains nascent — too few recognise the complexity of nature let alone the nature of complexity. Understanding advanced with cybernetics research in the 1950s and Ashby’s law best summarises the organizational transformation required today, variety absorbs variety, paraphrased by Malik in the 1980s as only complexity can absorb complexity.
As we’ve asserted in a post differentiating complexity and complication:
Organizations may gain advantage by reducing the complication over which they have domain — and perhaps there’s a happy medium to be found — but they cannot simplify complexity beyond this, for that is the product of nature. We can only seek ways to navigate it more simply and more nimbly.
In their 2014 book sub-titled How to Manage Complexity without Getting Complicated, Morieux and Tollman conclude:
Some observers think increasing business complexity is the problem. We disagree. We believe that while complexity brings immense challenges, it also offers a tremendous opportunity for companies. Increasingly, the winners in today’s business environment are those companies that know how to leverage complexity and exploit it to creative advantage.
We agree, obviously, but agreement matters not. Business has no choice. Unlike complication to a certain extent, complexity is unavoidable. The winners will compete with the appropriate blend of human organization and technology, sensing and sense-making in real-time and responding with agility.
What then is the purpose of business?
Business exists to establish and drive mutual value creation.
As I wrote in Attenzi — a social business story …
Mutual, sustainable value is generated within this network, within this system, and no one individual or category of individuals can do it without others playing their part — the right mix of others at the right time. It’s a natural law. It’s all in the mix. Ignore this, or indeed attempt to act otherwise, and you wither — particularly when facing off competition that does get it.
Note that value is not restricted to the narrow monetary sense. One must ‘see’ value from business however one perceives it, irrespective of one’s role and contribution.
It is perhaps self-evident. After all, how long do you tend to participate in organization personally when the value you see is less than that you perceive elsewhere?
A challenge via the Drucker Forum
When we first aired our take on the meaning of business, we were drawn into discussion with author and former World Bank director Steve Denning. He presents an argument founded on Drucker’s definition of business in his Drucker Forum article, How The Internet Is Forcing The Humanization Of Work.
Denning noted his problem with our definition of the meaning of business — “it doesn’t tell me what anyone has to do.” In contrast, he asserts that delighting customers is a crystal clear goal, and that since power has shifted from seller to buyer, ‘delighting customers’ sets out the right priorities for the firm to survive.
We share Denning’s optimism that we may be on the cusp of humanizing work, but we cannot subscribe to his rationale.
Notably Denning doesn’t waste too many words taking down the false idol of shareholder value — elaboration on that topic would simply be preaching to the converted on the Drucker Forum. He points out that playing to the motivations of one single stakeholder group, shareholders, is never going to be motivating for another stakeholder group, employees. And he is on the money in at least partially attributing a lack of trust and poor employee engagement to this dynamic.
He quotes Drucker (from Management: Tasks, Responsibilities and Practices, Heinemann, 1973):
Profits and share price increases are the result, not the goal of a firm’s activities.
Yet having concluded that crowning one particular stakeholder group was a mistake, we should question the simple crowning of another. In my presentation The Future of Organization (slide 23), I list three heuristics all of which are fundamentally flawed in their isolating simplicity:
- the customer is king
- it’s all about shareholder value
- our people are our greatest asset.
It’s not unusual to hear any one CEO avow each of these. One could be critical; how can a leader confess to three number one priorities?! Yet we would rather CEOs subscribe to all three than just one if it means they appreciate each can only stand in balance with the others.
The “problem with ‘establish and drive mutual value creation’ is that it doesn’t tell me what anyone has to do.”
Yes. That’s right. The system of organization, its constituent systems and the systems of which it is part, are complex and simple rules of thumb close down viable opportunities for appropriate adaptive response. The seed of an opportunity to establish mutual value may come from many directions and will likely be subject to many interplaying influences.
We’re not saying that creating and keeping a customer isn’t relevant, of course it is. We are saying that finding other people to work with, with complementary knowledge and skills, is also relevant. Finding the right investors is relevant. Creating and growing sustainable organization (as in organizing) is relevant. Understanding and working with the needs and within the constraints of our planet is relevant. Identifying and forging relationships with other organizations for mutual value is relevant. And the balance and interplay of these relevances is undoubtedly complex.
In shaping a view of work based on Drucker’s assertion, Denning writes that:
… the Internet is now forcing change, by … shifting power in the marketplace from seller to buyer. Customers, who have access to reliable information about the available choices and a capacity to interact with other customers, are now collectively in charge.
Yet isn’t it more accurate to talk about Internet access in general? Customer is but one role we play. Every other role involved in establishing and driving mutual value in the business context gets Internet access too.
Our argument pivots on complexity. No one guiding star exists for navigating any complex adaptive system. Complexity is a complicated mix of order and chaos, and only complexity can absorb complexity — simple heuristics cannot. The sooner we recognise the fact, the sooner we might begin to humanize business for everyone involved regardless of the role they happen to be playing. Euler Partners exists to help organizations work better, and navigating complexity is core to our work.
Denning sticks to his guns. “We may be talking about different things: theoretical purpose of a firm and how to run it.”
He points us to his Harvard Business Review article, Making Management as Simple as Frisbee, related again to the Drucker Forum, in which he argues that the heuristics / rules of thumb by which we run business are in need of updating. Moreover, Denning contends that our definition of the meaning of business, rephrased as “satisfying all the stakeholders”, doesn’t work in his experience. “It isn’t a viable heuristic to run a firm.”
So-called garbage can firms.
In his Forbes article, Is The Tyranny Of Shareholder Value Finally Ending?, Denning quotes a trio of academics — Cohen, March and Olsen — who in 1972 explained:
that pursuing multiple goals caused organizations to resemble “garbage cans” with three main characteristics. First “the organization operates on the basis of a variety of inconsistent and ill-defined preferences.” Second, the organization’s “own processes are not understood by its members.” Third, “the audiences and decision makers for any particular kind of decision change capriciously.”
As a result, “choices are made only when the shifting combinations of problems, solutions, and decision makers happen to make action possible.”
Denning equates our definition of the purpose of business with stakeholder capitalism, and in his article he warns of a “risk of a return to garbage can organizations”:
With its balancing of the interests of multiple stakeholders, stakeholder capitalism is hard to distinguish from managerial capitalism of the mid 20th Century. Balancing multiple interests may work in the context of a board of directors that has the time and expertise to spend days or weeks, say, on evaluating a single multi-billion decision on an acquisition.
But as a guiding principle for driving growth and innovation throughout a large organization, it’s impractical. It risks taking us back to the world of garbage can organizations …
In this article (2003) by Professor H. Jeff Smith in the MIT Sloan Management Review, stakeholder theory is defined as:
placing a duty on managers to balance the shareholders’ financial interests against the interests of other stakeholders such as employees, customers and the local community, even if it reduces shareholder returns.
In Managing the Extended Enterprise: The New Stakeholder View (2002) Post, Preston and Sachs present:
a new “stakeholder view” of the firm that holds that stakeholder relationships are the ultimate sources of the firm’s wealth-creating capacity. According to this view, long-term business success requires a firm to develop and integrate relationships with its multiple stakeholders within a comprehensive management strategy.
And Robert Reich reported (while US Secretary of Labor under Bill Clinton) that in 1951 Frank Abrams, chairman of Standard Oil of New Jersey, proclaimed:
The job of management is to maintain an equitable and working balance among the claims of the various directly interested groups… stockholders, employees, customers and the public at large.
Emergent stakeholder theory
We think about stakeholder capitalism as deliberate, ie, the typical top-down formulation of strategy to “satisfy all the stakeholders”. Just note the actors referenced in the four quotes above: board of directors, managers, the firm ie, its management, and once more management. Indeed Denning infers that this could be its only practical modus operandi.
However, as our prior references to complexity betray, our thoughts are framed in terms of the artful blend of the deliberate and emergent, and weighted towards the emergent if only because we suspect most firms will need to spend more time towards that end of the spectrum. Emergent strategy (you might say bottom-up, responsive) is requisite for sustainable business. To influence better, be influenced better. Such adaptive capability may be considered a competitive advantage today; tomorrow it will be a qualifier.
(Drucker recognised the need for adaptive strategy way back in 1969 in The Age of Discontinuity: Guidelines to Our Changing Society. Lest you think we think otherwise, given our contemporary review here of one of his assertions, he was a genius.)
Systems such as sociocracy and holacracy, and the responsive organization manifesto, emphasise the why and who over the what and how, ie:
Rather than controlling through process and hierarchy, you achieve better results by inspiring and empowering people at the edges to pursue the work as they see fit — strategically, structurally, and tactically.
As retold in Attenzi, one particular factory general manager really disliked any contentment with employees leaving their brains at the door only to pick them up on the way home, metaphorically speaking of course. He wasn’t having a go at the people, but rather any organization that accepted or indeed systematized this state of affairs. These people form vibrant local communities, towns and cities. They deal with deep emotional issues with friends and families, buy complex financial products and, in short, continuously balance everything life throws at them from one day to the next.
It’s in this light that we shrug off Denning’s insistence that we only need the customer-centric heuristic to guide our everyday actions at work lest (our words not his) we be too stupid to understand the balance of things. We’d rather sustain our faith that people can explore the options and make hard choices, and that the only organizational guidance we need is agreement on the values by which we operate, agreement on the organization’s purpose and organizing principles, and a systematic sensitivity to the impact of our behaviour, decisions and actions (see The quantified self, the quantified organization, and the organized self).
Emerging organizing principles and the technological transformation of sensitivity are fundamental determinants in resigning Drucker’s definition of business purpose to history. And so is the humanization of work, in stark contrast to Denning’s argument that customer-centricity is the path to it.
Intelligence is the ability to acquire and apply knowledge and skills, including but far from limited to the acquisition and application of heuristics. Anything that purports to support the humanization of work must surely encompass the freedom to express one’s intelligence. The freedom to make hard choices.
Hard choices — a godsend
From How to make hard choices, a 2014 TED Talk by Ruth Chang:
Imagine a world in which every choice you face is an easy choice, that is, there’s always a best alternative. If there’s a best alternative, then that’s the one you should choose, because part of being rational is doing the better thing rather than the worse thing, choosing what you have most reason to choose. …
A world full of only easy choices would enslave us to reasons. … (However) when alternatives are on a par, the reasons given to us, the ones that determine whether we’re making a mistake, are silent as to what to do. It’s here, in the space of hard choices, that we get to exercise our normative power, the power to create reasons for yourself …
When we choose between options that are on a par, we can do something really rather remarkable. We can put our very selves behind an option. … This response in hard choices is a rational response, but it’s not dictated by reasons given to us. Rather, it’s supported by reasons created by us. When we create reasons for ourselves to become this kind of person rather than that, we wholeheartedly become the people that we are. You might say that we become the authors of our own lives.
… Far from being sources of agony and dread, hard choices are precious opportunities for us to celebrate what is special about the human condition … And that’s why hard choices are not a curse but a godsend.
Is it too great a leap to presume that such freedom at work might correlate to greater employee engagement? And perhaps then better outcomes for all stakeholders including those precious customers?
Time, or more precisely the evolutionary process over time, will tell which definition of the purpose of business makes most sense this century.
Prior to that conclusion, to subscribe to “Business exists to establish and drive mutual value creation” one must also become adept at the practice of emergent strategy and willing to experiment with new forms of organization over command-and-control hierarchy. Sociocratic. Holarchic. Connected. Responsive. Wirearchical. Teal.
Perhaps this purpose may be described as emergent stakeholder theory, both normatively and pragmatically distinct from deliberate stakeholder theory, and naturally averse to garbage!
Organizations are dynamic not static. They don’t so much exist as transmute, continuously. Emergent stakeholder theory in practice might be explained by the same dynamics that finds self-interest in cooperative evolution, or you might invoke some Kantian theory of beneficent duty. Regardless, we suspect that the ability to effectively address challenges to sustainability demands the collective intelligence integral to emergent stakeholder theory.
Still not convinced?
Well consider the current and rapid erosion of the frictions identified by Coase in explaining the very existence of the firm. It is now conceivable that the firm as we know it may become a minority form of organization, and the rate of this self-organization can be expected to increase as those frictions decrease. Now try managing with top-down heuristics prioritising one stakeholder group.
If you don’t subscribe to this work-in-progress rationale for emergent stakeholder theory then you’ll continue to be guided by the totem of customer-centricity and to the purpose of creating and keeping a customer. At least, that is, until each stakeholder in your business, and quite possibly the customers themselves, see something more attractive in the mutual value creation camp.
As we pointed out earlier:
After all, how long do you tend to participate in organization personally when the value you see is less than that you perceive elsewhere?