The Nature of Business

Redesigning for Resilience

By Giles Hutchins

Green Books Ltd

Copyright © 2012 Giles Hutchins
All rights reserved.
ISBN: 978-0-85784-048-6

Contents

Title Page,
Dedication,
Acknowledgements,
Preface,
Introduction,
Module One: Transformational times call for transformational change,
Module Two: Nature as teacher,
Module Three: Firm of the future,
Module Four: Sustainability and the firm of the future,
Module Five: Human nature and nurture,
Module Six: Catalysts for transformation,
Module Seven: Techniques for transformation,
Module Eight: Inspiration for transformation,
Module Nine: Conclusions,
Notes,
Further reading,
Index,
Copyright,

CHAPTER 1

Transformational times call for transformational change

At times of great winds, some build bunkers, while others build windmills. Ancient Chinese proverb

Executive summary

* Business has a major impact on all spheres of life.

* Business behaviour is much affected by the prevailing business paradigm, which is still being reinforced today by publications and management education.

* We do not need to be bound by mindsets and mentalities about business that are no longer fit for purpose.

* A more balanced, interconnected understanding of business aids positive adaptation in an increasingly volatile business environment.

* Business can deliver value for itself while benefiting society and the environment; this is good business sense.

* Each and every one of us in business has the potential to be a force for good, so helping ourselves and our organisations to survive and thrive.

Business of today

Since the Second World War, the West has witnessed unprecedented economic growth. Emerging economies too have followed suit, some now ranked as the top economic powers of the world. Industrialisation, technological advancement, economies of scale and increasingly efficient approaches to profit maximisation have led to what we see today – the good and the not so good.

We live in a world of paradoxes. While the drive for economic growth is often rooted in a desire to improve the well-being of the stakeholders that the organisation or economy seeks to serve, there have been winners and losers. There have been great benefits and also great costs.

The currently prevailing view of the purpose of business is this: to provide goods and services to meet the perceived needs of the customer in order to generate profit for shareholders. The more the customer consumes, the better, as more goods and services are sold, and hence more profit gained. This is what we refer to today as ‘consumerism’. Consumption-based growth has become the driving force of economic growth, which in turn provides employment, providing income for consumers to consume more, in turn fuelling more economic growth. This prevailing business view is incomplete in at least two aspects.

First, business is primarily focused on providing ever more goods and services to generate more profit. This profit is determined by an economic value (and cost), disconnected from social and environmental value (and cost), incurred through sourcing, production and consumption. There are a number of ‘externalities’ that are not incorporated within the economic value and cost (the organisation’s balance sheet does not include a wide range of social and environmental costs and benefits). In other words, social and environmental value (the benefits and costs to all stakeholders) are not included within the current prevailing measurement of economic value. The consumer’s price paid does not reflect true, complete value. Nor do the producer’s costs incurred reflect true, complete cost. Hence, the prevailing approach to value, cost and profit is incomplete.

Second, the goal of business is to satisfy the needs of the customer. In so doing, the clever business mind seeks to encourage the desires of the customer so that their needs best align to the products and services of that business. This would seem sensible business. Hence, business invests in marketing, communications, media and advertising to help generate a demand for the goods and services it produces. In turn, the needs of the customer (the human) become influenced and encouraged by business. Does it matter if the influenced needs of the human no longer contribute to their present and future well-being? If the human consumes the product or service due to a perceived need and feels satisfied for a short period, then is it good business? Alas, we develop an economy that encourages human needs that are not always (perhaps seldom) aligned to the real well-being of the human. More sobering is that this can affect social and cultural norms by encouraging the pursuit of perceived needs and desires over the pursuit of betterment through values, character and wisdom. Hence, the prevailing approach to need (and well-being) is incomplete.

The vast majority of global human ingenuity is currently focused on generating incomplete value for incomplete needs. This incompleteness, I would argue, greatly contributes to the amount of trouble and strife in the world today.

It is also worth noting here the role of money in our current paradigm. Money is an excellent transaction medium. Money as a transaction medium provides ‘I owe you’ promises to pay between parties. Bizarrely, lending institutions (banks) have the right to issue new money (new ‘promises to pay’) based on the debt facility (which can be up to 90 per cent of the original ‘promise to pay’). This is known as fractional reserve banking; it is the most common form of banking in the world today, ensuring the broad money supply of most countries is far larger than the amount of base money created by each country’s central bank. And so money creates debt, which creates new money, which in turn creates more debt and more new money, and so on. The more money there is, the more debt there is. Lending institutions have been creating debt and money in a way that is no longer connected to value creation, which of course undermines the value of money, which in turn undermines the health of the economy, as it relies on it for value exchange.

As economies struggle, many look to stimulate more consumption – cheaper credit is the panacea. Encouraging more of the same is flawed. Bold decisions are needed that explore how long-lasting, wholesome economic activity can move us beyond the current conundrum. Many senior economists are patently aware that stimulating yet more consumption through yet more debt is exacerbating the fundamental economic problems we face. For example, Sir Mervyn King, the Governor of The Bank of England, stated in October 2011 that “unless overspending by Western economies was curbed it would bring about an ever-larger debt crisis that would mean much lower long-term growth rates”. The root cause of the debt crisis threatening major Western economies, he said, was a long period of “unsustainably high levels of consumption”, in which governments, companies and individuals spent more than they earned.

It seems a harsh generalisation to characterise business as a whole as excessively exploitative and greedy, and of course we know there are many in business that are neither. Also, we know of many products and services that aspire to providing real well-being for the customer. This book highlights some such examples. Indeed, it is perhaps understandable how we got into this prevailing paradigm. Only a hundred years ago (just a couple of generations) the world was viewed as an untapped source of goodness. Commerce and industry flourished by exploiting seemingly limitless natural resources.

Since the Industrial Revolution, we have achieved great feats of economic, social and technological advancement for which, as a species, we can be proud. Yet the challenges (and opportunities) now facing our businesses, economies and societies are all too apparent. These include:

* volatile input costs

* volatile prices

* volatile consumer buying patterns

* increasing complexity and risk in supply chains

* changing demographics, world population shifts

* shift to a multipolar world

* increasing socio-economic/political tensions

* increasing scarcity of finite natural resources

* increasing propensity of food and water shortages

* increasing frequency of natural disasters and epidemics

* climate change

* peak oil, peak elements, and so on

* ocean acidification and dead zones

* rapid decline in biodiversity

* increasing inequality

* rising world poverty

* increasing mental health issues and stress-related illnesses

* exponential growth in population and consumption rates.

So what has all this got to do with business and business paradigms?

First, it is our current business paradigm that has exacerbated the imbalances, tensions and volatility we face today. As Albert Einstein observed: “We cannot solve the problems in the world with the same level of thinking that brought them about in the first place.” To operate in the world we now live in we need fresh approaches to businesses that are fit for the present and future.

Second, good business is fundamentally about seeking out opportunities for value creation, not about trying to get something for nothing. As our social, economic and environmental landscapes become ever more volatile, business approaches need to adapt and evolve to optimise the opportunities for value creation.

Third, in the words of Paul Hawken, “Business and industry is the only institution that is large enough, pervasive enough and powerful enough to lead humankind out of this mess.” Therefore, the re-evaluation and transformation of our business paradigm is fundamental to the successful evolution, not only of business, but of our species as a whole.

In times of pressing challenges, in this ‘perfect storm’ of social, economic and environmental volatility, it requires great courage to break rank from a paradigm that is ingrained in our business mindset. Transformational times call for transformational change. Businesses that wish to thrive and survive in these volatile times must transform themselves from what I will call ‘firms of the past’ to ‘firms of the future’, so that instead of responding in incomplete ways to these pressing challenges, they anticipate and embrace change in the most successful way.

The good news is that there are courageous, bold people at all levels in organisations across the board that recognise the need to transform. Unsurprisingly, like any step change in evolution, the herd are fearfully holding on for dear life to a business paradigm that has now ‘expired’. Let us first explore this prevailing ‘expired’ paradigm – the firm of the past – which is based on conventional thinking, and organisational characteristics that we are all familiar with, yet which are no longer suitable for the world we now inhabit. As Jack Welch (former CEO of General Electric) put it: “When change within a business is slower than that without, you’re in real trouble.”

The firm of the past

The firm of the past is resolute in its goal – ‘to maximise shareholder return’. Over the last few decades, shareholders (and the investment market) have in the main become more interested in short-term returns. The goal of the firm of the past has thus increasingly become one of short-term profit, utilising two main levers: cost reduction (bottom-line management) and value enhancement (top-line growth).

Values and behaviours that assist the goal are encouraged; ones that do not are eliminated. The firm of the past is based on a ‘command and control’ philosophy. Management and governance are fundamental to ensuring effective operations within the firm of the past. Without such ‘carrot and stick’ management structures (with all the ‘tricks of the trade’ that are used to influence), people and processes could not be driven continuously towards ever-increasing short-term profits.

Economies of scale and industrialisation have been the main drivers for value-enhancement in a firm of the past: enhancing the bottom line through sweating of assets and reducing unit cost of production, while increasing turnover and market share where possible. Increased market share brings with it economies of scale, monopolistic benefits, and brand enhancement associated with ‘bigger is better and safer’ for customers, partners and investors. Merger and acquisition activity over the last few decades has thus been increasing, being viewed as the best way to protect and enhance shareholder returns. Also, acquisitive strategies seem like easier short cuts to improved returns than through organic growth, which can be time-consuming and challenging.

Bottom-line management and top-line growth, while two sides of the same business coin, require different approaches, often attracting different mentalities. Bottom-line management is rooted in efficiency gains, approached through tight governance, risk management, quality control and operational excellence approaches (for example, Six Sigma). Top-line growth is rooted in value-enhancement gains through improved sales win rates, higher product differentiation, higher brand value, higher margin contracts, improved goodwill and innovation, among other things. The former, operational excellence, is more of a science (measuring, monitoring, reducing, controlling); the latter, value-enhancement, is more of an art (brand recognition, client relations, perceived product differentiation, empathic sales relationships, creativity through innovation).

Executives in the firm of the past tend to be measured on short-term quantifiable improvements where possible. Executives often move positions after a couple of years in post having shown results against these short-term quantifiable measures, referred to as key performance indicators (KPIs). Such KPIs tend to be cascaded down through the hierarchy of governance within the organisation. Hence, executives delegate to lower-ranking subordinates within the governance structure, who in turn delegate to the ‘shop-floor’ operatives. Each level of governance is focused on the short-term results, with consistency of behaviour being managed through these measures in a ‘carrot and stick’ fashion. The person who achieves ‘the numbers’ gains the ‘carrot’: bonus, pay rise, increased status, promotion. The person who fails to achieve ‘the numbers’ is given the ‘stick’: loss of bonus, substandard performance rating, reduced status, possible loss of employment. The executive who excels in achieving personal targets, while underperforming on team or group targets, is viewed as ‘high-performing’ compared with an executive who excels in team or group targets while underperforming on personal targets. The executive who understands how to manage ‘the numbers’ consistently to forecast is often rewarded with senior executive positions, sometimes even CEO, as the ability to manage consistently by ‘the numbers’ is seen as critical in the firm of the past. Managers are appointed as leaders due to their ability to rationalise, control and de-risk, rather than their empathic and visionary leadership in challenging times.

Hence, the business paradigm of the firm of the past reinforces its own mentality through this focus on managing rather than leading, on personal excellence rather than team excellence, on risk mitigation rather than exploring new ways of operating to create additional value. Unfortunately, this business paradigm makes a rod for its own back, and life within the firm of the past becomes increasingly stressful as demands for improving on last quarter’s earnings endlessly continue, while relentless bottom-line management results in reduced investment in value-enhancement capabilities. Ever-decreasing capability of long-term growth is the cost incurred for singular focus on short-term profit maximisation – focusing on today’s harvest at the expense of sowing fewer seeds for the future. Sooner or later the future becomes the present, and it becomes harder and harder to maximise short-term shareholder returns with this business mentality.

In the firm of the past, questions like ‘whom is this organisation serving?’ are met with rolling eyes and responses of ‘it’s the shareholders, of course!’. Dare one ask who the shareholders are, or what their underlying motive for the long-term success of the organisation is? It is this ‘short-term shareholder return is king’ mentality, reinforced by a fixation with ‘numbers, numbers, numbers’, that typifies the firm of the past. Business needs to rationalise and quantify, while also qualifying and contextualising. Focusing on one at the expense of the other is not a recipe for success.

Reductionism and systems thinking

Neuroscientist Iain McGilchrist explores left-brain dominance in our Western culture. The left brain, according to McGilchrist’s findings, focuses on parts of the problem, decontextualising and abstracting the problem in a closed system. This, of course, helps us to analyse and find a solution to that problem. But this is a solution in its isolated closed system, not in a living, emergent, volatile business environment. The right brain is what interconnects, provides living world context, views things in an open system and develops a broad understanding. It is both the knowledge of the parts (left brain) and wisdom of the whole (right brain) that we need for complete and proper problem understanding and correct solution creation. To quote Einstein, “The intuitive mind is a sacred gift and the rational mind is a faithful servant”. For McGilchrist, “we have created a society that honours the servant but has forgotten the gift”.

(Continues…)Excerpted from The Nature of Business by Giles Hutchins. Copyright © 2012 Giles Hutchins. Excerpted by permission of Green Books Ltd.
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