Why a Firm Should Have Only One Bottom Line

The article below by Steve Denning and Forbes make the case that a firm has not just one possible bottom line, but more. One cannot maximize 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 and in this decade delighted customers might be the better bottom line to maximize. Read why!

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Gautam Mahajan

President-Customer Value Foundation

Email: Mahajan.g@customervaluefoundation.com

Why a Firm Has Only One Bottom Line

And thus the native hue of resolution
Issicklied 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: Hamlet

For several decades, I worked at an organization that professed to have multiple aims. Launched in 1946, the World Bank was created to be a financier of projects in developing countries. Over time, it came to pursue a clutch of other aims, including reducing poverty, creating conditions for a thriving non-public sector, environmental sustainability, good governance, greater educational fortune, 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 was constantly pressured to add components to respond to this ever expanding list of aims. Consequently, the projects frequently came to resemble “Christmas trees” and decision-making was notoriously slow. The only reason that anything ever got done was that everyone in the World Bank 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 eventually were made. “Getting out the lending program” determined careers: who got promoted or who got pushed aside. It was nice if the other aims were also furthered, but they weren’t essential. Even though the top management declined to articulate it as a single aim, the World Bank’s had a single de 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 corporate citizens” 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 for shareholders. Even though the firm appears to have multiple aims, it actually has a de facto single bottom line.

aims, consequences, means and values

I had a number of responses to my article yesterday which argued that “shared value” is less likely as 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 appropriate as 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 of sustainability.

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 pursuing multiple 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-making

Over the years, several efforts have been made to formalize the possibility of multiple bottom lines.

One is the Triple Bottom Line (known as people, planet, and profit) which captures an expanded spectrum 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 by proven design methods and automation tools that can be used by managers to keep track of the accomplishment of activities by the staff within their control and to monitor the consequences arising 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 the balanced scorecard can be useful. So long as external conditions remain constant, they work reasonably 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 to what to do in a crunch. Ultimately, the balanced scorecard is just a list of metrics. When conditions change, 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 as to what to do when choices have to be made. In most of the Fortune 500 today, even in those firms that profess to be implementing a balanced scorecard, that de facto aim is still: making money 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, then introducing a balanced scorecard or a triple bottom line won’t help much. The firm needs first to recognize explicitly what the current de facto bottom line is and secondly to put a place a new single aim that can steer decision-making throughout the organization, even as conditions change. As Peter Drucker elaborated in 1973, the only valid purpose of a firm is to create a customer. 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-or

Some readers disagreed, arguing that a business is a complex adaptive system of stakeholders working 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 a business is not to satisfy only shareholders, or only customers, or only employees, or only the local community. A business, they say, must satisfy everyone!

The idea that an organization is a complex adaptive system of stakeholders is not incompatible with the notion that in order to survive, the firm needs to give priority to some issues and stakeholders over others. If a firm has no customers or employees, it ceases to exist. Payments from customers or employees who serve customers are like breathing to human beings. The fact that we need to breathe doesn’t mean that breathing is the aim of being a human. Breathing is a precondition of human life, not the purpose.

Primary aim vs. “ignoring” other elements

The fact that we might give priority to one group of stakeholders over others does not mean that we are “ignoring” the others. In fact, a key argument for client delight is that by focusing our efforts on delighting customers, we end up generating more money for the shareholders than if we had focused on stakeholders more directly. And delighting customers as aim is also likely to generate deeper task satisfaction for employees than if we had given top priority to keeping employees happy. Far from ignoring other stakeholders, a focus on delighting customers creates an unparalleled possibility of benefits for everyone.

The business argument: customer delight makes more money

Delighting the customer is not just profitable. It’s hugely profitable. That’s ultimately why it has to become a business imperative. Its conquest of the business world is inevitable, not because the people 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 of its 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 the change.

The math argument: only one variable can be maximized

Why not aim to maximize both shareholder value and client delight, or employee satisfaction and customer delight? As a mathematical fact, several variables can be optimized but only one variable can be maximized. Two variables cannot be simultaneously maximized unless one variable comprises the other. It is thus possible to maximize both satisfied clients and delighted clients because satisfied clients include delighted clients. It is not possible to maximize both client delight 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 people need a compass: what is this organization all about?

The ethical argument

A firm that adopts client delight as its aim is also making ethical progress. Improving the lives of others is something worth believing in and fighting for. Delighting other people intrinsically appeals to our hearts. Thinking about and helping other people is central to ethics.

The timeliness argument

Customer delight as the aim of the firm fits the reality of the business world of 2011. Fifty years ago it was different. Fifty years ago, oligopolies were in charge of the market and could dictate change. That world has largely disappeared, as a consequence of the global rivalry and the approach to reliable information provided by the web, and the ability of customers to communication amongst each other. Now the customer is the effective boss. Firms that don’t grasp this new market reality are in for a hard time.

The lean startup argument

Some ask: why not delight employees. Why don’t managers just get out of employees’ way: they will know what to do. Let a thousand flowers bloom! Build on the ideas of the staff and so add valuable new features to product and services! The underlying assumption is that what employees see 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 make products worse for the customer. Ries takes experiments directly into the heart of product development and says to employees, “Look, if you’re actually building a product and delivering it to customers, wouldn’t you like to know if the features you’re adding are actually making the product 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 make most products worse. If the firm is aimed at delighting the employees and doing what the employees want, it will generally be making its business worse for the customer unless those employees happen to be tightly focused on delighting customers. Hence the primary duty of management 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, when his more timid rivals said no. Rather, as he himself pointed out, his stronger talent was saying no many times—a thousand times, no!— so as to “to get rid of the crappy stuff. The end 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 employees themselves 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 heroic CEO, making all the calls. Cook eventually discovered that he didn’t have to be the sole heroic figure, making all the decisions. When he started becoming an enabler of self-organizing teams and providing them with clear line of sight to the customer, he found that they were able to come up with, and validate, innovations that met customer needs. This can only happen if delighting customer is perceived throughout the organization as the number one priority.

The philosophy of life argument

The above arguments are powerful. But to me, the most persuasive argument is that delighting customers reflects a proper philosophy of life.

In fact, the aim of delighting other people is foundational. We might do this with a family member we love, such as a child, a significant other, or a parent. We might do it with a sketch poetry or a novel. We might do it by candidacy for societal change. We might do it by scientific discovery. We might do it by instigating real political change. Or we might do it by providing goods and services that truly meet people’s need. The fact that money changes hands doesn’t make it any less worthwhile, if true delight is there.

Delighting others requires a kind of mindfulness of the impact of what one does has on the lives of others. It is one of the things that make life worthwhile. Delighting others is our chance at making a 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 that delighting others is part of an elegant and complex process of human conception, development and realization. It opens our eyes to new possibility and dimensions of what it means to be human. 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 of genuine human excellence.

Source:Steve Denning, Contributor RADICAL MANAGEMENT: Rethinking leadership and innovation,12/21/2011 @ 11:42AM |2,068 views

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