For whom does your business operate?
This question runs through much of the Vital Edge – and gets right to the heart of your relationship with your company and with the hundreds of other businesses in your life.
Most businesses today run on the operating principle of “shareholder primacy,” which says that businesses exist primarily to maximize returns for shareholders. It treats the company as property and the people connected to the company as costs to be minimized in order to channel as much profit as possible to stock holders.
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Here on the Vital Edge, we start with a different assumption about the purpose of business. You could call it a “people-centered” approach, which essentially says that businesses exist to serve people. To be clear, it’s not just any people that they serve, but the people who are critical to fulfilling the firm’s mission in a profitable, sustainable way.
This people-centered approach to business doesn’t just lead to better societal outcomes; as we’ll explore in-depth here, it’s also a natural evolution in the way value is created in our modern, highly networked, economy. In short, it is the future of competition, and the future of business.
Machines play a critical role in increasing profitability. When we invest in machines to automate a firm’s processes, it’s called capital investment, and through these fixed, upfront commitments of capital we try to lower the ongoing, variable costs of operations. Smart capital investments save more variable costs over time than what they require in up-front fixed costs. This then drops more money to the bottom line as a way to compensatie shareholders with higher rates of return.
Because people are the biggest ongoing variable cost for most firms, when firms make capital investments with a shareholder primacy mindset, it usually leads to less money going to the people who actually work for the firm.
This is the classic story of profitability taught in the micro-economics classes of most business schools to this day. Like all dogma, it has elements of truth to it, but it also paints a vastly simpler picture than the underlying reality.
When it comes to reducing costs, Japanese manufacturers like Toyota have taught the world a thing or two about the importance of arranging the technology around the people, rather than the other way around. As part of improving their manufacturing quality, these firms pushed control to the people closest to where their value was being created – which is to say, to their assembly floors. They invested in automation technology and they invested in the people best positioned to generate real customer value from it.
Creating value is the essence of business, but many businesses fail to appreciate the critical role human ingenuity plays when it comes to creating value.
We may reach a day when our technology is capable of truly generative thinking. But until then, it’s really just a tool, programmed by human creativity. We may have to look hard to find the people behind the technology, but they’re there, meshing their creative insights into what the technology can do with their understanding of what other human souls actually find valuable.
“Pay no attention to that man behind the curtain.”
– The Wizard of Oz
It’s this “generative capacity” – our ability to imagine that which does not yet exist – that most sets human beings apart from even our most advanced technologies. It also happens to be the source of almost all real value creation in business.
In seeking to reduce costs, companies often buy technologies without investing in the human factors that bring it to life and create real value. This is the classic trap of capital investments: capital chasing technology in order to chase capital. It happens when companies extract too much value for external shareholders and fail to reinvest profits into the firm’s future capacity to create value – the most important aspect of which is the human part of the equation. The result is almost always an eventual downward spiral that usually ends in business failure.
The antidote, of course, is reinvesting in the business’ ability to generate value over time. It doesn’t mean turning away from technology, but it does require a shift in thinking. Rather than focusing our technology on maximizing short-term returns for shareholders, it means using technology to maximize people’s ability to create value. This is people-centered technology and it’s key to “people centered business.”
Being “people-centered” isn’t just about employees. Lines that once separated people inside the firm from people outside it are rapidly giving way thanks to new technologies that make it easier for customers, distributors, and suppliers to contribute value to a firm. This blurring of organizational boundaries takes many forms and goes by many names, such as the prosumer movement, user-contributed content, the sharing economy, and co-creation.
When I contribute product reviews to Amazon, like posts on Facebook, or rate restaurants on Yelp, I’m contributing value to these services even as I gain value through using them. End users contribute some 3 billion likes, comments, photos and other content to the Facebook network every day. So, who really builds Facebook? Is it the company’s internal software developers, or its one billion users? Well, it’s both.
Businesses that know how to engage people beyond their organizational borders have a huge advantage over those that don’t. This “engagement leverage” is the heart of social business, and radically opens companies to contributions from beyond their borders.
Social businesses create “contribution platforms” that maximize contributions from all stakeholders.
Google, Facebook and Amazon are obvious examples of large-scale contribution platforms, but they’re just a taste of the future. This radically networked approach to scaling the number of people who can contribute value to a business is already spreading beyond the technology sector, and as it does it radically increases the value of human relationships in every market it touches.
Companies increasingly look like the networks on which they run. The more I use Facebook, the more valuable it becomes to my friends and colleagues. This “rich get richer” phenomenon is an increasingly important source of competitive advantage in our networked economy.
It’s not just about building connections on Facebook though. Think about what happens when lots of people start using a company’s new product. That customer interest attracts other firms that build solutions to piggyback on the product’s success, which makes it all the more attractive to more customers and increases its attractiveness to additional firms and additional customers in a upwards-spiraling, positive feedback loop.
This kind of network feedback loop has always existed, but it’s been greatly accelerated by communications technologies that make customer interactions with a firm’s products and services much more visible to their social connections. This is the notion of “virality” – or how easily a product or service spreads from one customer to others – and it is now a core component in most high-tech startup business models. The growth of network technologies will soon make virality a key factor in most business types – the network economics are just too powerful to ignore – and as this happens, the value of people connections explodes exponentially.
In a social business, contributions from people outside the company account for a large portion of the economic value that the firm creates.
So, what happens if this new approach to business is simply shoehorned into the same tired goals of maximizing returns for shareholders? The answer is that it will simply pressure companies to minimize their investments in the people who contribute value from outside the firm – just as it does today with investments in employees. Over time, these old notions of corporate purpose will erode the company’s ability to create long-term, sustained value – just as they do today.
The antidote is continued reinvestment in a company’s generative capacity. In a world of social business, that means continued reinvestment in the networks of stakeholders who surround the firm.
When people feel they have a stake in a company’s product or service, they experience a sense of investment in its future. When suppliers retool to meet the specifications of a firm’s product, when customers invest time and energy into learning a new product, they’re making investments that give them a stake in the future of that product. Members of communities that are affected by a company also have a stake in its operations. Collectively speaking, these people are the firm’s stakeholders – and they are critical to the long-term success of any business.
We’re used to thinking about employees, suppliers and distributors contributing value to products and services, but often fail to see how other stakeholders create value. Customers create a revenue stream that funds ongoing investments of course, and we’ve already seen their growing role in co-creating companies’ products and services. But customers also create value for a business just by using its products and services in ways that unleash their quintessential purpose. A drill creates holes – but not without a customer who does the drilling. In an important sense, the company’s mission is really only fulfilled through the customer.
It’s not just customers though. A company’s surrounding communities also contribute transportation systems, natural resources, educated workforces and other important sources of value to a business, even though they might be hard to see at first.
People centered business doesn’t see stakeholders as costs to be minimized, but as critical contributors of value. It orients business models and organizational strategies around maximizing contributions from all stakeholders. It uses technology to transform companies into value contribution platforms attached to powerful networks of employees, customers, distributors, suppliers and other people with a stake in a firm’s success.
What we’re talking about is a radically networked, thoroughly modern, approach to stakeholder principles of management and governance.
When this broader set of stakeholders has a true stake in a company’s success, it forces a large-scale re-think of many aspects of the organization, including its governance and ownership structures. These are the deeper implications of the people centered business, and they are areas that we’ll talk a lot about on the Vital Edge.
Attracting Deep Contribution
If you’ve ever had a job that really engaged you at a heart and soul level, then you know how big a difference caring about work has on what you bring to the office each day. When people care, they invest more deeply – and that translates into real benefits to the company. Studies show that when businesses adopt disciplined approaches to employee engagement, their earnings grow 3.9 times faster than competitors that don’t.
When it comes to deep engagement, money isn’t everything though. Sure, compensation plays a critical role in recruiting and retaining talent, but research shows that it’s the fuzzier stuff – things like a sense of purpose and our relationships with people – that matter most in really engaging people in contributing to an organization. And that’s true for employees, customers and all of the critical stakeholders in a business.
When we interact with a people centered business as a customer, we know it immediately – because we feel it. It comes through in the sparkle of an eye or the tone of someone’s voice. These are the signs of humanity that can’t be programmed into a customer support script. They happen when someone is genuinely connected with their work and to the people who make it possible.
People centered business encourages people to bring their whole selves to the work of the firm. That kind of connection is a powerful attractor and a powerful competitive advantage in business – and it can’t be bought.
The money-centered paradigm sees money as what connects us to business – and the reason it exists in the first place. In contrast:
When we come together with other people in service of a mission, we experience a sense of purpose, and the sense that we are part of something bigger than ourselves. This sense of community and connection to other human beings is a powerful draw because it feeds the most powerful force on the planet – the human soul.
(good for sharing)
|1) Most businesses today run on shareholder primacy, which sees the company as property optimized to maximize returns for shareholders.|
|2) People-centered businesses exist to serve people who are critical to fulfilling the firm’s mission in a profitable, sustainable way.|
|3) Typical approaches to capital investment prioritize technology over people, rather than arrange the technology around the people.|
|4) The “generative capacity” of human beings most sets them apart from technology, and is greatest creator of value for business.|
|5) People-centered technology optimizes technology around the generative capacity of people, rather than as a way to maximize returns for shareholders.|
|6) Social businesses create “contribution platforms” that maximize contributions from all stakeholders.|
|7) The growth of network technologies makes virality critical to business success, exponentially expanding the value of people connections.|
|8) Supporting the long-term generative capacity of a social business means continued reinvestment in its network of stakeholders.|
|9) People centered business is a radically networked, thoroughly modern, approach to stakeholder principles of management and governance.|
|10) Companies that know how to deeply engage people grow much faster than their competitors.|
|11) People centered business sees people as the heart of the company – the source of its creative power and the core of its purpose.|