(This post follows
from our themes in previous posts. It might appear to be heresy, but worry not,
my capitalism and democracy friends. We discuss here one important part of how
we lift capitalism to its high and true potential. This post offers a perspective
far too long missed).
What? Surely anyone with a scintilla of
understanding of the business of business knows the assertion in this title
amounts to blasphemy. Throughout commercial time, it has been an accepted axiom
that a seller will sell her/his wares if and only if they receive payment for
them greater than the cost they incur to produce and sell them. The amount by
which the payment exceeds the cost is called profit. And, sale after sale, year
after year, the accumulation of this difference can be called wealth creation,
right? Right!
So, where’s the beef? Well, a focus on
profit as a motive does a critical disservice to the higher nature of people,
to our better angels. In more practical and commercial terms, it causes the
business to fall short of the wealth creation potential it really has.
Profit, as we note above and as has been
acknowledged by many students of economics, finance and business over time, is
an axiom, an axiomatic outcome of the commercial process – not a motive.
To suggest that it motivates the seller (producer), is to; (1) do a disservice
to the seller (producer) as a person whose special aptitudes are being used to
produce something she/he has a passion to produce in order to please the buyer,
the consumer and (2) cause a sub-optimization of the use of all the input
resources required to create the product.
The real bell-ringing motive of the seller (the
producer) in the commercial process, the one that creates maximum wealth over
time, is to optimize the value provided to each primary stakeholder
group (customer, employee, supplier, investor, community where the producer
(seller) exists and the general public interest). It is this primal motive
that causes the seller, the producer, to actualize her/his potential, to be
thrilled to the max AND to create the highest near and long term profit
possible as an outcome of this value-optimizing motive over time. Confusing
motive and outcome (profit as an axiom) results at best in pretty good wealth
creation over time, but not maximum wealth creation.
Well, so what? The answer to this
provocative question is that a focus on profit rather than on optimizing value
by definition causes the producer (seller), and those who watch her/him, to be
continuously looking inward, to be enchanted with winning (relative to other
sellers (producers)) and to slip into the seductive short termism behavior so
prominent in the commercial world – especially the investment banking part of
the commercial world. By contrast, the value-optimizing focus allows the seller
(producer) to be consumed with and captivated by continuously innovating and
creating the best possible product or service for the customer, while also; (1)
providing employees the truly fairest compensation and the fullest possible
self-actualization opportunities, (2) providing the suppliers with the most
attractive long term fair compensation), (3) providing communities the best
citizen behavior and (4) providing the general public the most able and willing
co-creator of the best society over the long run.
It all sounds so delightful, but also implausible.
A bit more explanation is in order, to connect with normal business and
organizational practice.
Normal
Business Practice.
The normal blocking and tackling of a business lies
in the important functions of effectiveness, efficiency, productivity,
creativity and innovation. When a business (our seller (producer)) is focused
on optimizing the value provided to its primary stakeholder groups, the
likelihood (the probability) that these blocking and tackling functions will be
performed at their highest level is itself maximized.
Without explaining every piece here all at once,
other related realities about the market, local and global, such as universally
held unalienable rights and ubiquitously treasured virtues will cause the
products and services of our seller (producer) to attract buyers (consumers)
above all other choices available to them. The marketing opportunity will have
been elegantly achieved and exceeded, simply by focusing on serving others in
this way. AND, the profit outcome, the accumulating wealth, will be maximized
as a result - a necessary and natural result of doing what is right and
actualizing one’s potential (individuals and groups of individuals (companies))
as a seller (producer).
What Does It all Mean?
The dominant focus of for profit business over the
years has been inward, near term and win-lose. Profit has been all too often
taught to be both the “business of business” and that which owners and managers
should focus on. It is as though the motivation of producers (sellers) is to
be achieved by a continuously ringing cash register. How silly that is, and how
demeaning! Indeed, though, wealth has been produced over time, much wealth,
but not enough for the very reasons we present. The primal motive has been
misstated.
However, if business had been dominantly focused on
value creation for its customers and its other primary stakeholders over the
years, more wealth would have been produced. More importantly, in this
beginning of the 21st century, with the globally disruptive
communication and technology revolution as one significant catalyst for
paradigm change by itself, we have the opportunity and obligation to reset our
dominant focus toward primary stakeholder group value optimization. Companies
will rock because; (1) customers will eagerly buy their product or service, (2)
their employees will be able to fully actualize their individual and group
value, (3) suppliers will receive optimal value through their relationship with
the companies, (4) communities will receive optimal value from the company as a
citizen member of the community, (5) the general public interest will have a
willing participant in optimizing value in the public interest and (6)
investors, including owner-investors, will have both optimal and maximized long
term value – importantly and necessarily (axiomatically) including maximized
wealth creation.
By the way, this same paradigm change in focus
applies to non-profit organizations, governments – all organizations, local and
global.
Summary.
The case for a reset of the definition of
motivation and focus for businesses (and all organizations) to the obvious - Optimization
of value for primary stakeholder groups - is clear. More can be
written about it, but the case is intuitive, and it is certainly more than a
semantics game. It is the literal heart and soul of the highest behavior we can
engage in as people and economic actors for local and global societies.
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