Expand the Pie Before Dividing It Up
"Many managers who view themselves as the heroic guardians of shareholder interests—the no-nonsense, tough-as-nails guys who run their businesses by the numbers, who pride themselves on their hypercompetitiveness, and who think that "organizational culture" and "shared values" are irrelevant fantasies concocted by out-of-touch academics—may be inadvertently running their companies into the ground and systematically destroying the wealth of their investors...
"The most successful organizations understand that the purpose of any business is to create value for customers, employees, and investors, and that the interests of these three groups are inextricably linked. Therefore, sustainable value cannot be created for one group unless it is created for all of them. The first focus should be on creating value for the customer, but this cannot be achieved unless the right employees are selected, developed, and rewarded, and unless investors receive consistently attractive returns...
"Why do managers so often choose not to focus on value creation and instead make decisions that systematically decrease the long-term value of their businesses? One reason may be that their training and education lead them to define their organizations' interests too narrowly... If management defines the organization's self-interest (and consequently its goals) too narrowly—for example, to maximize this year's or this quarter's reported earnings—it will view that interest as being at odds with the interests of customers and employees...
"This approach is based on 'win/lose' or 'zero-sum' thinking: The underlying assumption is that there is a fixed pie of value to be divided up among customers, employees, and investors, so the interests of the three groups must be traded off against one another...
"Companies that act on this myopic conception of self-interest may stumble into a downward spiral of poor decision-making that is difficult to reverse. For example, as reduced employee training and compensation lead to low employee morale and poor performance, and as underfunded R&D allows a product line to age, customers can become dissatisfied and begin to defect... When customer do defect, profits shrink, tempting management to cut back even further on training, compensation, and R&D, thus accelerating the spiral of customer dissatisfaction and defection...
"Alternatively, if managers define their company's interests broadly enough to include the interests of customers and employees, an equally powerful spiral of value creation can occur. Highly motivated, well-trained, properly rewarded employees deliver outstanding service, while effective R&D investments lead to products that enjoy a significant value-adding advantage and generate higher margins. Satisfied, loyal customers (and new customers responding to word-of-mouth referrals) drive revenue growth and profitability for investors...
"An 'expanding the pie' approach to management requires that a company alter its thinking along several dimensions...."
Read more in Value Creation and Business Success by Paul O'Malley from which the foregoing was quoted.
