This article is by Paul Barnett, CEO of the Strategic Management Forum taken from his LinkedIn post and based on the presentation he gave recently at the Warwick CG Conference 2019: Reframing Impact - Driving Change Under Wicked Conditions. The event took place in the Warwick Business School facilities in the Shard, London. Reframing Impact-Driving Change Under Wicked Conditions was the theme of the conference, and his talk had the same title as this article.
I began by challenging a statement in the conference preamble which said, “what it means to drive change and impact has and will always be open for debate”. I argued that, "the most impactful leaders are never in doubt what drives change and what impact they need to have, even when they face wicked problems. What they remain focused on is value creation. In business that means customer value creation first and foremost. And this focus helps them remain undaunted".
They retain this focus on customer value creation because they recognise the truth in Peter Drucker's famous statement, the only purpose of a firm is to earn and keep a customer. And the only way to do that is to be obsessed with creating customer value. It is a truth that is captured in a statement by Jeff Bezos, Founder and CEO of Amazon.
Creating customer value is the focus of every start-up business, of course. If it were not, the business would fail at the outset. But things start to go wrong as the business grows. This is evident from the typical lifecycle of a business.
Bezos refers to the start-up phase as "day one", and advises all business leaders to be worried about "day two". He explains why, and how, they lose their focus on customer value creation, in this way:
Sadly, all the evidence suggests "process becomes the focus" all too often.
I have often cited research showing, "a mere 22% of the 772 directors surveyed by McKinsey in 2013 said their boards were completely aware of how their firms created value, and just 16% claimed that their boards had a strong understanding of the dynamics of their firms’ industries".
Based on this research, I have asked hundreds of executives three related questions: "Do you believe the directors of your business or organisation know how the firm creates value, who for, and how?" The number that think their directors do know is in the very low single digits - less than 5%. The people I am asking are usually senior executives of large organisations, including heads of strategy and chief strategy officers. I also ask them if they can answer these three questions. To date not one has been able to answer all three. Usually they respond by asking, "what do you mean by value?" My hypothesis to explain this is, companies focused on process are thinking about value in this way:
Their obsession is with the denominator i.e. performance, efficiency and cost control, because their aim is to maximising profits, to maximise shareholder value and the market value of the firms shares. Their focus is not the numerator i.e. growth in revenues from innovation designed to increase customer value creation and sales. Look at management theory and models for the past century and you will see that almost every model has been about managing the denominator through methods such as Business Process Reengineering, Total Quality Management, Just-in-Time delivery and the like. You will also find that the metrics are return on investment (ROI) and return on assets (ROA). The talk is of leverage, sweating the assets, and gaining a maximum share of the customer's wallet or lifetime spend.
Even before Frederick Winslow Taylor introduced Scientific Management, and his focus on labour productivity, we see evidence of this obsession with the bottom half of the value equation. I call it Denominator Capitalism. Martin Wolf, Chief Economics Correspondent of the Financial Times (pictured) described the result as a “rent-extracting economy, masquerading as a free market”. The defining characteristic is value extraction, not value creation.
The problems caused by this focus have been clearly articulated by the authors of Beyond Performance who state, “when it comes to achieving sustained excellence in performance, what separates winners from losers, paradoxically, is the very focus on performance. Performance-focused leaders invest heavily in those things that enable targets to be met quarter-by-quarter, year-by-year, but they tend to neglect investment in company health; investments in the organisation that need to be made today in order to survive and thrive tomorrow”.
Keller and Price were not suggesting performance, efficiency and cost control are unimportant. Nor am I. They are just insufficient if the business is to be sustainable. At least as much importance must be placed on the "health" of the organisation, say Keller and Price. By that they mean the capacity to generate future value.
A good example of the disastrous consequences of not focusing on customer value creation is offered by Henry Ford, and Ford Motor Company throughout its history. I recently learned this from Bryce Hoffman, author of American Icon. The book tells the story of how Alan Mullally successfully turned around the company from the late 1990's. But Hoffman also explains how Ford repeatedly failed to learn from the mistake of focusing on performance whilst neglecting the importance of customer value creation by continuous innovation.
The type of innovation a business focuses on also matters. Business mostly focuses on incremental i.e. marginal improvements - to extend the life of a product line, charge a price premium, or extract value from customers in other ways. The other type is real, radical and disruptive innovation. It is usually driven by customer value creation efforts, but accounts for far less of what gets called innovation.
Interestingly, the corporate crises that result from these mistakes rarely get blamed on management having the wrong focus. They are almost always blamed on external factors.
What are the real causes of corporate crises? And are external factors just a good excuse for poor strategic decisions, bad governance and poor stewardship? PwC's Crisis Survey 2019 provides the answers to these questions. The most likely cause of crises are internal, not external, factors according to the executives they surveyed.
Of course, some crises are the result of external factors and genuine surprises, but most are predictable as Bazerman and Watkins explain, and illustrate with many examples, in their book, Predictable Surprises (2008).
I strongly believe many predictable surprises are the result of Wilful Blindness, a concept Margaret Heffernan has explained, and illustrated, in her book and in her very popular TED Talk. It explains how, and why, people chose to be blind to issues or problems they could, and should, have known about.
As the Ford example illustrates, corporations fail to learn from the mistake of focusing on performance not customer value creation, even after a crisis. And, as the PwC Crisis Survey makes clear, most businesses face a crisis every 2 years, with larger corporations facing more than most - at least one significant crisis every year.
Peter Senge wrote The Fifth Discipline: The Art & Practice of The Learning Organisation in 1990 (Updated 2006), but the lessons have yet to be learned by most leaders. The reason, I believe, is that most business schools are still teaching the same old management theories, methods and tools. However fresh ideas are available. In my view, some of the most important are addressing the reasons for bad decisions and how to make better decisions. Others are looking at systems thinking as a way to address the levels of complexity which are exacerbating the problems.
Recently, I have written about Red Teaming and about The Power of Active Thinking, and I will soon review Critical Systems Thinking and the Management of Complexity. Additionally I plan to summarise the key ideas of Peter Senge. I think they are of great importance and should not be overlooked.
The key arguments I have made so far are:
It is true that today’s leaders and executives face unprecedented challenges across many fronts. However:
At this point in the presentation I introduced Valueism and Social Contract Accounting, the two concepts I have been developing, that help keep businesses and organisations of all types focused on the creation of customer value, and value for all other stakeholders. For more on these concepts you can read the introductory article I wrote for London School of Economics (LSE)
My presentation then went on to illustrate the arguments for a focus on continuous innovation driven by customer value creation. I compared the responses of two companies facing the same wicked challenge at the same time.
Whilst the decline in photographic film sales was sharp, it was also predictable. And it had been predicted. Kodak had even pioneered the first digital camera but, in a decision to focus on its more profitable core business, it chose not to pursue the camera project.
Speaking after the collapse of Kodak, Dr Willy Shih, its former Vice-President, said the company “could have tried to compete on capabilities rather than on the markets it was in” like Fujifilm did but “this would have meant walking away from a great consumer franchise. That’s not the logic that managers learn at business schools, and it would have been a hard pill for Kodak leaders to swallow.”
In contrast Shigetaka Komori, Former CEO of Fujifilm, identified inertia as the first reason of Kodak’s downfall. “It was the premier company for so long ”. “This I believe, made it slow to adapt. From the outside, it appeared that Kodak deep down just really didn’t want to adapt.” On the other hand, Fujifilm, always the challenger in the shadow of Kodak, learned to be bold and innovate to close the gap with the historic leader. As a necessity, its corporate culture was more adventurous and accepting of managed risk.
The result of the different approaches speaks for itself. Fortunately we also have the benefit of the full Fujifilm story in the Komori's book, Innovating Out of a Crisis. In it he says, “No matter how unpredictable the company’s financial situation was as we implemented the reforms I refused to cut back on R&D investment”. “If anything, I increased spending”. Top R&D managers were given the task of developing the Fujifilm Advanced Research Laboratories, a 635,000 square foot space. It was to be operated under three guiding principles:
Intelligent fusion – of the thought process and knowledge of specialists from different fields.
Innovation – To create disruptive innovations/technologies and new value networks.
Value Creation - To Provide society with new customer value
In concluding the presentation I suggested, the biggest challenge facing most business is to shift from a value extraction to a value creation mindset. But, there are ways to start this and I proposed they might begin by understanding how customers view value.
According to Prof. Clayton Christensen of Harvard Business School, "customers buy or product or use a service to help them get a job done”. That is how they derive value. So, "The focus of market research should therefore be to fully understand the job they are trying to get done”. Because, by understanding the job customers are trying to get done we can discover opportunities to improve the existing offer, or whole new areas to create more value for customers and for the organisation.
In this context I suggest, creating customer value can be defined as, “giving the customer the best means of getting the job done as the lowest overall cost – not price”.
This focus on customer value creation as the purpose of the organisation, is the way successful leaders face wicked problems and remain undaunted.
Alan Mullally represents perhaps the best example. He became CEO of Boeing, tasked with reviving the company. That was a big enough challenge in itself, but he also faced the consequences of the 911 Terrorist attacks on the World Trade Centre in New York which resulted in the loss of a massive number of cancelled orders.
Later, as I mentioned already, he was tasked with turning around the failing Ford Motor Company. He began that process, but then found himself having to deal with the impact of the 2007/8 global financial crisis. He successfully saw the business through that episode.
Like Komori at Fuji. Mullaly's focus in both situations was to invest in customer value focused innovation at a time when the vast majority of CEOs would have cut all investment to reduce costs. He knew the only way out was to address both the performance challenges and, simultaneously, innovate if the firm was to have any chance of a long-term future. It had been a lack of innovation and customer value creation that had put the companies in a bad position to start with.
As co-directors of BE Advisory, Andy Wilkins and I will be offering a One-Day Course, a Workshop Programme, and Director Briefing for boards. We will explain in detail how successful leaders face wicked problems and remain undaunted. From January we are also offering the first 2hr Taster Event.
Taster events are being held in London on February 3rd, March 2nd and April 6th. The One-Day Course will be delivered in London on February 24th, March 23rd and April 20th. Any enquiries can be sent to firstname.lastname@example.org
Comments? Questions? Write to us below or check out the original article to see the discussions. Warwick CG plans to hold our second conference in February 2021, stay tuned!