Rick's Ramblings

Tuesday, February 26, 2013

Business Constituents

Many modern business texts used in MBA programs will tell you the "purpose of a business is to maximize shareholder value."

I think teaching that to tomorrow's managers and leaders is a bit misleading, and maybe misguided.

A business exists to meet the needs of three key constituencies:

• Customers
• Employees
• Owners

It is important that a business has a strategy to meet all constituents' needs.

Read on for my thoughts.

While I certainly believe a business will cease to exist if it doesn't meet the needs of its owners, a claim that the only purpose of a business is to "maximize shareholder value" feels bit bit one dimensional to me. It oversimplifies the task of running a business and along a dimension that could lead to harmful management practices. I might be able to accept this statement if we go a bit further into "how" a business maximizes shareholder value.

A business cannot thrive without meeting the needs of its customers. Delivering competitive products and services of high value and high quality is imperative. Understanding customers' requirements (spoken and unspoken), innovating solutions, living up to the promise of those solutions, and supporting each customer should occupy the majority of a management team's time. There is no chance of legitimately increasing shareholder value if the needs of customers are not met.

And, if employees are not trained, motivated, compensated appropriately and valued by a company, it is highly unlikely the full suite of customer needs will be met. Employees must be inspired and motivated by the mission of the business. They need to "feel good" about coming to work. They need to feel safe to innovate and explore new ways of creating value. Let's face it, the best product strategy in the world can be undermined by a lackluster, unmotivated workforce. (And, I'd extend the employee base to the whole community in which a business is homed.)

If you have engaged employees working on products and services that bring value to customers, then it typically follows that the company will thrive and make money. Of course, this is the reward for owners and it is important to have goals, processes, metrics and triggers in place to ensure owner satisfaction.

All too often, I think a company looses its balanced approach to meeting the needs of these three constituencies and puts too much management focus on only one of them. Becoming competitively compelled and simply reacting to competitors can lead to dead-end investments and a lack of focus. Being customer compelled and "doing whatever they ask" can also lead to a fractured product line where it is hard to ever get in front of customer needs and surprise them with your innovations.

But, the most common issue is an intense and exclusive focus on the needs of the owners. This happens when quarterly results become more important than customer service. When making that last penny of earnings to meet projections means accelerating product shipments and compromising quality. When cost-cutting measures (often even in highly profitable times) mean employees are under extra stress.

So, I'd propose that the purpose of a business can be restated: To profitably meet the needs of three key constituencies: owners, customers and employees. To be successful, a company needs innovative and valuable products and services that meet customer needs; created and produced by employees who are motivated and engaged; with a business model that produces the profit and growth needs of its ownership.

It is management's job to balance effort, investment and attention across all constituencies.

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