The past decade saw a revolution in recognizing the need for sound business models. The provision for customer value propositions now comes to the forefront in any strategy discussion. But such discussions leave the enterprise falling short of producing its greatest potential value when the essential factor remains in the shadows – what value the businesses of the enterprise create for humanity.
In Invigorate Learning we introduced the law of learning, derived in addressing how the enterprise creates value. It calls for invigorating learning throughout the enterprise by exploring, exploiting, and orchestrating.
Now we turn to our fifth of seven questions to answer regarding enterprise value creation: What value does the enterprise create? We find the answer in its economic offerings (whether commodities, goods, services, experiences, or transformations)(1), purchased by customers, which satisfy human needs through the businesses carried out by the enterprise. That means managing must function to create offerings in order to establish businesses, the domain of enterprise value creation that creates and delivers value to the customer, captures value for the enterprise, and weds the enterprise to its ecosystems.
The Economic Values First Principle
In our research into value creation we discovered the inexorable link between it and knowledge, arriving at the economic values first principle. Peter F. Drucker brought this to light in his 1964 book Managing for Results when he declared business to be a “process that converts an outside resource, namely knowledge, into outside results, namely economic values.”(2) While this definitional statement appears at first glance to be pretty matter of fact, it embodies the richness of humanity.
For the distinction between information and knowledge lies in that information can be codified, while knowledge exists only within a person’s brain; that’s why it remains outside of the business, residing in its worker’s heads (or in the heads of other people in other enterprises, and even within customers). In accord with the prior laws, workers:
- gain knowledge through the law of learning,
- recognize the appropriate possibility space and discover value-creation opportunities within it via the law of creativity,
- align with a meaningful purpose in accord with the law of meaning,
- find intrinsic motivation in agreement with the law of potential,
and then convert their knowledge into offerings that benefit customers, creating economic value. This holds true even when the customers of a business are not individual consumers but other businesses who in turn create economic values through their roles in the ecosystem.
The Human Enrichment First Principle:
Probing deeper into the harmony between the laws of managing, you may remember that the first criterion of an enterprise’s meaningful purpose, associated with the law of meaning, is to enrich greater humanity. So it becomes axiomatic that the ultimate criterion of economic value creation, through the offerings of the enterprise’s businesses, is that it enriches humanity as well.
The enterprise and its businesses float in a sea of humanity. And all the activities of the enterprise exist within the who and why aspects of value creation associated with humanity. Therefore they are subject to the law of potential that calls for fulfilling people’s innate needs and the law of meaning that calls for meaningful purpose, and again one that enriches greater humanity.
The import of this for managing: why is not to be pondered after the fact when discovering, inventing, and innovating, but is the first and foremost consideration in the pursuit of value creation. Ultimately, why we do what we do, why we do it where we do it, why we do it how we do it, why we are the ones who do it, and why we do it when we do it all fall within the first criterion of meaningful purpose, that of genuinely enriching humanity.
Recognizing that the benefiting of humanity is part and parcel of value creation, we identify the human enrichment first principle. We hold that businesses create true economic value when they genuinely enrich humanity. This principle acknowledges one of the most critical truisms to understand in economics: humanity creates value for humanity. The creation of economic value then, by definition, becomes inseparable from serving humanity. Anything less, and the net economic value to the world easily turns negative – an unsustainable proposition if not an amoral choice.
With this in mind, from Drucker’s economic values and our human enrichment first principles we deduce the fifth law of managing:
The Law of Humanity
Only the enterprise that enriches humanity,
through the knowledge embedded
in its business activities,
creates offerings of unquestionable economic value.
As is the case with every law of managing, we see conventional managing violating this law when its short-termism, agnosticism toward enriching humanity, and failure to value the knowledge of its workers reduce the enterprise to a mere economic engine. These backward priorities then require countermeasures in an attempt to justify the enterprise’s existence to (and answer criticisms of) the rest of humanity, such as with corporate social responsibility (CSR) programs that use words like “conscience,” “citizenship,” and “sustainable” to paint a different-than-reality picture, rather than creating a new human-enriching reality.
The enterprise adhering to the laws of managing requires no distinct CSR program, as enriching humanity is a corporation’s social responsibility, not a side adjunct to “make up” for being in business. For as Calvin Coolidge, the 30th U.S. president, stated, “Prosperity cannot be divorced from humanity.”(3) That again is why the enterprise must ensure that the aim of its activities are guided by a meaningful purpose, one that enriches humanity. The resulting intrinsic motivation then fuels the production of exceptional financial results that ensure the motivating purpose can in fact be carried out, not just for today but indefinitely into the future.
Conventional managing characteristically gets the logic of value creation backwards, attempting first and foremost to manage ends, like financial outcomes of a business, as opposed to its value-creating means for producing those outcomes. The laws of managing get cause and effect right by focusing first on the means, such as employing the full human potential of the enterprise to enrich humanity, which then ultimately results in producing the ends, such as favorable financial outcomes. Rather than the financial ends justifying the activity means, it is properly managing the means of production that fulfills the ends of enriching humanity, with financial results simply playing their role as the measuring stick of value creation success.
Managing in accord with the laws thus attends to the intrinsically motivating means of enriching humanity that then eventually produces extrinsically rewarding ends, rather than working backwards from extrinsic rewards based on the desired ends in an attempt to then shape the necessary means of achieving them – an approach that quashes intrinsic motivation (as we saw in chapter two).
From the law of humanity we extract its associated managing imperative, which emphasizes working to achieve meaningful results in conjunction with financial results:
Imperative to Create Offerings: Enrich Humanity
In adherence to the law of humanity, managing must
enrich humanity with compelling economic offerings. This
creates the value both desired and deserved by not only
customers but workers and society at large as well.
Contrast this imperative with how traditional managing generally seeks to create new offerings by advancing attributes of existing offerings, attempts to increase profitability in the short term, and strives to please Wall Street before customers without disrupting existing businesses. But this supposed lack-of-disruption benefit eventually becomes a burden.
The anti-disruption bias is yet another reason why heroic leadership has grown up to be such a close companion to command-and-control managing. By itself, conventional managing puts short-term profits ahead of enriching humanity, with mediocrity being the inevitable result. It is generally incapable of proposing, acting on, and achieving bold efforts without some heroic leader to counter its lack of enterprise orchestration.
On the other hand, genuinely enriching humanity in line with a meaningful purpose is a tough standard to which to hold any enterprise. But it is like getting daily exercise; once fully in practice, the benefits grow to become pervasive across all aspects of value creation. It also sets the stage for the enterprise to stave off mediocrity, as opportunities to enrich humanity never end. And should you bring on or already have a new charismatic leader charged with saving the enterprise, he should recognize that his task now shifts from being a dictatorial reformer to becoming an inspirational steward of the humanity and the activities entrusted to him, while in turn crafting a way of managing in accord with the laws that outlast him.
Enterprises must break the pattern of temporary successes that lead to mediocrity and then on to dissolution or dramatic rebirth only to repeat the cycle. Though many a shareholder activist may advocate for better short-term results – while many an NGO activist demands absolution for any resulting success – only an enterprise that enriches humanity ultimately provides the shareholder with the greatest return on investment.
So far, our first five laws of managing have gotten us, in brief, an enterprise of wholly engaged people exercising their fullest potential in discovering opportunities and gaining knowledge in order to enrich humanity. But managing still has more to do. In particular, it needs to ensure that the enterprise sustains its humanity-enriching capability through time. Hence the next law addressing how to sustain enterprise vitality.
(1) B. Joseph Pine II and James H. Gilmore, The Experience Economy (Boston: Harvard Business Review Press, 2011, Updated Edition), pp. 7-36, 244-260. Pine and Gilmore explain the five and only five distinct economic offerings of business enterprises to their customers. These offerings form a progression based on their relative economic value. The Progression of Economic Value goes from commodities, to goods, services, experiences, and ends with transformations.
(2) Peter F. Drucker, Managing for Results (New York: Harper & Row, 1964), p. 5.
(3) ForbesQuotes, http://www.forbes.com/quotes/1378.