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lenny-mendonca's picture

The Most Important Question in Business Today

We have all been witness to the tremendous contributions that business and markets have made in creating wealth over the last few decades, raising the standard of living for millions. This can be seen in the development of medicines, enhanced food production techniques, broad proliferation of communication technologies, and a host of other life-affirming advances. Yet, in the face of these accomplishments and a dramatic economic downturn, we are also keenly aware of inequities and promises that remain unmet.

 In the wake of the financial crisis we are now confronted with evidence that confidence in business and markets has been profoundly shaken. This is seen in the tremendous destruction of wealth, a surge in government and regulatory activities, and heightened social and environmental challenges that are now in stark relief from Columbus to Copenhagen. Add to these developments those trends have been gaining momentum well before crisis—a growing talent shortage, the rise of Asia, climate change, demographic shifts, and others that I and my colleagues at the McKinsey Global Institute have been studying and you have the makings of a perfect storm.  

 This storm is the coming together of many events, and portends powerful changes that are capturing the attention of many of the executives with whom I speak. To prepare for these changes in the roles of business, governments, and the social sector, what's required is the “smart evolution” of business thinking and strategy. Simply stated, it means creating wealth in ways that are more considerate and aligned with the natural systems upon which all life depends.

 This begs the question: What is the proper role for business and its leaders in society, and in the communities in which they live and operate? Getting the answer right is one of the single most important components for building a successful business of the future. I submit that companies that do so will win. Those that do not will disappear. In fact, these issues matter so much that they must occupy a place at the heart of corporate strategy -- not in some sideline or administrative function. The value at stake is too great to not be treated in that way. Many, though not all leaders, are coming to agree.

Admittedly it's still more the norm that institutions and the people that animate them become caught up in internal matters and day-to-day concerns, losing sight of the wider world outside. This gives rise to a second critical question: How can business properly fulfill its role and responsibilities in society given current incentive structures? Our collective response to this will determine not just business success, but whether society succeeds or fails; whether communities prosper or suffer; whether we enjoy sustained economic growth or stagnation.

The answers are not always easy to square with the demands of the market. And yet, the very success of the market, of societies, and of the corporations that operate within them are determined by their effectiveness in getting this right. Our shared prospects for success are determined by the skills that come from our education systems, the quality of our water and air, the effectiveness of our governments, and other building block elements that all now require our most serious attention.

External shocks the likes of which we have just experienced only sometimes arise with limited warning. However, most threats to business arrive after considerable indication of a coming storm. Leaders whose strategies embed and build the capability to sense, shape and prepare for long-term horizon risks and opportunities are better positioned for the trends that will punish their competitors. This is undoubtedly the shape of winning business strategies for the future, and we have an urgency to embed this type of thinking more deeply in strategy than ever before.

Three question for management innovators:

1. What are effective ways to elevate and place business-society issues on the leadership agenda?

2. What are innovative ways and examples of how these issues are becoming more entrenched in corporate strategy?

3. What does it mean to get wealth creation right?

 

Throw your ideas into the MIX here in the comments and/or contribute a Hack or a Story in response to these questions. I look forward to engaging with you on this vitally important topic.

 

 

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thomas-simon's picture
Help! Been working on transformative change my entire career. See www.myioffice.net  - I am 65 years old, live in rural Iowa  - totally disconnected from resources of capital and management. Yet have self-fiananced and built over 13 years an extraordinary transformative platform. I have a pipeline of clients  - some so large it is head spinning - yet I need help since I am not well heeled - by any means - and virtually shut out from traditional sources of working capital... help! help!  
erika-ilves's picture
Hi Lenny,
 
Your blog post has been working me for almost three months now. Your analysis and framing the issue of the role of business and its leaders in society as the Most Important Question in Business Today resonated 100%. Yet I found it hard to engage the questions you pose to the management innovators. So, I kept coming back and re-reading your blog until I could finally put a finger of what was tripping me up. 
 
I find it hard to move beyond ideologically-inspired answers to the question about the role of business in society without firmly grounding myself in larger context. What is "proper" without a full picture of what needs doing, be it on a planetary scale for global businesses or regional scale for more localized businesses? 
 
So far, we have conceived of "proper" in somewhat static and inside-out terms, looking at the world through the lens of business (i.e., answer 1.0 was "the business of business should be business or maximizing shareholder value"). Then starting back in the 1980s, we started to look at the same question through the lens of society, but as if it were on the other side of the fence, separated from business yet housing a wide range of stakeholders impacted by business operations (i.e., answer 2.0: "business should maximize stakeholder value"). It is hard enough to manage Investors, Employees, Customers and Suppliers in the 21st century. But when you add scores of stakeholders into the equation, each insisting on being treated as the business' most important customer, the leader's job - even with the best intentions - gets overwhelmed by complexity.
 
Perhaps, the key to unlocking this complexity and conceiving of a "proper" role for business and its leaders in society resides in reversing the relationship suggested in your second question to the management innovators: "What are innovative ways and examples of how these issues are becoming more entrenched in corporate strategy?" Instead of trying to entrench these issues in corporate strategy, we could try entrenching corporate strategy in these issues. Here is what this would mean in the context of global businesses: Before conceiving of corporate strategy, the CEO would need to temporarily let go of his habitual window on the world as the CEO of a particular business, and try to make sense of what needs doing on a global scale. In a sense, it's like imagining that he or she got a temporary promotion, moved one or more levels up to the level of Planet Inc CEO. What should be the mission, vision, strategy for the human race? What are the goals and deliverables for the Human Project?

Creating a coherent narrative about the Human Project would force leaders to consider, organize and prioritize what needs doing from a world-centric perspective. This narrative then becomes the story about the world a particular business or industry operates in and opens up the solution space for what the role of a particular business should be given what needs doing within the Human Project. Corporate strategy becomes contextualized and entrenched in the Human Project rather than the other way around.

"Proper" is no longer defined in a vacuum but in direct relationship to what needs doing in the world. As 'what needs doing" changes and evolves, so should the meaning of "proper." So, we are getting closer to a dynamic and context-dependent answer to the question about the proper role of business and its leaders in society in the 21st century.
 
If you are interested in this line of reasoning, we have developed it further in our hack "Planet Inc. CEO --  Leadership Fit for the 21st Century." Based on this line of reasoning, we could re-imagine the mission for the McKinsey Global Institute, too.
 
Thank you for posting your questions. Nothing quite energizes a management innovator's mind like the most important questions.
 
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neelesh-marik's picture
Chip Conley, in his summary talk on the recently concluded Enlightened Business Summit, puts this whole thing very succinctly: 
Business must move the focus from being the best in the world, to being the best for the world.
 
The simplified Maslow-like progression then becomes: survive --> succeed --> transform
lenny-mendonca's picture
Thank you for this and apologies for the delay in response. My original post went up ahead of a holiday break. I very much like the addition of Maslow's psychological elements to this argument.  Appreciate you sharing.  -LM
tory-gattis's picture

Thought I'd pass along something I've written previously that you may find relevant to your questions:

The Economy and Organizations

People have needs.  A common articulation of these broad needs would be Maslow’s hierarchy of needs in order of priority (see graphic[1]).  People grow and mature up through Maslow’s hierarchy through repeating cycles of contentment -> discontentment -> aspiration -> achievement -> contentment, i.e. as they satisfy lower level needs they aspire to meet higher level ones.

 

In a capitalist economy, people specialize their skills and then trade their services to meet these needs.  Organizations act to coordinate large numbers of people and their skills toward creating a set of products and/or services for customers to meet their needs.  Money can be thought of as “tokens of gratitude” that people give in exchange for having their needs met.  Profit is a measure of value creation: input resources are transformed into output goods and services, and the difference (profit) represents the amount of value created (i.e. items with less total value to people have been transformed into items with more total value to people).  High profits act as a signal to attract additional capital to grow to meet the market need, both to the organization itself and to its competitors.  Competition keeps a lid on profits.  Creativity/innovation enables the meeting of more needs with fewer resources, which can also be expressed as maximizing return on assets (ROA) or improving productivity.

A more productive/efficient economy allows a broader portion of society to evolve faster through Maslow’s hierarchy.  Since fewer resources are required to meet a need, it becomes more affordable for more people.  It also frees up society’s resources for meeting higher-level needs (i.e. fewer resources required for housing and transportation allows more resources for education, therapy, and meditation teachers).

A new type of asset that has risen to prominence in recent years holds tremendous promise for vastly improving the productivity of our economy.  Traditional assets, like land, physical equipment and employees’ time, have a one-time acquisition fixed cost, ongoing variable cost, and limited utilization (i.e. they can only be used for one function at a time).  We might refer to these as “scarcity assets.”  On the other hand, this new asset type still has a substantial one-time fixed cost, but little or no variable cost and unlimited utilization/duplication.  Examples include intellectual property, databases, knowledgebases, software, medicines, brands, processes/methodologies, and educational and entertainment content.  We might refer to these as “abundance assets” - once they have been developed and investors have received a return on their investment, their availability to society should be unlimited and their long-term price should move towards zero.  Abundance assets have the potential to dramatically improve productivity, increase global wealth, and accelerate the evolution of society through Maslow’s hierarchy.

So the net economic, social, and even moral purpose of organizations becomes clear:

  • help more and more of society evolve up Maslow’s needs hierarchy
  • by meeting customers’ needs
  • using fewer and fewer resources
  • through investing in abundance assets
  • to improve productivity.

It should also be noted that as more of society moves further up Maslow's needs hierarchy, they tend to become more conscious of and motivated by global issues, including social and environmental challenges.


[1] Maslow’s extended hierarchy of needs: http://www.edpsycinteractive.org/topics/regsys/maslow.html