Hack:
Purpose Driven CapitalismPlus – Reimagining Capitalism as a 5 Dimensional Market System with a 5M Mindset and 3V Heartbeat!

Step 1:  Redefining the spirit and essence of Capitalism by resetting it with a profound Seedal Chain Principle

As it turns out, the best way to answer this five part question, is to re-imagine capitalism as a purpose driven Capitalism Plus, in five dimensions, as outlined below - 

• First and foremost, it is all about re-imagining/regrouping  the Meta market’s expected and unexpected events in Force, Energy and Power dimensions (or space-matter-time dimensions in a larger universal context) using nature’s  energy management principle, to help design the right type of resistance mechanism for the right type of event. In other words, one of the lessons learned from the 2008 financial meltdown crisis, among many, is that the capital markets, in the larger context, did not have the right type of in-built resistance/replenishment/recharge type automatically triggered mitigating mechanism for the right type of event. In other words,
  • Energy  oriented events to be handled  with matter dimension based proactive efficient replenishment mindset
    • Market motivation energies (i.e. internal motivation to get prosperous etc) and tangible and intangible capital resources including the natural resources etc, need to be handled by an in-built recharge mechanisms to replenish them.
  • Forceoriented events to be handled with Space/distance dimension based proactive resistance mindset i.e. (note : Force=Energy/distance)
    • Expected events or manmade events like bank/trade risk migration, environment sustainability risks, state and health of labor force, rise of state capitalism, radical movement, evolution and pandemic etc need to be handled with sufficient elastic cushion space to re type resistance mechanism to bounce back from the impact.
    • Unexpected event or Messiah made unexpected events (pandemics, natural etc) also need to have a similar elasticity, but then must have plan B type alternate path of execution to bounce back quickly.
  • Power oriented events, to be handled with time dimension based proactive effective channeling mindset. (note : Power=Energy/Time)
    • Policies from Social/political institutions, religion, ideology etc. need to have a timely lever to channel/control its dosages and its impact on the system.
• Reimagining the means  - i.e. from the current shareholder value focused multiples method at the ticker level and GDPat the country levelto a three dimensional Triune Shared value(TSV) mindset i.e. Stakeholder value +Societal Value+ Emotional/Cultural value
• Reimagining the method i.e. from single dimensional capital market system to a five market system with a causal chain among them.
• Reimagining the metrics with three dimensional TSV value formulas that are manifested in 5 different intermediate forms within each of the five market systems.
• Reimagining Mediation as self regulated mechanism using “inside-out” emotional/cultural motivational energy driven ethical mindset, with minimal government involvement.

Step 2: Redesign it as a 5 dimensional Value market system with a fundamentally patient 5M Seasonality Mindset

Let’s face it - the true value of any market system, is primarily driven by its equity prices, which in its essence is the summation of its “future cash flow value” and its linkage to “future expectation building abilities” discounted by today’s cost of capital. While there are quite a few valuation models (e.g. McKinsey’s Zen of corporate Finance formula, multiples method, DCF, NPV, IRR) available, to accurately quantify the cash flow value of the individual assets and its cumulated value, there are not many proven models available, to accurately establish the causal chain relationship between the “tangible cash flow driven capital value”  and intangible “expectation building abilities” - and so, stock markets, often follow the tread mill effect of trading on misinformed  causal chains and mismatched expectations.

Part of the reason for that behavior is that, the so called “causal chains” within the “expectation building abilities” are often hidden within the “intangible” value creating capitals of the economy (i.e.  Purpose, human, Intermediate Goods and Product capital, per our Cplus design) and so, they are not well understood by the capital markets, within its right context, especially when it comes to the causal chain relationship among them. “Causal chain relationship among the expectation building abilities” in this context, all comes down to answering the following question –

• What events cause or trigger the motivational purpose energy (or vision or a dream) to go through the 3 intermediate  value creating steps in the forms of capital of CPLUS (i.e. human, Intermediate Goods, Products) and how, before transforming itself into an equity capital?

All said than done, the challenging part of answering this question is that those three value creating steps (or causes) that happen within the four walls of the company, are not usually visible to the larger capital market, where the corporation's stock is traded. This is the primary reason, Capital markets, by and large, trade on the “Expectation building abilities”, that are derived from the earning guidance, product portfolio pipeline for the next 5 years, share repurchase program schedules/dividend payout, management changes and other big ticket capital expenditures - provided by company executives on an ongoing basis.

Trading Value vs. Creating Value – Another big challenge of Capitalism, in its current form

The implication is that  equity markets, either over react to those  “expectation building abilities” in the form of higher stock prices, or in some cases, under react (or some might suggest punish) with lower prices – purely based on the way, it interprets the causal relationship between the cash flow value  and the “expectation building abilities”.  As it turns out, this causality interpretation gap seems to be the single most important factor, driving many company executives and investors, within the current form of capitalism to get into this game of trading value, as opposed to creating them fresh, says Roger Martin.

What do we mean? From investor’s standpoint – while quantifying cash flow is important in making the near term investment decisions,  interpreting the causal relationship accurately, is key for them to bet on a stock for the long haul. Similarly, from company’s leadership standpoint – while quantifying cash flow value is critical for making effective near term operating decisions (i.e. achieving Q-To-Q results), framing the causal relationship among their value capitals and its “expectation building abilities” accurately, in the form of earning guidance statements, is very important to manage the expectations of their investor community and to stay focused on their long term strategic choices.

As it turns out, this causality gap between “expectation building abilities” (i.e. value that are buried within the intangible capitals like purpose, labor, IG, product capitals) and “cash flow based fully realized equity capital value” seems to another big hurdle faced by the capital markets today, apart from the insufficient resistance/replenishment/recharge mechanism that were identified as part of the Meta market events section.

And so, if we had to dissect the components of value life cycle of a firm -

• Invisible value of discovering the unmet “Jobs to be done”  value + Invisible idea/vision seed value +invisible incubator value + commercialization value(when there is no alternative product available) + commoditization value (when alternate products are available with heavy competition)

If we look at this equation, interestingly enough, they map 1:1 to the five markets within the Capitalism Plus’s five market structure. Yet another interesting insight here is that-  it also reiterates our earlier point that stock prices are often decided based on the commercialization and commoditization value components (i.e. equity market ), partly because, market does not have visibility to the unrealized invisible values of the early capital life cycles(i.e. remaining for capitals), the primary driver behind those expectation building abilities.

Five market system comes to life within Capitalism Plus framework

The question is how these five types of capitals within the five dimensional market system fit together? It all starts with the Purpose seed, transforming itself into an inside-out emotional/motivational energy capital called purpose capital, that is traded within the central purpose market, which then is exchanged in the form of Intellectual/Emotional/Cultural Capital(C+EC+CC) within the labor market as a human capital. This is when the human capital resources, start generating the creative ideas and solutions needed for the intermediate goods (IG) capital, that is traded within the IG market. While IG market is all about promoting the intermediate incubator value to the external world, Product market, on the other hand, trades the finished Product Capital (i.e. jobs to be done), which then ultimately gets traded in the form of investment capital within Capital – all linked together by a causal chain relationship and anchored by the central purpose market in the middle, delivering value in three forms (Share holder, societal and emotional/cultural value) – as outlined in the picture below.

Interestingly enough – this five types of capitals  map 1:1 to five markets -  suggesting the need for four additional virtual markets  on top of the equity  capital exchange ( i.e. primarily cash flow value driven)– and link them all together with causality - as outlined in the picture above and explained in detail in our firm’s Purpose driven strategic planning framework (http://www.managementexchange.com/story/strategic-planning-purpose-driven-way-using-nature%E2%80%99s-seedal-chain-principle)

1. Purpose equity capital exchange model ,based on the formula -> Purpose value= Profit x (1-g/ROIC)/ (WACP-g)
2. Human capital equity exchange, based on human capital growth, per one of my recent hack at MIX site (http://www.managementexchange.com/hack/reforming-performance-management-systems-%E2%80%93-virtual-purpose-equity-vizpity%C2%A9-exchange-way)
3. Intermediate Goods Market  or Value chain equity exchange based on the formula  ->ROIC= Margin x  Velocity
4. Product Market or customer “Job to be done” exchange, based on the formula -> Consumer/customer value=Jobs-to-be done/Price
5. Financial capital market which is today’s’ version of capitalism based on the formula ->Share holder value= Profit x (1-g/ROIC)/ (WACC-g)

Providing this type of valuation visibility in these five dimensions, not only will help us to accurately establish the causal relationships, but also, help us to increase the size of the value pie, with our profoundly principled, fundamentally patient and socially accountable approach.

With that said, I hear someone asking - how what does these five markets work together from the “day in the life” standpoint?  Here are few possible implementation configurations

• Tightly coupled “weight factor rating” model, where four Intangible Markets (Purpose, Human, Intermediate Goods and Product market) are configured as a public opinion/rating based markets, with direct linkage to the tangible Capital Market. In other words, traders are expected (mandatory) to submit a “weight factor percentage allocation” of their buy price, among the five markets, say (15%-25%-15%-15%-25%) respectively, which would give a clear indication of the motivation behind their trade (i.e. which market among this 5D market is motivating them to invest on this stock).  For example, traders who believe in the management and talent of the company will assign more weight to human market, whereas, traders who believe in the purpose/vision of the company will assign more weight for purpose market and so on and so forth.
• Loosely coupled “weight factor rating” model, where four Intangible Market (Purpose, Human, Intermediate Goods and Product market) are configured as a public opinion/rating based markets, with honorary linkage to the tangible Capital Market. In other words, traders are encouraged to submit a “weight factor percentage allocation” of their buy price, among the five markets, say (15%-25%-15%-15%-25%) respectively, which would give a clear indication of the motivation behind the trade (i.e. which market among this 5D market is motivating them to invest on this stock).  For example, traders who believe in the management and talent of the company will assign more weight to human market, whereas, traders who believe in the purpose/vision of the company will assign more weight for purpose market and so on and so forth.
• Reverse weight/value allocation model,  where we allocate weight to the four intangible market based on a pre-established weight factor distribution, say, (10-30-10-10-50), as decided by the company during the IPO.
• Reverse weight/value allocation model, where we allocate the weight to the four intangible market based on a pre-established weight factor distribution, say, (10-30-10-10-50), as decided by the public opinion/rating on a day to day basis.
• Transparent Internal company metrics driven weight allocation model linked to capital market value (multiples method and/or McKinsey’s Zen valuation formula) using our firm's CPM type system.

Please note that these options all need to be detailed out before it can become a working solution.

Step 3: Execute it with the socially accountable Triune Shared Value (TSV) portfolio heartbeat (Sequel)

While it all sounds great to link these five capitals with a causal chain within the context of this 5 dimensional market structure, one might ask, how do we make sure that they are executed with a socially accountable heartbeat?

Right off the bat, let us reiterate our earlier point that Capitalism plus, in its essence is a purpose driven, three dimensional triune shared value balancing market system (i.e. the “inside-out” motivational/emotional energy value balancing the remaining two “outside-in” stakeholder and societal value energies) using a 5 dimensional market system, with a collaborative 5M (Meta events, Means Mechanism, Methods and Metrics) mindset.

The question is what is this Triune Shared Value?

First things first – let us establish some context before answering our TSV question. If at all one thing we have learned from the CSR programs within large corporations, it is the fact that “pressure politics” driven charity programs have not yielded its intended results, and the primary reason being is, that corporations have not yet figured out a perfect way, to successfully link CSR programs to their Competitive Advantage, says, Professor Michael Porter. Having personally witnessed, how CSR programs are being run within few large corporations, we tend to agree with the Professor, and rightfully so, he is in the process of rebranding the decade old CSR concept, with an integrated approach of linking shareholder value with societal value, using his own flagship concept of Competitive advantage (CA), as CA is the only motivational energy that is capable of compelling corporations and societies to work together to create such shared value. By now, I am sure, most of you would have guessed, what we are talking about – Yes, the buzz word for his new approach is called, Creating Shared Value (CSV).

Outside-in vs. Inside-out energies

With that said, as we started further analyzing the origins of the two outcomes within this CSV (i.e. shareholder value and societal value), it became apparent to us that they both happen to be sourced and  manifested as “outside-in “energy motivational sources (shareholder and societal) respectively.  As it turns out, outside-in sourced outcomes, in general are not sustainable (per the law of nature), unless they are balanced by one or more of the inside-out energy sources and this is where our purpose capital traded within the purpose market of our 5D market structure fits the bill.

With that said, as we further started analyzing CSV with this emotional energy driven cultural/emotional value lens, we saw a Triune Shared Value (TSV) concept emerging, which by the way, happens to be sourced from our firm’s Virtual Ocean Strategy framework – which makes us to hypothesize – TSV, perhaps is the next wave of CSV?

• CSR = Shareholder value+ Societal value (With no direct linkage to CA)
• CSV = Shareholder value+ Societal value (With direct linkage to CA as defined by Michael Porter)
• TSV = Emotional energy driven cultural value, primarily derived from the purpose capital within Capitalism Plus’s 5 dimensional market structure+ Shareholder value+ Societal value (With direct linkage to SCA)

Leveraging Michael Porter’s CSV definition – we see the following TSV definition emerging – as TSV after all, in its spirit and essence is very similar to CSV, with some minor tweaks -or simply put, TSV is nothing but CSV in steroids!

• TSV is a Purpose Capital driven Motivational/Emotional/Cultural energy value driven policies and practices that enhance and sustain the collaborative competitiveness of a company while simultaneously advancing economic and social conditions in the communities in which it operates - as outlined in the picture below.

With that said, we hear someone bringing up another argument – while it all sounds great to talk about CSV and TSV – but, what counts, at the end of the day is just share holder value – as most valuation formulas are all based on just three key financial ratios of growth, ROIC and cost of capital – as highlighted in one of our earlier articles. While there is a merit in that argument, more and more research is confirming with empirical data, that there is a direct correlation existing among emotional energy driven cultural/emotional value, societal value and shareholder values. The question is how we quantify those correlations, using a financial formula, very much like how share holder value is being quantified using a financial formula.

TSV components expressed as hypothesized financial formulas

Interestingly enough, we had proposed  one such correlation in the form of a hypothesis called purpose-profit balanced societal value  formula, with a new metric called WACP  - which is nothing but a  Weighted average of WACC (weighted average cost of capital) and WACP(weighted average cost of purpose  in one of our earlier articles (http://strategywithapurpose.blogspot.com/2010/11/purpose-profit-balanced-sustainable.html). Interestingly enough, our hypothesis was recently being validated by Wharton Business School Professor Henisz with his empirical data based findings, as highlighted in his article (http://knowledge.wharton.upenn.edu/article.cfm?articleid=2814#.TieL9eTHQt4.email) - which means our hypothesis was spot on!

• NOPAT x (1-g/ROIC)/ (WACP-g)

Similarly, we had also proposed another Purpose Capital driven cultural/emotional value correlation in the form of a hypothesis called Purpose Capital driven cultural value formula – as Purpose Capital driven cultural value, like share holder value, is just discounting our future heavenly experiences (which happens to be faith & hope driven in most denominations/religions), based on today’s cost of emotional capital (which happens to be love in most denominations/religions), that is expressed using our own version of Zen of Purpose Capital Formula, listed below. In other words, we not only need to grow with a purpose capital mindset, but also, must learn to exercise our purpose capital energies of faith & hope, in a prudent manner, and start applying those energies within the capitalistic society, above and beyond the minimum threshold of collaborative love (or cost of Purpose Capital driven cultural/emotional capital called love), for us to increase our Purpose Capital driven cultural/emotional value.

• Purpose driven cultural/emotional energy value= Purpose Capital driven cultural gain x (1- Purpose Capital driven cultural growth/Return on purpose driven cultural capital)/ (collaborative love threshold-purpose driven cultural growth).

Now that we have a set of hypothesized formulas for societal and purpose capital driven cultural/emotional value components, we see a holistic TSV value equation evolving.  Granted, lot more research, with empirical data needs to be done before publishing these formulas as working formulas, however, Professor Heinz’s recent work is the step in the right direction and we are happy to see that his research has validated the underpinnings of our purpose driven societal value formula.

Virtual Ocean Strategy (VOS) to Triune Shared Value (TSV) mapping

 With that said, yet another interesting aspect of TSV  is that, it happens to be perfectly sourced from our firm’s VOS frameworks on a 1:1 fashion,  as we had alluded earlier and shown in the VOS-TSV mapping picture on the top of the page  and further reiterated in the following mapping  as well.

• VOS’ Purpose Driven Leadership (PDL) Framework -> TSV’s Purpose Capital driven emotion/cultural value
• VOS’ Portfolio-Thread View based Strategic Planning Framework -> TSV’s Shareholder Value
• VOS’ Purpose Innovation Portfolio (PIP)Framework (PIP) -> Societal Value

As we further look at this 1:1 mapping, it is interesting to see that VOS’s SCA equation is the one that happen to bind the VOS and TSV components on a 1:1 fashion. Speaking of our own version o SCA equation, we would like to reframe it as Sustainable Completive and Collaborative Advantage (SCCA) to highlight the sub component called collaborative cultural value advantage, within our SCA equation, that facilitates such type of binding as well.

• SCCA = market or experience advantage + capability or competency advantage + collaborative cultural value advantage

While the first two components of SCCA are sufficiently being explained in our earlier articles using EPP© and CPP© frameworks , we would like to highlight Collaborative Advantage , the third component  within our SCCA equation, as further explained in our Purpose Innovation Portfolio( PIP©) framework. Purpose Innovation is a revolutionary, boundaryless innovation concept that helps us to increase the size of the value pie, by tearing down the artificial trading boundaries among corporations, within both related and unrelated industries, using a powerful causal chain (externality, H&W, sustainability etc) which by the way, happens to perfectly align with our earlier implication of supporting bolder ideas of accommodating the needs of 10B billion people of planet by 2050. And so, in our humble opinion, Purpose Innovation is the next wave to unleash these sustainable growth opportunities within CapitalismPlus, especially within the pull side of the value chain, as covered in one of our earlier articles (http://strategywithapurpose.blogspot.com/2011/01/purpose-innovation-answer-for.html).