The Value Creation System: Stakeholder Purposes, Contributions, and Derived Benefits
There are five central stakeholders in the value creation system: customers, shareholders, employees (not only within the firm's four walls but in the value-creating business system), leadership, and society. Each has its own purposes, makes its own contributions to the system's functioning, and derives its own benefits. Each, intuitively at least, understands that value creation is a system with multiple stakeholders and that there are interdependencies among each. Because of these interdependencies, and partly because of the system's overall capacity or lack of capacity to create value, the benefits received by each stakeholder may or may not measure up to the original purpose. As with a tandem bicycle, perceived extra effort from one partner may be rewarded with concomitant effort by another; foot dragging may be reciprocated. The result can either be a virtuous circle of mutual commitment to higher output or a vicious circle of less and less output.
The enterprise value-creation process is similarly susceptible to virtuous circles and vicious circles. When the system is in balance and stakeholders perceive equity, value creation is enhanced; when the system is in imbalance and stakeholders perceive inequities, value creation is diminished. Those perceiving inequity may reduce their commitments or even withdraw from the process.
Perceived inequity can arise for one or both of the following reasons: A stakeholder perceives inequity in his own transaction with the system in the sense that actual derived benefits fail to match up to contributions (e.g., when customers perceive that the price they are paying for services rendered is unreasonably high). A stakeholder perceives inequity vis-à-vis other stakeholders, as when employees are asked to accept flat wages while their bosses take home huge bonus payments.
In either case, the result is the same; one or other contributor to the value-creation process reduces their commitment to the detriment of overall value creation.
The main purposes (and hoped-for benefits) and main contributions to value creation for each of the five major stakeholders are shown in Table 9-1.
| Stakeholder | Main Purpose (and Derived Benefits) | Main Contribution | Abbreviation |
|---|---|---|---|
| Customer | Satisfaction | Price paid | cus sat |
| Shareholder | Shareholder value improvement | Capital | shr val |
| Employee[*] | Benefits in terms of compensation, meaningful employment, personal growth | Work, motivation, followership | emp ben |
| Leadership[*] | Self-realization in terms of personal accomplishment, creativity, financial reward | Passion, commitment, leadership | ldr realz |
| Society (mankind, nation, region, and/or community) | Progress (at least not regress) | “Access” to society's legal, environmental, and educational infrastructures, and to the advantages (disadvantages) of a free (closed) economy | soc prog |
[*] Many employees are also leaders, and vice versa. The distinction between employers and leaders is therefore prototypical only.
There is nothing in Table 9-1 to suggest that shareholder purpose has any particular supremacy over the purposes of other stakeholders. The truth of the matter is that each stakeholder is much more likely to pursue primarily his own purpose, and to see the other stakeholders as means to his ends rather than ends in their own right. We may therefore reasonably speculate the following.
From the perspective of a shareholder, shareholder value creation is beyond doubt the ultimate end purpose of the enterprise, and customer satisfaction, motivated employees, committed leadership, and societal progress (at least compliance) are the means to achieve this end.
From the vantage point of public policy, however, we could well imagine a different primacy; namely, that the ultimate end purpose of the enterprise is societal progress, and that adequate returns to shareholders, committed leadership, customer satisfaction, and motivated employees are the means.
From the customer's point of view, outstanding products and services that exactly fit individual needs are the ultimate end. What happens at the level of the enterprise must be considered from the customer's standpoint mainly as a “black box” that provides the means to achieve his ends.
From the leader's point of view, satisfied customers, motivated employees, societal progress, and value creation for shareholders may, in reality, simply be the means to satisfy personal creative passions and ambitions.
And that if we ask employees what they really want, and why they dedicate themselves to their jobs and careers, the honest answer is much more likely to be their own personal growth, satisfaction, and compensation than the well-being of the shareholder.
Primacy of purpose obviously depends on which vantage point one looks from.