Inherent Business Differences and Their Impact on Balance

Two factors describing the underlying nature of a business largely determine whether there is likely to be a tendency toward stakeholder balance or imbalance. The first factor is whether the product or service may be regarded as “noble” in its own right (noble here may be interpreted as a product or service that serves broad societal interests, as well as producing individual customer satisfaction). The second factor is the average level of profitability that prevails in the industry. Figure 9-1 shows four basic and contrasting conditions in which a company may be situated. It is also true that, in such a four-cell matrix, companies in the upper right-hand cell (i.e., with noble products or services but low profitability) often tend to be nonprofit businesses. Companies in the remaining cells are usually in for-profit sectors.

Let us now describe each of the four underlying situations in more detail, and use a simple two-dimensional map of purpose and performance to depict these contrasting situations and approaches for each of the five stakeholders to better understand the possible interactions among each.

Products or Services with High Nobility and High Average Profitability

Examples would be health care products such as pacemakers, eye care devices, or implant hearing aids, represented respectively by companies such as Medtronic, Alcon, and Cochlear. In such businesses, stakeholder balance is not a given, but is certainly easier to achieve than in many other businesses (see Figure 9-2). The very fact of higher profitability provides at least the prospect of satisfying more than one stakeholder, and the noble nature of the business tends to inspire passionate leadership, motivated employees, and at least a promise of societal progress. In the long run, as Figure 9-2 also shows, high performance on each dimension and strong internal balance is likely to be maintained because the virtuous circles so created are self-reinforcing.

Products or Services with Low Nobility and Low Average Profitability

Examples here would be old-technology coal mining, standard disposable plastic utensils, or nondegradable packages. Here, balance is difficult, if not impossible, to achieve (see Figure 9-3). Low profitability means that Peter has to be robbed to pay Paul, and shareholder value usually achieves primacy (often eventually undermining the long-term value creation process itself). Also, low nobility often means doubtful or disgruntled employees, dispassionate leadership, and the specter of societal regress. In the long run, as Figure 9-3 also shows, performance on all dimensions may fall even further as vicious circles are set up that further impair already fragile balances. A diminishing cake invites unhealthy internal competition for ever smaller slices of the shrinking benefits.

While companies in the top-left cell of the matrix (e.g., Medtronic, Alcon, and Cochlear) often exhibit natural balance and companies in the bottom-right (e.g., coal mines and disposable commodities) exhibit natural imbalance, companies in the other two cells may be more or less balanced or unbalanced and may be managed in two very distinct ways. When one dimension of performance is overly emphasized at the expense of others, vicious circles result, which only aggravate imbalances, often resulting in lower performance overall. When, however, management actively pursues strategies toward balanced performance, not only does each individual dimension improve, but interactions produce further positive effects overall. A virtuous circle results, in which performance on all five dimensions can increase. We may envision these interactions schematically by depicting the short- and long-term consequences of different primacies of purpose on maps similar to those used earlier.

Products or Services with High Nobility, but Relatively Low, or Even Negative, Average Profitability

Performing arts companies (even the Bolshoi has trouble making ends meet) or drug rehabilitation centers, such as San Patrignano near Rimini (which is nevertheless an outstanding example of getting near to financial sustainability, despite its underlying characteristics), are good examples. Balance here is an open question, depending very much on leadership and its priorities.

Vicious Circles Predominate

As Figure 9-4 shows, when high nobility is combined with low average profitability, the short run is often a mixed picture. Dedicated and passionate leadership can create value for the society and for customers, but employees sometimes get left behind (in financial compensation if not in motivation), and profitability, by definition, is low. In the long run, in the absence of any offsetting forces, vicious circles set in where funds shortages jeopardize the very accomplishment of the leader's vision. In turn, unless there is great stamina, personal leadership commitment is also undermined eventually, with falling performance all around.

Virtuous Circles Predominate

With the same underlying business characteristics, proper regard for the financial side of the activity can make all the difference. By taking this into account, as well as the people who work to actually create value for the customers, leadership passion is fully exercised, customers are satisfied, and society benefits. A classic example would be Diaghelev's success in taking the Ballets Russes^[4] to France in the early 1900s. His passion and the dedication of his troupe were uncontestable. His talent to identify a totally new way of bringing together different art forms (each of which he mastered to a high degree himself) resulted in ecstatic Parisian audiences. Ballet literally took an upward leap. This success in turn provided an ever stronger case for funding, and Diaghelev himself always kept his eye on this financial side, tapping his allies in the Russian court to keep the Ballets Russes financially afloat, at every possible opportunity. This virtuous circle went on for 20 years, even surviving the World War I. It ended only with Diaghelev's death. Figure 9-5 shows a typical short-run imbalance for this kind of business, and how, in the long run, virtuous circles can lead to higher performance and better balance all around.

Products or Services with Low Nobility and High Profitability

Alcohol and tobacco companies come to mind here (e.g., Philip Morris or British American Tobacco). Again, balance is neither guaranteed nor excluded. It all depends on leadership's priorities.

Vicious Circles Predominate

A very analogous situation to what we have seen earlier is created. Here, however, profits start high but end lower in the long run because of lack of attention to leadership's own purposes, to people and their motivation, and to the ever open trap of societal regress. Conceptually, the result is similar: exacerbation of imbalances and falling performance all round. Profitability itself is undermined at the end. Lawsuits against the tobacco industry related to the health hazards of smoking are a good example of this downward spiral. Figure 9-6 attempts to capture these scenarios schematically for the short run and the long run.

Virtuous Circles Predominate

With the same starting conditions, strong leadership can make all the difference. We have seen this clearly demonstrated by leaders in the oil industry and in the chemical industry, where the potential for environmental damage is large. From a less glorious past, there are signs now that stronger leadership is paying much greater attention to performance, not only on the bottom line, but across all other dimensions of purpose, and particularly the environment. A marker point in this reversal was the attempted sinking of the Brent Spar by Shell. It became painfully obvious, as German drivers boycotted all Shell gas stations, that to ignore the society at large was an extremely perilous undertaking from a financial perspective. There was a substantial risk of profits landing in the basement, not only in Germany but all over Europe, as the boycott threatened to spread. Figure 9-7 shows scenarios for the short run and long run for these kinds of business.