Monday, May 31, 2010


That's the title of a book by John Kay. I've only looked at it but not read it yet.

An idea of its contents though is given in this article. The principle idea is that complex goals are best reached obliquely, not directly. To climb a mountain you traverse it you don't go straight up.

A classic example is the concept of a firm. The profit of a firm is a very complex consequence of the interplay of a number of factors. Many firms when they set profit as an objective fail because they do dumb things - like expand into the wrong markets, cut costs instead of expanding service.

The example he gives is the pharamceutical industry and the relative success of firms that have serving the customers/market need as the goal, versus those that state profit is the goal. The former make more profit!

My current favourite example is what's been happening with telco customer service. As marketing makes the product ever more complex driving more calls to contact centres, the cost f customer service goes up. So the profit maximiser reduces the per unit cost of a call, often by outsourcing. Quality however also declines, and if it includes offshoring, customer satisfaction declines even if due to bias. If the goal was customer satisfaction he strategy would be to remove the need to call or improve first call resolution.

I'm prepared to bet that nowhere in the accountability system do the marketing/product managers have a metric about how mny calls are generated by their individual plan or offer.

If you think about the theory of the firm, it is clear that firms do not exist to "maximise shareholder value". Firms exist because someone identified a need in a market and identified that to meet that need required more capital resources than they could muster and/or required the internalisation of a lot of interactions between individuals. Capital is an input, like labour, that you need to give a return to for its use. The firms objective is actually to minimise its cost of capital - usually achieved by balancing debt and equity financing. The objective with equity financing is to generate a return for shareholders, for their added risk of being unsecured they expect a return higher than debt financers. That can either be through a stable dividend or the prospect of asset growth.

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