Purpose and AAPT a case study

I stumbled upon an odd little group yesterday that calls itself the Ideas Lunch which is an extension of a book summary activity called Book Rapper. A pleasant enough activity.

Yesterday's lunch was on a book by Daniel Pink called Drive: The Surpising Truth of What Motivates Us.

The discussion probably wasn't that much on the book, which tries to make its theme that it is intrinsic motivation rather than extrinsic motivation (the carrot and stick of the corporate world) that motivates us. I tried to put the excessive reliance on extrinsic motivation into what I think is its correct institutional and political context.

The concept of a firm as it is applied in standard microeconomics relies upon the concept that the firm is a "profit maximiser". All the actions of the firm are understood, indeed predicated on, this being the firm's motivation and the prediction of how the firm will behave rests on it. Standard theory then suffered a major crisis when Berle and Means undertook their empirical study, published as The Modern Corporation and Private Property.

This book neatly explained why CEO's might pursue other strategies, most particularly things like a revenue maximisation rather than profit maximisation. The response of economics was not to change their theory to match behaviour, but instead to mount an attack on what was labelled the principal/agent problem. And thus began the tradition that mouths "the purpose of the firm is to create shareholder value".

But this is patently a nonsense. It describes neither the history of the development of the concept of a joint stock firm, nor the process by which any individual firm comes into being. The history of the firm as a concept was the development of big or risky projects - initially major sea trading expeditions and "city" works projects - that could not be accomplished without sharing the risk or adding capital from multiple sources. In all cases the purpose - the voyage or the sewerage system - preceded the capital formation.

The same is true of any other new business. The fundraising prospectus does not say "let's form a company to deliver shareholder value" it says "we have identified this market need and by doing these things we can meet that need and pay investors a return for their capital employed". The real "purpose" of the company precedes the generating of the return to shareholders, but return to shareholders is still a necessary condition.

This feeds into motivation by understanding the work of Blake and Moutton in
The Managerial Grid. This book suggests that managers make a choice between focusing on the task and focusing on their people. They describe a manager as sitting on a Cartesian grid of these two dimensions. A (9,0) focuses only on people a (0,9) focuses only on the task.

They suggest most real managers are "statistical (5,5)'s". That is one day they worry about the task then the next have a staff picnic to worry about the people. But they also suggest that managers can be a (9,9). The path they build rests on the fact that people feel happy when they can understand their contribution. So by being clear about the task and how it contributes to the firm's purpose and encouraging them an d supporting them can result in a focus on the task AND on the people.

Of course the success of the strategy needs a firm purpose that is grounded in what the firm exists to do - not just how it pays for capital. My thesis is that the vision and mission "thing" is vital to company success.

The reference to AAPT is fed by the plethora of stories about the impending sale of AAPT. It made me think about the varieties of telcos and how they succeed or fail.

AAPT grew out of the news service AAP. When AAP started selling news services direct to corporates in the 1980s they fell foul of the rules prohibiting "interconnection". AAP became a leading firm lobbying for change to the rules, and then put its money where its mouth was and spawned a competitive telco. As such the company always had a purpose - to bring the benefits of competition to telecommunications users.

When the firm was acquired over 1999-2000 by Telecom New Zealand this changed, not least because the parent firm didn't believe in that purpose. Telecom itself attempted a project in about 2004 to define its own purpose beyond generating shareholder value. It composed a very powerful narrative of its purpose as being to fulfill people's need to communicate. Unfortunately it was never allowed to dominate the strategy discussion (and I think the whole episode is left out of Theresa Gattung's memoir Bird on a Wire.

As AAPT lost its purpose the next generation of "telco" found theirs. What defines Internode and iiNet is that they are companies driven by people whose passion was to make the Internet available to everyone. I don't think Simon Hackett or Michael Malone sat down and said "I can make money by being an internet service provider". The reason for building an ISP from scratch was so they and their mates could enjoy the Internet.

A company's "purpose" doesn't have to be "causal" - the need of people they want to satisfy can be mundane or even outright evil. But to be truly successful the company has to know and explain what is the purpose that comes before "making money".