Source of error: performance targets
“Don’t aim for success – the more you aim at it and make it a target, the more you are going to miss it. For success, like happiness, cannot be pursued; it must ensue, and it only does so as the unintended side-effect of one’s dedication to a cause greater than oneself or as the by-product of one’s surrender to a person other than oneself. Happiness must happen, and the same holds for success: you have to let it happen by not caring about it.” Victor Frankl
WINNERS ARE MORE LIKELY to set out to serve than to win. This is a particular case of a general rule, sometimes called the oblique principle. This rule suggests that we do not normally get what we aim for. Companies with purely financial objectives are not as profitable as those with more customer-centred objectives. For example, James Collins, who has researched enduring great companies for some 20 years, found that companies that set out to maximise profits end up being less profitable, on average, than those with more “visionary” goals. Indeed, this “round-about method of thinking” has always been at the heart of the marketing concept: winners discover that the best way to enrich their shareholders is to focus their collective efforts on creating value for their customers. Shareholder returns are, in this sense, a by-product of the ability to create a continuous flow of repeat customers.
Peter Drucker, one of the founders of management as a field of study, famously made the point that “the purpose of a business is to create a customer”. Economic profit is the reward that markets bestow on those firms that succeed in this endeavour. In other words, profit may well be the most reliable measure that we have of a company’s success – and of course it also provides the fuel for a business to continue to create a sustainable population of repeat customers – but as an objective for the business and as a focus for the activity of its employees, it is counterproductive.
Likewise, the method of thinking that uses anticipated cash flows rather than anticipated competitive market response to judge the viability of any particular strategy is flawed. The focus of investment appraisal should be upon the reasons for believing that one strategy will beat another, not upon ways of configuring the cash flow estimates to yield the right new present value. It is notoriously easier to invent positive cash flows than viable winning strategies. Cash flows are the consequence of strategies, not their justification. Financial markets are fair. A positive net present value is the reward that markets give to firms for competing effectively in customer markets. Cash flow projections merely add a disingenuous element of spurious precision.
The oblique principle also has many other applications in business. For example, financial measures of performance are a lousy way to motivate employees. Most of us do not go to work to enrich shareholders even though we recognise the virtues and merits of capitalism. We go to work to express our talents, to earn a living, to socialise with colleagues, to participate in exciting projects and perhaps to make a difference to the world. Effective organisations play to these motives. Winners seek to fulfil the higher needs of their employees.