In the course of my training with business leaders, we inevitably come to the existential business question… “What is the purpose of a business?”
This is a great question, and one with a very simple answer.
The purpose of a business is to create value.
That’s it. To create value. Plain and simple. That is what a business does.
On the front end, a business takes in materials, energy, labor, capital equipment, knowledge, and information, and on the back end produces some offering – typically a product or service – that is in some way of greater value to those who consume it than were those things that went into the front end. Certainly, the use of my iPhone is of far greater value to me than is the pile of glass, aluminum, and circuits that make it up. By so manipulating and arranging those inputs, the business produces an output with a higher net value. And it is this higher net value that the business can, then in turn, monetize in the marketplace.
In so doing, the business actually creates value for four different stakeholders – workers, customers, shareholders, and society. Workers gain value in the form of compensation, benefits, and, most importantly, the intrinsic value of having a sense of purpose and mission in the world. Customers gain value in the form of receiving and using the offering – because it does some job for them that allows them to achieve a desired outcome according to a particular need and motivation they have. These are jobs and outcomes for which they are willing to part with their own hard-earned income. Shareholders gain value in the form of quarterly dividends and increasing market capitalization of the business (meaning their shares continue to increase in value so that at some point in the future they can realize a net gain from their sale). And society gains value by the (hopefully positive) social and economic benefits the business’ activities and offerings bring into play. Thus, in all of these forms, and for all of these stakeholders, the business’ purpose is to create value.
That then brings us to the question of how the business is to create value. Peter Drucker, the godfather of contemporary management, said it well… “…the business enterprise has two – and only two – basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.” The answer, therefore (which we are in agreement with), is that a business creates value through marketing and innovation. Innovation creates the value propositions that markets wish to buy; marketing makes them aware of, and interested in, those value propositions by aligning them with buyers’ intrinsic needs and motivations.
This leads to an ensuing series of questions around the purpose of specific functions in a business. Three of these I wish to expound upon.
We have perhaps all heard discussions in the past of the ambidextrous organization – seeing the business in two logical halves, with one side focused on executing and extending today’s value proposition, and the other side focused on developing tomorrow’s value proposition. While I believe this is a good conceptual model, I actually like to refine it further and put forth that the business enterprise should be viewed along three, not two, swim lanes, namely, Execution, Renewal, and Reinvention. I will explain each of these and their role.
Execution is focused exclusively on executing today’s foundations of value, and doing so with the utmost of efficiency. This is so as to extract the maximum possible value from them. This is the land of Operational Excellence, using classical methods like Lean Manufacturing and Six Sigma. By reducing the amount of unwanted variation from outputs, and reducing as much cost as possible through efficiency gains (without sacrificing the end value), the results of this work pass straight to the bottom line, resulting in increased retained earnings and thereby potential dividends to investors. More importantly, every dollar “earned” in retained earnings is (in part) also one more dollar that can be passed on to reinvestment initiatives – aka “innovation”.
This brings us to the second swim lane – Renewal. Renewal is focused exclusively on extending today’s foundations of value by using sustaining innovation (incremental innovation) to incrementally improve current offerings. This is the land of R&D Managers developing Technology Roadmaps and Product Managers developing Product Roadmaps to plan out the year-by-year evolution of their respective technology and product portfolios. Each year these portfolios will evolve to incorporate new extensions of the offerings, and offerings will evolve to incorporate new features, functions, and capabilities. It may involve the expansion or contraction of certain model line-ups as more or less market segmentation is needed. This swim lane is incredibly important for keeping the business’ current portfolios alive and relevant to their markets as those markets gradually evolve year after year. This is where the business will execute its Horizon 1 Innovation Strategy.
In the way of example, think of how a venerable product line like the BMW 3-Series has continued to evolve each year for the past 42 years so as to remain fresh and relevant through incremental innovations like airbags, ABS, navigation systems, body restyling, and so forth. Behind this has been a series of Product Managers working hard to define each new model so as to be relevant to the needs of the evolving 3-Series buyer – across six major generations of the product line. Without this Renewal, the product line would lose touch with its market. But through Renewal, it remains in touch with the market and is able to continue bringing ongoing value to a business like BMW. The purpose of sustaining innovation, therefore, is to extend our current foundations of value for as far out as they will possibly go, a process we call “Value Capture”.
Parenthetically, whenever product lines or entire portfolios have reached a point where they can no longer be fundamentally extended (think film photography in the consumer market) – i.e their rational end-of-life where they must be rationalized – they can then be placed into an offshoot swim lane we call Exploitation, where the business will seek to milk every last ounce of value from them without investing any further in their future. Eventually, the revenue derived from this line will diminish to a point that continuing it is no longer profitable or strategically prudent, and then it will be phased out completely.
Finally, there is the third swim lane – Reinvention. Reinvention is focused exclusively on defining and developing entirely new foundations of value for the business to monetize in the marketplace – typically foundations of value that will better resonate with emerging market needs that are becoming salient due to technological, sociocultural, political, and other types of changes happening in the world. This is the land of dedicated “X-Works” innovation teams working on breakthrough, disruptive, and even transformative innovations – those new platforms that will deliver value for tomorrow’s needs – a process we call “Value Creation”. This is where the business will execute its Horizon 2 and Horizon 3 Innovation Strategies.
Examples might be brands like BMW and Audi (even Porsche) entering the SUV market – Horizon 2 initiatives when they were first conceived. Or those same brands pursuing new innovation to develop their autonomous vehicle platforms (through R&D, partnerships, and Corporate Venturing) – clear Horizon 3 initiatives when initially launched.
In this context, the purpose of breakthrough innovation is to enable a business to remain relevant to each successive generation of its markets by offering new foundations of value that better resonate with those markets’ evolving needs, while the purpose of disruptive and transformative innovation is to empower the business to remain resilient to structural changes in their markets and other revolutions in their external realities occurring over the long haul (also known as “tsunamis” and “bends in the road”). Reinvention also often brings with it the need for internal transformation of the business, as it reconfigures itself to be able to optimally deliver on these new foundations of value with new business models that appropriately sync with emerging realities.
These are the three swim lanes that ultimately matter in the strategic life of a business – delivering value through Execution, renewing that value through Renewal (sustaining innovation), and delivering new foundations of value through Reinvention (breakthrough, disruptive, and transformative innovations). And inside of each of these, the two basic functions that represent true profit centers for the business are innovation and marketing… marketing to know markets and to let markets know us, and innovation to deliver the net value these markets are willing to pay for. Everything else is a cost center.
When businesses get this formula right, and align to it an effective Horizon 1 / Horizon 2 / Horizon 3 Innovation Strategy, they will emerge as market leaders and will remain so throughout the long haul.
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Anthony Mills is a foremost thought leader on business innovation. As the Founder & Chief Executive Officer of innovation agency Legacy Innovation Group, he has advised business executives from all over the world and has led countless innovation efforts. He can be reached at email@example.com