Over my many years as a business practitioner and amateur researcher/reader, I have been trying to “figure out” business, in all of its fascinating complexity. By being able to break it down into it’s component pieces I hope to be able to better understand the real essence of “how businesses operate” and then to be able to somewhat elegantly communicate the simple rules for how businesses operate.
As I read through the following thoughts, I realize that I am hopelessly far away from my own stated goal and that I haven’t really done the subject justice. What I have done thus far is identify what I believe to be a number of “truths” about REALITIES of business, and the OUTCOMES that these realities lead to. So the following is very much a “work in progress” however I thought it might be worthwhile to share it here and get some comments and feedback from readers. So here goes…
Reality A: By any measure, a large portion of the worlds’ population lives in a market based economy where the general providers of our personal and professional consumables are private sector, or pseudo-private sector businesses.
Reality B: Individuals, when provided with the opportunity, pursue the highest value offering at their own affordable price point. Both value and price are subjective to the individual, and both have a subjective risk component.
- Outcome A+B: Individuals, as consumers, send businesses thousands of pricing signals every day.
Reality C: Business is a profit-seeking machine. Its’ fundamental essence is the desire – and often the regimented “necessity” through corporate structure – to seek reasonable, sustainable profit for the goods and services on offer.
Reality D: If a reasonable business case can be made for solving a problem or serving the needs and wants of an individual or another business, a profit-making opportunity exists. The better the business case risk/reward profile, the better the opportunity.
- Outcome B+C+D: Effectively managed businesses excel at understanding the pricing signals of their customers.
Reality E: Basic business logic is fundamentally pragmatic. If we can make money legally, then the rest we can rationalize. We believe in the power of the market and its pricing signals, and by adhering to, or exceeding the applicable regulations and laws, we allow ourselves the dignity of believing we are acting responsibly.
Reality F: As individuals, business owners, managers, and human beings, our powers to rationalize are awesome. This is equally true whether for noble or devious ends.
- Outcome D+E+F: A good business case and the ability to defend it to self-interested stakeholders in terms agreeable to them are critical “table-stakes” conditions for a sustainable business.
Reality G: Business owners and managers trust business cases that can most effectively price outputs and cost inputs, and that can provide some assurances as to the current and future risk posture of those prices, costs, and general market conditions. A business case is first and foremost a risk management tool for business, and it is the closest thing they have to a crystal ball.
Reality H: Most business owners have a strong preference for a level of predictability in the basic operating conditions of the market, and so are supportive [at minimum, silently and behind the scenes] of regulation that endorses basic rules and enforces them. This provides the business with an assurance that there are “rules of the game” which broadly apply to all.
Reality I: While some of the “rules of the game” are formalized in law and/or industry specific rules and guidelines, many of the rules are implicit as they relate to the general production and provision of the products and services. It is the bending and breaking of some mix of these explicit and implicit “rules” that differentiate businesses and provide them their potential competitive advantage.
- Outcome G+H+I: Capable business owners excel at risk management, embrace regulation if it is uniformly applied and enforced, and believe they can take advantage of the situation and profit from it.
Reality J: Business owners, while philosophically aligned with operating on “a level playing field” with little government intervention, recognize the benefit to any business case of monies from the public purse and willingly embrace and pursue any public monies (grants, tax breaks, concessions, etc.) for their own businesses.
Reality K: Regardless of the actual level of legal regulation and structure, a predictable environment is easier to model in business cases than an environment in flux. Thus, businesses seek out stable regulatory regimes that provide the confidence of “the rule of law” (or some equivalent stable and predictable operating environment).
- Outcome J+K: Business owners seek to operate and invest in predictable environments where long term conditions seem stable (taxation, regulation, cost structures, labor availability, etc.) and then petition for “special treatment” for their own individual circumstances.
Where does this all lead us? For me, this leads to an ultimate “truth”, which is that business behavior is quite predictable, and can be accurately predicted based on examining (1) the pricing signals provided to business, (2) the business case underpinning any venture, (3) the risk tolerance and risk management abilities of any business team, and (4) the predictability of the environment(s) the business is looking to operate within.
I’m not sure that any of the above is really new thinking, however I hope it does provide some value in terms of helping understand why businesses operate the way they do. And for me, it also leads directly to the #1 truth we need to embrace about re-aligning business to operate in a “kinder, gentler” way: If you really believe something is priceless, you need to be prepared to put a price on it.
Of course, this applies to reducing environmental degradation, more efficient water usage, addressing CO2 and global warming, taming obesity, and many other “social ills” that we are currently struggling with. I’ve blogged more about these ideas here and here and here…
Your comments? Do you agree with the way I am connecting the dots, or am I missing something in my analysis — are there other realities and associated outcomes I should be modelling for in my analysis?