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‘Grow the Pie’ by Alex Edmans

“How great companies deliver both purpose and profit.”

Pieconomics is an approach to business that seeks to create profits only through creating value for society & goes beyond CSR.

Who should read this book?

Owners, founders, managing directors, executives, C-Suite: This book is all about purpose & strategy. It explains why some organisation flourish more than others.

Investors: For the same reasons. The book provides practical advice to assess organisations and their leadership.

Stakeholders: Policy makers, employees, suppliers, customers, … who believe life is not a zero sum game. This book explains how everyone can win by growing the pie.

Why you should read this book (or not)?

One of my all-time favourite books! As simple as that. It is a positive book written in terms of options & possibilities. I get a positive vibe, positive energy & a sense of happiness when reading it.

It is not an easy book. And that is also the only negative point I have. The rigour used in the research is great (not mixing correlation with causation; thinking about alternative explanations; etc). Unfortunately, that makes some chapters a bit long-winded. The conclusions are all the more interesting as these are counter-intuitive and the author argues against common practices & believes, proposing clear & actionable alternatives.

I wish many leaders & investors read this book and act accordingly. It would definitely create a better world.

Interesting extracts

“A pie-growing company’s primary objective is social value, and it views profits as a by-product. Surprisingly, this approach typically ends up more profitable than if profits were the end goal. That’s because it enables many investments to be made that end up delivering substantial long-term pay-offs. But since these pay-offs couldn’t have been forecast from the outset, the projects would have never been approved if profits were the only criterion. A ‘maximise shareholder value’ rule is theoretically appealing, but practically unworkable, because it’s very difficult to calculate – even roughly – how many important decisions will affect long-term profits. The power of the pie-growing mentality is that it replaces calculations with principles, providing practical guidance for decision making under uncertainty.”

“The main ways in which companies serve society are through a ruthless dedication to excellence in their core business, or creatively applying their core competencies to new challenges, such as Mercedes using its precision engineering expertise for breathing machines. (…) Excellence in your core business, or using your comparative advantage to solve social problems, typically doesn’t involve major financial expenditure. It only needs an attitudinal shift – to be driven by the hunger to create value for society even if the immediate benefit to profit is unclear.”

“Enlightened Shareholder Value (ESV) has trouble even with tangible investments that have intangible benefits. (…) So you can’t calculate the NPV of the gym, and without it, you can’t justify the gym under ESV. The problem with intangible outcomes is not risk, but uncertainty. A risky problem can be analysed as you have a rough idea of its parameters. (…) With uncertainty, you don’t even know the parameters of the problem. (…) Risk concerns known unknowns, but uncertainty comprises unknown unknowns. And the returns to intangibles aren’t only uncertain, but also distant – even if they do arise, they’ll be far into the future. (…) Evidence shows that leaders use a much higher discount rate for long-term benefits than they should. So NPV calculations are driven by short-term effects.”

“The market doesn’t value many intangible assets directly, but only when they later show up in tangible outcomes such as profits. So a pie-growing mentality requires long horizons – treating other stakeholders well does benefit investors, but only in the long term. That’s also true for other measures of performance. Customer satisfaction, eco-efficiency and stakeholder-oriented policies are all public information, but take a long time to affect the stock price.”

“A selective purpose statement seems uncomfortable, because highlighting certain members or activities suggests prioritising others. But the trade-offs enterprises face are uncomfortable. A broad purpose statement ignores the reality of trade-offs, but a focused statement provides guidance in three important dilemmas. The first is whether to take actions that help some stakeholders and hurt others. Engie took the difficult decision to close the Hazelwood plant, even though it led to job losses, because its purpose prioritised the environment. The second is where to allocate an enterprise’s limited time and resources. What a company leaves out in its purpose can be as important as what it includes. Purpose is as much about knowing what not to do as what to do. A discerning leader recognises her firm’s resource and capacity constraints, and understand that it can’t do everything. Instead, she directs them where they can make the most difference. To paraphrase leadership expert Craig Groeschel, ‘to do things no-one else is doing, you have to not do things everyone else is doing’. This is similar to an effective strategy. Reckitt Benckiser could only concentrate on its 19 Powerbrands by reducing investment in its other products. The third is which business opportunities to turn down. The pharmacy CVS’s purpose is ‘helping people on their path to better health’. In 2014 CVS stopped selling cigarettes even though they generated $2 billion in sales, shortly before renaming itself CVS Health. What seemed a crazy business decision had a simple justification. As CEO Larry Merlo said, ‘put simple, the sale of tobacco products is inconsistent with our purpose’. CVS’s sales rose from $139 billion in 2014 to $185 billion 3 years later.”

“A pie growing enterprise acknowledges stakeholder mutuality – the long-term, two-way relationship it has with its stakeholders. (…) This recognition transforms the relationship along 2 dimensions:

  1. Rather than seeing customers, workers and suppliers as sources of only revenues, labour and input, the enterprise views them as sources of ideas and collaborators in fulfilling its purpose.
  2. Instead of only taking from stakeholders – receiving their revenues, labour and inputs – it strives to deliver long-term value to them, beyond its contractual obligations.”

“The common saying ‘What gets measured gets done’, is often used to highlight the importance of measurement. But this saying should instead warn against the danger of excessively relying on measurement, since some factors simply can’t be measured and so will end up not getting done. In a purposeful organisation, what gets monitored gets done. Monitoring certainly involves measurement, but also understanding the context behind the numbers, qualitative dimensions of performance, and changes to policies and practice that might not manifest in numbers for some time.”

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