Is business a living machine? The capitalist-enterprise model is broken

The capitalist-enterprise model is broken. It focuses on shareholders, but those who aspire, dream, sweat and yearn are usually not the shareholders, but its employees and vendors

For over 50 years, almost every practitioner of business management has probably been a fan of Peter Drucker. I am, therefore, like a bhakt in a temple town as I visit his birthplace, Vienna, to participate in the “Davos of Management”. The Global Peter Drucker Forum and the Living Machine Institute in Austria have joined forces to reframe “The Next Management”, titled “The India Way: Humanism, Longevity, and Compounding Returns”. In recent times, more people have been struck that the capitalist-enterprise model, seeded in America, is perhaps broken. What is the model? Why is it thought to be broken?

 

The centrepiece of this model is the joint-stock company, in which the liability of the shareholder is limited. Over the past decades, the single-minded focus of management leaders has increasingly been to promote shareholder wealth on the premise that the shareholders are the owners of the company. Are they really? The people who aspire, dream, sweat, yearn, and love are usually not the shareholders but the people who are most affected by the company — community, society, employees, vendors, for example. The current model has evolved over a couple of centuries concurrently with the industrial revolution. When there is a sharp focus on shareholders, there emerges a strong emphasis on efficiency — of manpower, machines, and capital usage — rather than on effectiveness. What is the difference?

 

Peter Drucker on efficiency vs effectiveness

 

According to Drucker, you need effectiveness to magnify and translate efficiency into results. He emphasised that the sole purpose of a business was to create and satisfy the customer. In his seminal book The Effective Executive, he addressed the difference between “effective” and “efficient”. Which is more important when it comes to organisational performance? You recognise an effective organisation as one that enables ordinary people to collectively achieve extraordinary results. How simple yet profound — to encourage ordinary people to achieve extraordinary results!

 

Efficiency is getting a lot of things done while effectiveness is getting the right things done. Further, Drucker wrote effectiveness, unlike innate attributes such as talent and intelligence, entailed a set of practices you could learn. In fact, it’s essential to learn effectiveness because without it, talent and intelligence won’t get you anywhere.

 

The contemporary capitalist enterprise model, with its excessive orientation to enhancing shareholder wealth, is hugely committed to efficiency — to extracting the maximum from a given resource. The model treats enterprise almost like a machine, whose efficiency can be enhanced by continuous improvement. Further, too often, human avarice, greed, and hubris get fed into the menu for efficiency. These lead to enterprise failures like Enron and Lehman Brothers — watch the play Lehman Trilogy, now running in theatres in London and New York. Think of India’s Satyam Computer and Kingfisher Airlines. The efficiency-only trap is a threat to all enterprises that are fixated on increasing market capitalisation (unicorn-aspiring startups to please note).

 

To minimise the risk of getting trapped in this web, one must consider an alternative model: Effectiveness, underpinned by efficiency. In this model, the shareholder is not the lone god for whom enterprise leaders cater. Employees, community, vendors, and many others who work to make the company into a “living machine” feature in the leadership agenda. The reason is that the value from a “living machine” is superior to that from a machine. The markers for a living machine are humanism, longevity, and compounding results, the theme of The India Way discussion at Vienna.

 

When Roger Bannister made the four-minute record of running a mile in 1954 at the Iffley Road tracks, many scientific minds opined that the limit of human endurance would not permit any further improvement to the record. Yet, the human “living thing” — through advances in motivation, physiology, nutrition, and equipment — has made it possible for Moroccan Hicham El Guerrouj to record three minutes and 43 seconds. Living machines yield more than inanimate machines because of flexibility, adaptation, and human consciousness, which machines cannot yet do.

 

Here is the catch. Dealing with living machines requires reflection, thought, patience, and, above all, time. In the belief that their shareholders will not give them time, enterprise leaders push the fixed machine beyond its limits, breaking the machine rather than training it to adapt and renew. Some Indian companies seem to have learnt this, like Godrej, TVS, Birla, Mahindra, Tata, and Hindustan Lever (now Hindustan Unilever). It has been my singular fortune to have served in Tata and Hindustan Lever, where I learnt the “living machine” principles from the grassroots.

 

It is satisfying to expose the ideas of the living machine to a global audience. 

The author’s latest book is JAMSETJI TATA: Powerful Learnings for Corporate Success, coauthored with Harish Bhat. rgopal@themindworks.me