Profit and Loss: My definition of a business and the role of leaders

“Business” is just a made up word for a group of people who decide to work together towards a common goal that they feel will help them achieve their own personal goals. This collective pursuit is only possible if the common goal of this group produces some product or service that meets the collective and independent goals of the society in which the business exists.

Businesses do not exist because of great leaders or managers. The greatest leader can achieve nothing in business unless he happens to work with a bunch of other people who have decided to work together towards a common goal. The individuals work for this common goal, not because the great leader asks them to, but because they believe they can achieve their own individual goals, that is they believe they are in the best possible position to make money, advance a career, or occupy themselves. And this can only continue if their output is desirable by other individuals called customers.

To put it another way, a business can be described as a function of two variables. If X is the sum of the individual wills the employees of the organization, and if Y is the sum of the individual wills of customers, then the business f(x, y) can be described as:

f(x, y) = XY

This is what the graph of a business looks like, with the bottom left corner of the frame being bankruptcy, and profits increasing exponentially along the z access as X and Y increase:

xy

While it is impossible to definitively quantify X and Y, it is possible to draw some conclusions from my function. When X and Y increase together, the function of the business, or profits, or perhaps the utility of employees and customers, increase exponentially. When either is zero, the function is zero, or the company goes out of business.

I’ll present two quick practical examples to illustrate my point. First, Twitter is a company that is growing exponentially. Twitter the name for the group of people who decided to work together and use their talents for innovation and writing computer code to achieve their personal goals of pay, advancement, and self-worth. These people are achieving their goals, because the product they produce allows hundreds of millions of other people to achieve their goals of communication, leisure, connectivity, the need for information, or whatever else they use Twitter for. Both variables, the will of employees (X), and the will of customers are increasing (Y), and so the business (or function) of Twitter is growing exponentially.

Blockbuster is a group of people who also want to make money, advance careers, or increase self-worth – a high or maybe even growing X value, but sadly for these people, the customers can achieve their goals of entertainment better from Netflix, On Demand, or iTunes. The Y in this function is being reduced to zero, and Blockbuster is going out of business.

Where does leadership fit into this equation? I now believe that the minuscule role leaders play in the function of a company can be expressed as a coefficient, s, which modifies X, the sum of the individual wills of the company, so that:

f(x, y) = sXY

In other words, a business is a function of the sum of the individual wills of employees which is modified by a leadership coefficient, times the sum of the individual wills of consumers. I suspect this leadership coefficient is a very very small number that, from company to company, ranges between zero and a teeny tiny bit over one.

The sad story of Circuit City will provide an example. In the two-thousands, Circuit City fired all of their commissioned salespeople. Commission salespeople at Circuit in those days could make almost a hundred-thousand dollars per year in commission. As a result the company had been able to attract top sales talent, and create a competitive advantage over Best Buy, Walmart and the Internet. Then the leaders decided to fire all those talented salespeople, and they hired clerks to replace them. To express this fatal decision in my function, we can let the leadership coefficient s equal zero, so that the function for Circuit City (CC) became:

f(CC) = (0 * X) * Y

The horrible leadership decision modified the sum of the individual wills of the employees to zero, and even though the demand for consumer electronics remained high (Y), Circuit City went out of business.

But why am I suggesting here that this leadership coefficient is always a small number? This seems odd since for the past two years I’ve been writing blog posts about how leadership and management can move companies to greatness.

Well, I’m beginning to realize that leaders can only bend the wills of individuals so much, if at all.

The real question is what moves people? What motivates someone to behave in a certain way? The real answers to this question are too varied and too complex to be known. A group of a dozen direct people can millions of factors that motivate them – from their upbringing, to their genetics, to the laws of physics, to the mood they are in, to their family life, to their hobbies, to their dreams, to their greed, to their intellictual capcity, and so on. Of these millions of motivators, leadership is only one factor, and so even when leaders do a great job, they can only bend the sum of the individual wills by a multiple of 1.0001 at best.

So is all hope lost, and are leaders to submit to the fatalism of my cold math? Maybe. The way I see it, business leaders only have one way of significantly affecting the ultimate success or failure of an organization – and that’s by attracting and hiring people who will behave in a way that when their individual utility is maximized, the utility of the organization increases. In other words, hire people who when they chase after their personal goals by behaving based on their own unique and inexplicable motivators, they will also be chasing the company mission. Stated simply, as a leader making a hiring decision the question is, if I cannot change a person in any significant way, are they likely to advance the mission of the organization? Only by building the right team, can a leader effectively change future outcomes. The rest is just fate.

Epiloge

For the one or two of you who may recognize some of the language used above, yes I did deduce this post from Leo Tolstoy‘s War and Peace. For those of you who have not read it, or are too afraid to read it, let me tell you this. You could read ten books this year and learn nothing, or you can read War and Peace and learn the meaning of life. The book is not hard to read. Tolstoy is extremely accessible. It’s just long. You can do it.

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