They exist first and foremost to deliver returns to their shareholders’ capital – and the sooner they deliver it, the better.
The idea of a business has evolved slowly through a series of what we can now see as definable eras: periods when particular strategies, corporate forms and styles of management became the dominant norm.
Transitions between eras play out over decades with some elements of the previous era remaining in place, while others evolve into something quite different. The shareholder primacy era, for example, retained and enhanced several features of the previous period, including the importance of professional managers and the pursuit of scale to achieve leadership economics.
However, companies in the current period refocused on their core businesses, shed noncore assets, outsourced more and more functions, and made their remaining assets sweat harder. The ones who succeeded earned substantial rewards.
Today, the shareholder primacy era is under pressure from multiple sources. Technologies, markets and customer expectations are all changing rapidly, and it seems more difficult than ever to translate strategy into rapid and effective execution.
Younger employees, who now form the largest generational cohort in the workforce, are increasingly skeptical about corporate career paths, but we can’t yet know how this generation’s work lives will play out. Many want to work for companies that pursue a higher purpose in addition to profits too. A growing number of CEOs see a higher purpose not as a side issue or fluffy topic but rather as a central element of their culture, people and customer strategies.
The cumulative impact of these pressures has already set in motion another profound shift in eras, which, over the next 10 years, will result in the biggest change in business since the 1970s.
What will be different about the firm of the future?
Google, Facebook, Tencent, Tesla, Alibaba and Amazon – as well more established companies like Vanguard, Starbucks, Haier and LEGO – symbolise the emerging era. The bigger the company is in its industry, the less likely it is to be the customer advocacy leader.
Underlying the historic trade-off between scale and intimacy is another very real tension – between size and speed. A constant throughout all eras, especially the professional management and shareholder primacy eras, was that scale matters -particularly scale relative to your competition. Relative market share, properly defined, was highly correlated with profitability and return on capital in most industries.
Companies of the future will see that scale will still offer potential benefits. But the dynamics are changing. With more scale and experience comes the opportunity to decrease your costs. But companies will have to develop a new kind of experience curve, one that takes speed as well as scale into account.
Companies will combine big data with human intelligence from frontline interactions with customers, whilst transactional activity will be almost entirely automated; algorithms and machine learning will simultaneously reduce the need for routine interactions.
The shareholder primacy era accelerated the idea of industry ecosystems with its embrace of outsourcing, and today, there is no part of a business value chain that cannot be outsourced. Increasingly, outsourcing can also be provided by individuals who want only a transactional relationship with a company.
Leaders of tomorrow
Working for a company of the future will feel different, as if you are venture capitalists relentlessly focused on mission-critical roles, and thinking about creating value through ecosystems.
Other aspects will feel like a professional services firm which has a faster speed and flow, but putting everything in place will be a profound leadership challenge requiring the need to guide staff through the mother of all change-management journeys.
Previous shifts in eras have seen more failures to adapt than success stories of navigating the transition, but shifts are rare enough that most leaders have no direct experience with them. When the time comes, leaders have to be bold, think long term and, above all, act.