Essay Question "When companies embrace a powerful CSR cause and are truly passionate about it then business success in many forms will surely follow” Discuss

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John Kay. The profit-seeking paradox: how the most profitable companies are not the most profit-oriented pp. 19-28

John Kay., (2011) Obliquity : why our goals are best achieved indirectly, null Profile

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3 The profit-seeking paradox

how the most profitable companies are not the most profit-oriented

For most of the twentieth century, ICI was Brit-ain's largest and most successful manufacturing company. In 1990, ICI described its business purpose:

ICI aims to be the world's leading chemical company, serving customers internationally through the innovative and

responsible application of chemistry and related science.

Through achievement of our aim, we will enhance the wealth and well-being of our shareholders, our employees,

our customers and the communities which we serve and in which we operate. 26

ICI's business had evolved over the decades through chang-

ing interpretations of the 'responsible application of chem-

istry'. Traditional strengths in dyestuffs and explosives were

translated into new chemical businesses - industrial feedstocks

and agricultural fertilisers and finally, after the Second World

War, pharmaceuticals.

But this strategic decision was slow to bring returns.

The pharmaceutical division was a continuing drain on ICI

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The oblique world

resources until the discovery of beta blockers in the 1960s gave

the company the first effective drug for controlling hyperten-

sion. More discoveries followed, and in the next two decades pharmaceuticals became the growth engine of the company.

The research capabilities developed in ICI provided a

pool of talent from which other companies, like Glaxo and

SmithKline and French, found ideas and people. In particu-

lar, SmithKline recruited James Black, the chemist behind beta

blockers, who was frustrated that ICI was emphasising profit

over science. Black went on to discover a new group of block-

busting drugs, anti-ulcerants. These transformed the profitabil- ity of first SmithKline and then Glaxo, whose related product

Zantac was a runaway success. ICI's decision to enter pharma-

ceuticals ultimately led to the development of a British global

pharmaceutical industry, perhaps the greatest achievement in postwar British business.

In 1991, a predatory takeover specialist, Hanson Trust,

bought a modest stake in ICI. While the threat to the com-

pany's independence did not last long, the effects were gal-

vanising. Directness was the order of the day. The company

restructured its operations and floated the pharmaceutical divi-

sion as a separate business, Zeneca. The rump business of ICI declared a new mission statement: 'The ICI Group's vision is

to be the industry leader in creating value for customers and

shareholders through market leadership, technological edge

and a world competitive cost base.' 27

The company embarked on an extensive programme of

acquisitions and disposals that failed in every respect, includ- ing that of creating shareholder value. The share price peaked

in 1997, a few months after this new strategy was announced. The decline thereafter was relentless. In 2007, ICI ceased to

3 /The profit-seeking paradox

exist as an independent company. The responsible application of chemistry not only created a better business than did the

attempts at creating value: it also created more value.

When I taught strategy at London Business School in the

early 1990s, I told students that Boeing's grip on the world civil aviation market made it the most powerful market leader

in world business. Just as ICI was committed to chemistry,

so Boeing was committed to aeroplanes. Bill Allen was chief

executive from 1945 to 1968. The spirit of himself and his col-

leagues, he explained was to 'eat, breathe, and sleep the world of aeronautics'. 28

During Allen's tenure Boeing developed the 737. With almost four thousand planes in the air, it is the most success-

ful passenger airliner in history. But the company's largest and

riskiest project was the development of the 747 jumbo jet.

When a non-executive director asked for details of the expected

return on investment, he was brushed off: some studies had

been made, he was told, but the manager concerned couldn't

remember the result. 29 By the early 1990s the company had

established almost complete dominance of world civil avia-

tion. Boeing created the most commercially successful air-

craft company, not through love of profit, but through love of

planes. The oblique approach to profitability delivered spec- tacular results.

Yet it took only ten years for Boeing to prove me wrong in

asserting that its market position in civil aviation was impreg- nable. A decisive shift in corporate culture followed the acqui-

sition of the company's chief US rival, McDonnell Douglas. The new CEO, Phil Condit, explained that the company's pre-

vious preoccupation with meeting 'technological challenges

of supreme magnitude' would have to change. 30 Directness

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would displace obliquity, it claimed: 'We are going into a

value based environment where unit cost, return on invest- ment, shareholder return are the measures by which you'll be

judged. That's a big shift.'31 The company put the location of its corporate headquarters up for auction, and its senior execu- tives agreed to move from Seattle, where the main production

facilities were located, to Chicago. The newly focused business reviewed risky investments in new civil projects with much greater scepticism, and made a strategic decision to redirect

resources towards projects for the US military that involved low financial risk. Chicago had the advantage of being nearer

to Washington, where government funds were dispensed. So Boeing's civil order book fell behind that of Airbus,

the European consortium. The aims of Airbus were not ini-

tially commercial but, by oblique chance, Europe's champion became a profitable business. Boeing's strategy of getting close

to the Pentagon proved counter-productive: the company got

rather too close, and faced allegations of corruption. 32 And what was the market's verdict on the company's performance in terms of unit cost, return on investment and shareholder return? Boeing stock, $32 when Condit took over, rose to $59 as he affirmed the commitment to shareholder value; by the time of his enforced resignation in December 2003 it had fallen

to $34. Condit's successors once again emphasised civil aviation.

The 777 is a success, and the Dreamliner appears a better vehicle

for the future than the huge Airbus 380. By 2008, Boeing had regained from Airbus its leading position in commercial avia- tion and the share price its earlier value. At Boeing, as at ICI,

shareholder value was most effectively created when sought obliquely.

3 /The profit-seeking paradox

That profit-seeking paradox, like the conundrum of hap-

piness, illustrates the power of obliquity. Comparisons of the

same companies over time are echoed in contrasts between dif- ferent companies in the same industries. Jim Collins and Jerry

Porras undertook paired comparisons between outstanding ('visionary') companies and adequate, but less remarkable firms

with similar operations. Merck and Pfizer was one such compar- ison. Collins and Porras compared the oblique philosophy of George Merck - 'We try never to forget that medicine is for the

people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been'33 - with the directness of John McKeen of Pfizer - 'So far as humanly pos- sible, we aim to get profit out of everything we do.' 34

Collins's book was published in 1994. Fifteen years later, in How the Mighty Fall, Collins would revisit the Merck story:

'In his 1995 annual letter to shareholders, Merck's chairman and CEO, Ray Gilmartin, delineated the company's number

one business objective: "being a top-tier growth company".'

The opening line of the chairman's letter in the 2000 annual report stated directly: 'As a company, Merck is totally focused on growth.' 35

Merck's shift to a more direct approach did not have a happy outcome. Both Merck and Pfizer would, in the late 1990s, bring to market a new class of drugs called COX-2 inhibitors.

These products are powerful analgesics, and for some patients, who have difficulty in tolerating established anti-inflammatory drugs such as aspirin, COX-2 inhibitors have proved invalu- able. But the best route to revenue growth was to promote

these drugs to a mass market for which inexpensive substitutes were equally satisfactory.

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Vioxx, Merck's product, aggravated heart conditions in a

small minority of these patients. The company was slow to respond to reports of adverse reactions, but finally it withdrew Vioxx from the market and faced the prospect of extensive

litigation from alleged victims of its promotional campaigns. Merck fell off Fortune's list of most admired companies, on which it had occupied a prominent position for many years. 36

Today, the pharmaceutical company that has created most value for its shareholders is Johnson and Johnson, whose oblique 'credo' was first set out in 1943 by Robert Johnson, a scion of the founding family and company chairman for thirty years. 'We believe our first responsibility is to the doctors,

nurses and patients, to mothers and fathers and all others who use our products and services,' the credo begins. It ends, many lines later, 'when we operate according to these principles, the stockholders should realise a fair return.' 3 7 Events seem to have

proved Robert Johnson right. Few companies go as far as Sony's declaration of its oblique

approach to profit in its founding statement: 'We shall elimi- nate any undue profit-seeking.' 38 But Collins and Porras paired

Hewlett Packard with Texas Instruments, Procter and Gamble with Colgate, and Marriott with Howard Johnson, and found the same result in each case: the company that put more emphasis on profit in its declaration of objectives was the less

profitable in its financial statements.

There are many similar examples of the triumph of the

oblique over the direct. Citigroup was created in 1998 as a result of the merger of Citicorp, the world's largest retail bank, with the Travelers financial group created by the ambitious

Sandy Weill. The group structure featured Weill and the more cerebral John Reed of Citicorp as joint CEOs. Tension between

3 /The profit-seeking paradox

the two men was evident from the beginning, not least in their vision of the business: '"The model I have is of a global con-

sumer company that really helps the middle class with some-

thing they haven't been served well by historically" [said Reed].

"That's my vision. That's my dream." "My goal is increasing shareholder value," Sandy [Weill] interjected, glancing fre-

quently at a nearby computer monitor displaying Citigroup's

changing stock price.' 39

Within a short time, Weill had displaced Reed. Then rev- elations of a range of improprieties at Citigroup tumbled out.

By 2002, a shaken Weill would be asserting that 'we must

be conscious of a broader purpose than simply delivering profits'. 40 Soon after, Weill himself was out of office, replaced

by the lawyer Chuck Prince, with a brief to restore Citigroup's

reputation.

But allegations of wrongdoing kept coming, to be fol-

lowed by business disasters. As the credit expansion reached

its apogee in 2007, Prince would tell the Financial Times: 'So

long as the music is playing, you have to get up and dance.

We're still dancing.' 41 But a month later, the music stopped.

Prince would also soon lose his job, and by 2008 Citigroup

would be surviving only on life support from the US taxpayer.

The merger had in less than a decade destroyed almost all the shareholder value in Citicorp.

The modern philosopher Alasdair Macintyre contrasts the

business of fishing - designed and planned - with the practice of fishing - the methods and traditions which have evolved

over the generations in a fishing community. In the fishing business:

A fishing crew may be organised and understood as a purely technical and economic means to a productive end, whose

25

,,

'' '

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aim is only or overridingly to satisfy as profitably as possible

some market's demand for fish. [ ... ]Not only the skills, but also the qualities of character valued by those who manage the organisation, will be those well designed to achieve a

high level of profitability. And each individual at work as a member of such a fishing crew will value those qualities

of character in her or himself or in others which are apt to

produce a high level of reward for her or himself.

That is the sort of crew in which Sandy Weill would be

comfortable, at least so long as he was captain. But Macintyre

admires the practice of fishing.

Consider by contrast a crew whose members may well have initially joined for the sake of their wage or other share of

the catch, but who have acquired from the rest of the crew

an understanding of and devotion to excellence in fishing and to excellence in playing one's part as a member of such a

crew. [ ... ]So the interdependence of the members of a fishing crew in respect of skills, the achievement of goods and the acquisition of virtues will extend to an interdependence of

the families of crew members and perhaps beyond them to

the whole society of a fishing village. 42

For Macintyre it appears self-evident that the first crew will

catch more fish. But is he right? Or are the complex objec-

tives of a business organisation - including a fishery - better

achieved by an equivalently complex process of balancing

incomparable and incommensurable underlying values and

goals? As so often, we have a Harvard Business School case

to help us. The Prelude Corporation, once the largest lobster

producer in North America, sought to bring the techniques of

modern management to the fishing industry. The case cites its

president, Joseph S. Gaziano:

3 /The profit-seeking paradox

The fishing industry now is just like the automobile industry was 60 years ago: 100 companies are going to come and go, but we'll be the General Motors[ ... ] The technology and money required to fish offshore are so great that the little guy can't make out. 43

Soon after the case was written the Prelude Corporation

became insolvent. It did so, moreover, for entirely explicable

reasons - which emerge from Macintyre's account. You don't

make fish, you hunt it. Your success depends on the flair, skills

and initiative of people who cannot be effectively supervised.

The product of people who feel genuine commitment, who

'have acquired from the rest of the crew an understanding of and devotion to excellence in fishing' exceeds that achieved

when the 'only aim is overridingly to satisfy as profitably as

possible some market's desire for fish'. 44 That is why Macintyre's

second crew is still fishing while his first is not.

George Merck and Robert Johnson created great businesses

which, in consequence, made remarkable amounts of money

for their shareholders. ICI and Boeing were more successful as

profit-making companies when they 'served customers inter- nationally through the responsible application of chemistry'

or 'ate, breathed and slept the world of aeronautics' than when they tried to 'maximise value for our shareholders' or 'go into a value based environment'.

But the last word in this chapter should go to Jack Welch, CEO of General Electric from 1981 to 2000. Welch was not

just America's most admired businessman but a darling of

Wall Street. The rise in the market capitalisation of GE during Welch's tenure represented the greatest creation of shareholder

value ever. Ten years into retirement, he told the FT: 'Share-

holder value is the dumbest idea in the world.' 45 Elaborating

his thought to Business Week a few days later, he explained:

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The job of a leader and his or her team is to deliver to

commitments in the short term while investing in the long

term health of the business[ ... ] Employees will benefit from

job security and better rewards. Customers will benefit from

better products or services. Communities will benefit because

successful companies and their employees give back. And

obviously shareholders will benefit because they can count

on companies who will deliver on both their short term

commitments and long term vision. 46

The route to profit was an oblique one.