True Purpose of a Business
by Rod Collins
One of the hottest trends in the food industry is the increasing popularity of plant-based products that replicate the taste of their meat counterparts. If you attend a baseball game at Minute Maid Park in Houston, change planes at the LAX Airport, or stop by your local Burger King, you now have the option to order a plant-based burger that you would swear in a blindfold test is an all-beef patty. Sold under catchy brand names such as the Beyond Burger and the Impossible Burger, plant-based foods are now being stocked at local grocers and are becoming as popular with health conscious meat eaters as they are with vegans and vegetarians. Wall Street analysts project that the plant-based meat substitute market could become a $140 billion industry over the next decade.
Non-dairy milk products are another vegan inspired option that is fast becoming a burgeoning market. In the past year, sales of non-dairy ice cream increased by 44 percent compared to a three percent rise in dairy ice cream sales. According to data gathered by Innova Market Insights, the global non-dairy milk market is expected to grow to $21.7 billion by 2022.
The encouraging projections for these innovative—and possibly disruptive—products have caught the attention of business leaders in the traditional food industry, who have recently begun acquiring smaller plant-based food companies to establish a presence in what appears to be a growth market. And this development has caused alarm among vegan purists who feel that the acquired plant-based companies have “sold out.” But have they really? Might it be possible that they could be catalysts in the evolving transformation of an industry?
An Expanding Market
In a recent article in LiveKindly.co, Colleen Patrick-Goudreau, suggests that the key takeaway from the entry of meat producers into the plant-based market is that the superior distribution channels and economies of scale that large companies enjoy means that more people will have more affordable access to plant-based products. And whether they are vegan or not, the higher the proportion of plant-based foods in the daily diet, the better the overall health of the population.
Patrick-Goudeau urges the purists to be open to the practical reality that there is a diversity of values about food, and although many of the purchasers of the new plant-based options may not be strict vegetarians, they are increasingly valuing the importance of expanding the proportion of plant-based foods in their diets.
She also points out that the entry of traditional producers into what was once a niche market is a clear sign that these businesses have concluded that the risk of not investing in vegan food companies is higher than the risk of sticking with their long-established business models. This means that there are profits to be made in this expanding market.
One of the reasons the companies are investing in innovative business models, she suggests, is because it is consistent with the fundamental purpose of a business, which is to generate profits. Patrick-Goudreau seems to be urging the vegan purists to consider that, when it comes to influencing the behavior of consumers, the profit motive may be a more effective driver of change than ideological conviction. But that assumes the prime motivator of corporate behavior is profits.
Profits and Profitability
If you’ve ever taken a business course, you probably learned that the purpose of a business is to create shareholder wealth. This fundamental and often unquestioned assumption has guided management theory and practice for well over a century. According to this assumption, business success or failure is a function of one prime driver: profitability. This notion is continually reinforced by a mercantile priesthood of Wall Street analysts who worship at the altar of profitability. For the Wall Street analysts it’s very simple: the best performing companies make money; the poor performers don’t.
While it may be true that the best performers make money, it doesn’t necessarily mean that every company that makes money is a best performer. If companies overemphasize short term profits over long term growth, their profits will be short-lived. Or if profits are derived from monopoly market power, as was the case with Blockbuster, an innovative upstart with a game-changing business model could permanently disrupt what was once a lucrative and reliable profit stream.
In many instances, a myopic focus on profits can actually be counter-productive to sustained profitability. While this may sound counter-intuitive, a deeper understanding of the nature of profits may help explain the relationship between profits and profitability.
Good Profits and Bad Profits
Fred Reichheld is a management consultant who discovered that all profits are not equal. He noticed that companies that focus on good profits behave differently and are more successful than those that tolerate making bad profits. Reichheld defines good profits as net revenues realized by so delighting customers that they are willing to come back for more and bring their friends and colleagues with them. Bad profits, according to Reichheld, are dollars made at the expense—and sometimes even at the abuse—of the customer. Not surprisingly, Reichheld’s research shows that companies that are more interested in earning good profits rather than just making money enjoy both strong profits and sustainable growth.
With this understanding in mind, Reichheld developed a simple but powerful measure that managers can use to ensure that they are making good profits. This measure is known as The Net Promoter Score (NPS), which is computed based upon the distribution of customer answers to one question: On a scale of 0 to 10, how likely would you recommend a good or service to a friend, family member, or colleague? The score is computed by subtracting the percentage of ratings 6 or below from the percentage of scores of 9 or 10. Accordingly, the score can range for anywhere between – 100 and + 100.
A company like Zappos, which is renowned for its excellent customer service, is likely to have a very high NPS and assurances that it is making good profits. On the other hand, had Blockbuster measured its NPS at the height of its best times, the company would have likely had a low score because its 20 percent profit margin was almost fully attributable to the late fees that were so unpopular with its customers.
When the source of a company’s profit margin are fees that customers detest, these are profits that are clearly being made at the customers’ expense. And when bad profits can undo a company, it calls into question the assumption that the purpose of a business is to generate profits.
The True Purpose of a Business
A little more than a decade ago, I did extensive research into a group of vanguard companies who practiced an alternative management model and designed their organizations as distributed networks rather than centralized hierarchies. The innovative tools and practices of this novel approach are described in Wiki Management: A Revolutionary New Model for a Rapidly Changing and Collaborative World .
One of the most fascinating findings from this research is that the vanguard companies have a very different perspective about the purpose of a business. They do not accept the conventional view that the purpose of a company is to create shareholder wealth. This is not to say that they think profits are unimportant. Quite the contrary, as a group, the vanguard companies are very profitable and are very often more profitable than their traditional counterparts.
What sets the vanguard companies apart is that they see profits as the reward for fulfilling the true purpose of a business and not the purpose itself. For them, the fundamental purpose of a business is to create customer value. They understand that, in a rapidly changing world, customer values are continually shifting. By keeping their focus on changing customer values, they don’t get locked into fixed business models that may be profitable today and gone tomorrow. Instead, the vanguard companies are designed to adapt by finding new ways to delight customers as technologies create new ways to deliver customer value.
This may explain why traditional food producers are investing in plant-based food production. When the purpose of a business is to create customer value, you need to understand how customer values are changing. The acquisition of plant-based companies is not a selling out. It is a recognition that vegans and vegetarians are beginning to shift the eating habits of the general population. And while, it may not be the perfect script that the idealists would prefer, it is more reflective of how change happens.
But more importantly, these unusual corporate suspects may become enablers of a radical change in our dietary habits because they understand the true purpose of a business is to create customer value.
This article was originally published in Management-Issues.com