• Difficult to measure doesn’t mean “do not measure”.
• Organisations innovate to produce net value over the long term.
• Profit is an excess of value.
• Doing something valuable is wasteful if there something more valuable you could be doing instead.
• A business is a collection of value centers.
• A role is a set of responsibilities, authority, and rewards.
• Rewards should be designed so that the motivation of the individual harmonises with the goals of the organisation.
• An employee’s marginal contribution determines their rewards.
The metagoal is the reason for an organisation’s existence. The only valid measurement for metagoals is the generation of value. An organization should develop capabilities that best serve the metagoal.
The metagoal should be based on creating more value through an accurate assessment of the organisation’s capabilities. Goals are the result of investigating which opportunities produce the most value.
The metagoal is the motivation behind all organisational action and inaction.
As time passes, innovations become less valuable. To decrease this deterioration of value organisations can:
• develop customer relationships,
• maintain brand integrity,
• build complex distribution channels,
• negotiate favourable contracts with suppliers and customers,
• develop novel novel applications,
• maintain an aggressive intellectual property strategy,
• aggressively protect corporate secrets, and
• improve the quality-cost ratio at an increasing rate.
All businesses must innovate and innovation is a systems-based rather than goal-based approach to finding the unexpectedly valuable.
Organisational intelligence guides resources to incrementally higher values producing more value for customers with lower required resources for the producer. To thrive in shifting, complex environments, an organization must properly utilise the dispersed intelligence of employees.
Team members must be encouraged to find new ways to create value by innovating all areas of organisational function. Knowing why something is profitable is more useful in the long term than knowing that it is profitable. Each organization must develop tools to measure and understand value drivers.
Businesses are a collection of value centers that must be continually assessed and optimised. Value centers must apply organisational intelligence to build a fundamental perspective that is based on evidence and open to criticism. This will allow them to calculate which actions are most likely to generate the greatest amount of value over the longest time horizons.
Team members should be clear about the perspective they are using and avoid unnecessarily complex mental models.
Profit is an excess of value.
Activity profit for the seller = price – cost of transaction.
Activity profits for a buyer = value – price.
Price is what divides each transactional pie.
Waste increases transaction costs to the seller and reduces value to the buyer.
The best way to limit waste long-term is through maintaining a cost advantage while delivering more value. Organisations must constantly innovate to generate valued competitive differences.
Waste analysis weighs the costs and benefits of a change by investigating whether something is worth doing, how well it is being done and whether profitable alternatives exist. This is done by estimating the additional value an investment would provide and the additional total cost of the investment.
Waste analysis answers the question: would more growth here be a waste?
Doing something valuable is wasteful if there something more valuable you could be doing instead. Opportunities and alternatives must be constantly investigated. Everything has an alternative use and so we should seek out the highest value alternative for each resource and capability.
A common management mistake is using fixed budgets to control costs. This encourages leaders to reject profitable opportunities that would exceed their budgets. Another mistake is the across-the-board cuts in budgets or people which indiscriminately removes profitable expenditures and people along with the unprofitable, thus reducing overall profitability.
responsibility, authority and reward (RAR)
The RAR of an employee defines their responsibilities, delimits authority, and structures rewards. Responsibilities are the set of expectations that are attached to a given role.
In delegated action there is no transfer of responsibility. A new RAR agreement is created between the leader and the delegate and does not alter the leader’s original RAR agreement in any way.
A RAR agreement emerges from an ongoing dialogue between leaders, team members and other relevant parties.
It is the responsibility of each individual to ensure their RARs are up-to-date, accurate and aligned with the metagoal. Team members and leaders are responsible for ensuring that the RARs focus the team on maximising its contribution towards the metagoal.
Each role is a bundle of responsibilities. Responsibility expectations are written statement specifying the results required from an employee if the organization is to achieve its goals.
• clear, specific and measurable,
• focus on outcomes instead of specific activities,
• open-ended to expand each individual’s vision of what could be contributed towards each activity,
• make priorities and expectations clear.
Authority represents one’s freedom to act independently in the execution of a role. Limits should be set, but authority represents total freedom of action within those agreed limits.
Authority is based on responsibility which in turn is determined by track record. Proximity to a problem does not determine the decision-maker. Neither fully centralised nor fully decentralised authority is functional at scale. A hierarchical approach means decisions are the responsibility of those with the best information.
Rewards should be designed so that the motivation of the individual harmonises with the goals of the organization. Team members should be rewarded for creating extra value. This reward philosophy attracts and retains motivated, responsible entrepreneurs.
Rewards should work with the neuropsychology of the team to help them more accurately determine the most productive choice. Leaders should use rewards to guide the efforts of team members where they can produce the most value. The ideal reward for team member is whatever motivates them to maximise organisational value.
Value creation and value loss should be rewarded or penalised based on evidence. This encourages employees to include opportunity cost in their decision-making calculations. The value of missed opportunities should be estimated to eliminate the incentive to avoid riskier opportunities that are in the organisation’s best interest.
For instance without the proper incentives an employee may prefer to pursue a €200,000 opportunity with a 90% probability versus a €2,000,000 opportunity with a 50% chance.
There should be no upper limit on rewards so that people do not limit their value production.
The purpose of rewards is to motivate action that contributes to the metagoal. This means the marginal contribution of team members performing similar roles will vary greatly, as should their rewards.
An employee’s marginal contribution should determine their rewards. Marginal contribution can be assigned to a specific employee. It is calculated as the value produced by the employee minus the opportunity costs associated with the employee.
The best evidence possible should be gathered relating to both negative and positive contributions. Calculation should include uncompensated contributions from prior periods because both positive and negative effects carry over into the future.
The salary is an upfront payment for the for future value. If an employee adds more value than is reflected in the original salary, they should share in that extra value. One organisational goal is to retain and motivate those that generate the most value. Even the most profitable team members can become more profitable with the proper rewards.