10 characteristics of being a productive durability company.
The fundamentals structures which have long underpinned the world economy and society as whole is going through a massive upheaval. Companies have long thrived in an economy which had long, benign cycles which had a linear pathway to success.
Consequently, companies have sought the easiest path to driving faster and faster economic efficiencies even if it meant the innate qualities of the organization were sidelined in that process. Size and growth driven by efficiency has been the mantra of success up till 2008 and lies shattered in 2020.
To thrive in this new world which emerged from the various crises, leaders must lead for resilience as much as they did work for efficiency. They must build organisations that excel and create what we call “scarce capital” – purpose led existence, trustworthy brands, energetic cultures, continuous innovation capabilities. Scarce capital makes companies far more resilient to unpredictable shocks and allows them to prosper in these new crises realities and yet generate economic surplus. Ten elements define these scarce capital-rich organisations as “living machines”.
- Infuse business with meaning. At the heart of any company which defines itself as a Living Machine is a deeply personal commitment of the leadership to infuse meaning, purpose and value into the mechanical ‘dead’ body of business. There is a conscious attempt to re-enchant the motive of business with human nature and its myriad qualities.
- Maintain intellectual honesty. Living Machines have a bias towards the invisible elements which provide character and depth to the enterprise. They dedicate extraordinary efforts to nurture dynamic mindsets, challenge implicit assumptions and outdated beliefs through “Safe Spaces’. By strengthening such an intellectually honest environment, they infuse sensitivity and depth into relationships which underpin the brand, culture and innovation.
- Treasure the invisible. Such organisations put a premium on the role of invisible elements in driving their business success. In other words, they are deeply conscious of the fact that their distinctive identity is held together by their brand, culture and creativity; qualities which money can’t buy. They regard them as Scarce Capital (rather than money) as their chosen way to sustain economic returns in excess of cost of capital. Thus, they base their strategy and business model on the deployment of Scarce Capital and its returns.
- Produce cash flows from the unseen. They are fully aware that Scarce Capital produces a significant reservoir of future cash flows that have been earned but not released into the P/L over time (at least 5-6 years). As a result, the greater the deferred gratification and perseverance they make in the short-term to nourish Scarce Capital, the greater their chances to earn disproportionately higher returns post the build-up phase.
- Harness the exponential power of scarce capital. They appreciate the exponential outcome is integral to the working of Scarce Capital and therefore it is non-linearity (both risk & reward) over time gets even more pronounced. This exponential effect is especially pronounced once Scarce Capital is channelized to its perpetuity time value frame. This explains why many ‘unknown’ firms suddenly break into a path of extraordinary growth unleashing the pent-up compounding effects over time. Equally it is the same aspect, which when expressed as risk causes many successful firms to lose their path, hit a wall or self-destruct.
- Understand the economics of scarce capital. Living Machines are appreciative of the fact that Scarce Capital works in an oblique pathway compared to the linear economic logic dictated by hard assets. These companies allow this non-linear pathway towards financial goals to remain front and center while making choices on capital allocation and strategic choices. They are also aware that returns on Scarce Capital economics are far less capital intensive compared to tangible assets and the returns from Scarce Capital are not only significant so too its durability.
- Create the future in the now. Companies designed as Living Machines have a bias towards perpetual value creation rather than chasing seductive money making schemes. They understand that value that lasts has to be earned here and now through disciplined thought and action. In other words, they understand that Perpetuity is not a handout but something to be earned daily and this reservoir of value is being built by today’s actions directed through Scarce Capital.
- Recognize that money is not value. Companies that have productive durability understand the limitations of conventional finance and management information systems, which treat money as something which is measurable, fixed and finite. As a result, such systems treat the future potential of the company also as something which is measurable, fixed and finite – for example as a linear extrapolation of the current cash flows. Durable companies understand that the bulk of today’s value of the company is not the result of a linear extrapolation of the present. Instead, it is the result of the exponentially compounding of value that flows from the quality of its scrace capital, which in turn is largely the result of the quality of today’s thinking and behavior.
- Synthesise opposing ideas. Scarce-capital rich organisations have a distinct tolerance to hold opposite ideas and fuse them without getting into polar standpoints. They are able to harness the best of both worlds and yet stay away from conventional thinking. Fuse Purpose with Shareholder value, Probability to Certainty, the Finite to Infinite and Invisible to the Tangible.
- Institutionalise the life force. Perhaps most distinctively, leadership of such institutions is careful to avoid the pitfalls of personality cults. When a founder starts a company, he or she brings a belief of infinite possibilities to the company and a philosophy of how to capture those opportunities. These visions, values and beliefs are often the life force of the company. However, when such people leave the company, they often take these human values, intuitions and ideas on which the company’s scarce capital is built with them. The risks for the company is decay of its “life force”. Leadership of durable companies works to transfer the ability to build and protect scarce capital. They help to instill the value creation logic and management mind state of the organisation. They ensure the transfer of the understanding that the returns from scarce capital are non-linear. In short, they believe it is possible to methodically embed the process of creating and nurturing the company’s scarce capital. This institutionalization is among their most important and lasting contributions.