The essence of a business
If you ask a CEO, “what is your company about?”, he/she will probably describe the company’s products or industry or strategy. That’s all fine, and to be expected, but the more I look at businesses, the more I realise they have an underlying “essence” that transcends their products and industry and strategy (and even people).
Think about the big tech companies such as Google, Microsoft, Cisco and Apple. If you ask what these businesses are about, you’ll get closer to the root of essence.
I’m stepping a little out of my circle of competence here, but I’d say Google’s essence is providing a nurturing environment for employees that supports unfettered research and development. I’m sure they’ll gush some company line about being customer focused or shareholder focused or focused on whomever is asking. But I think the essence of Google is more about its employees than anyone else.
I think Apple’s essence is about design innovation and product differentiation. Again, they may argue they’re customer focused (tough to argue after their recent silence on issues with the iMac), but the truth is plain as day. We don’t really hear about Apple’s employees the way we hear about their rock star counterparts at Google. We don’t even hear about Apple’s newest, most revolutionary technology. But we do hear about design, about simplicity, and about differentiation.
Okay, this is all a little wishy-washy, but it became apparent when we recently tried to hire people for a new investee. There was talk of “culture” and how the new person had to be easy going, easily approachable, and not too aggressive. But that wasn’t the essence of this particular company. We could hire innumerable easy going people, but would they relay “the message”?
It’s worth asking what you’d like the essence of your new/existing company to be. Compare that to what it really is and ask why. As we can see with Google, Apple, et al., essence drives businesses beyond facts and figures. Most private equiteers would cringe at such nonsense, but then most aren’t advocates of long-term value creation either.
Image: Essence is more than corporate culture [source: Shutterstock]
I think these articles need a ‘like’ button – for when I entirely agree with you but have no further comments!
As a distressed investor, I guess I am often asking myself questions like ‘what *should* be the essence of this business?’ ‘What went wrong with the current essence that resulted in the firm plummeting?’
I think in those situations, it becomes much harder- there is no wrong essence, and by bringing in new management, you are essentially trying to change the company’s culture anyways – but you need to build some form of drive into your investees (other than greed!)
Analyst
11 Dec 09 at 09:14
@Analyst
I wonder if it’s only the remarkable businesses that have an easily discernible “essence”? We can pretend the distribution business down the road has some sort of underlying driver of success, but are we just kidding ourselves? I don’t think it means only sexy high-tech businesses are remarkable; think Walmart, FedEx, etc.
But I do think that businesses that grow quickly and make their mark on the world need to have a unique driver. Not a competitive advantage or culture, but something that that’s industry agnostic, something more than just a statement cooked up at a board meaning. Something engrained.
The Private Equiteer
12 Dec 09 at 06:45
Hmm I think you’re on shaky ground here.
One obvious problem with the “we don’t hear about [x]” argument re Apple is that this is more about the particular firm’s marketing/PR strategy than any underlying truth.
Google is a problematic business to analyse primarily because their mission (“organise the world’s information”) is so distinct from their revenue streams (selling advertising). But if you’re saying the “essence” of Google is great employees organised and motivated to maximise innovation isn’t that the same as “What is the source of Google’s competitive advantage?”.
Overall I think “essence” is a confusion of separate concepts about culture, business model, valuable/rare/inimitable resources, and competitive advantage which probably blurs the picture more than it sharpens it.
Alex
13 Dec 09 at 12:38
Alex, I agree.
For me personally it’s about the basic assumptions/axioms, but separating those is really really hard (most of what you see are the values derived from the axioms, and then culture derived from the values). That plus what is your business about (what do you do and whom for), although in good companies they often reinforce each other (the word I hate – congruence).
vlade
14 Dec 09 at 16:01
I don’t think the essence of a business is its business model, or resources, or even its people. Apple’s combination of function, form and simplicity may be partly the product of people and resources, but I think it’s something much more. A common enduring objective perhaps.
Same with Google. I didn’t say “great employees”, I said, “a nurturing environment for employees.” You probably didn’t pick up on my negativity. Ironically, my life runs on Google products, but it doesn’t stop me thinking the company is one big mess of poorly integrated software. However, its essence, to me, is its employee-centric environment, which acts as an incubator for ideas. Again, not just culture or business model, but a common objective.
I see what you’re both saying, that this concept is getting a little too blurred with other concepts. But that’s the point. I think there’s something in great businesses that can’t be explained by culture, business model, inimitable resources, competitive advantage, etc.
Would the world miss your company if it fell over tomorrow? Not just for the fact they’d need to find another supplier, but would they deeply miss something you have that no one else has or can reproduce? It’s bordering on the “moat” that Buffett talks about, but his moat is generally explained. The essence I’m talking about seems like it should be easy to copy, but in practice no one’s doing it.
The Private Equiteer
15 Dec 09 at 10:37
Maybe “essence” = the particular interaction between the elements of culture, business mnodel, etc.
A sort of “business alchemy”. That is why it appears straightforward to describe in a theoretical discussion, but hard to achieve in practice. And, as with alchemy, the “secret” to realization lies within the rare individual that can practice the art (i.e., the unique entrepreneur visionary vs. the typical, common CEO).
But you are right, “essence” is the best word to depict the concept that you are seeking to describe.
David Jung
15 Dec 09 at 12:43
PE, how do you separate Apple’s “essence” from the axioms underlyng the values (which in turn define the culture)?
Would it exist if there were no people in the company? Would it exist if there were different people in the company, with different values?
AFAIK, Apple hiring under Jobs used to be run as a cult – you were hired for value fit with first and last. Can’t comment on Google there, but I’m sure someone could.
Wouldn’t you say that when Jobs left Apple and went to do NeXT, company’s essence went with him – which is why Apple struggled until he got back?
Isn’t it then about the things people at the company value (more precisely, the people who can influence the company value), such as new ideas and freedom to pursue them for Google, and the company comes to represent these values? I don’t use culture on purpose, as similar cultures can be built on different values, and similar values might lead to different cultures. How would say GM look like if its employees had (so deeply held) values of Apple or Google?
vlade
15 Dec 09 at 14:20
@vlade, you know, I’m not really sure. I know a few people that work at both Apple and Google, none currently with GM unfortunately, but I am curious where these values come from. I’m sure they come from people in some form, but how do they endure? Does it take one person handing down edicts, as per Steve Jobs, or does it become contagious and sustaining without the original people?
The Private Equiteer
16 Dec 09 at 22:11
@david, i did a quick search to see what people really mean when they talk about “business alchemy” and yeah, I think that’s pretty much what I was getting at. From one site, “true business alchemy is about sharing ideas that stick.”
The Private Equiteer
16 Dec 09 at 22:13
Ah, the deep end
Some (quite a long time) ago, I had a loyalty theory. People were loyal either to other people, or to ideas (values).
In general, it’s much much easier to be loyal to people, as we can identify with them. Athough we are internally loyal to ideas (values), I think we look for the externalization. It’s much easier to externalis to a role model than to an organization – especially if the organization doesnt’ have the values strongly codified (think Ten Commandments and Catholic Church as a formal organization where people are loyal to an idea).
I think the sustainability is very hard, simply because people change, and unless there is strong external context (be it the strong role model, or the codex you really believe in) to either get those people who don’t “fit” in, the values can slowly dissipate over time (it’s harder to be as enthusiastic and working 24/7 when you have three children as when you were 25 – the more duties we have, the more compromises we do).
I think SAS institute is a good exaple (from the little I know). Jim Goodnight is sort of a hero, especially for US employees, who would be prepared to swear the campus is paradise on earth (and, if you are the right person, it is).
The non-US operations on the other hand work much more in line with the other companies there (for one, it’s not really feasible to provide on-site gym, doctor, restaurant and what have you for five people), and I think the company’s values there are held much less than in US. Jim controlls the company, but who will replace him if he retires or dies? Will (s)he be as much of a hero to the employees? Will his/her beliefs be as strong as Jims?
What I do think is that successfull companies are much more likely to have this sort of “alchemy”, “values” whatever you want to call it – because it’s probably something that gives their employees a sense of belonging, and thus motivates them much better than a lot of other things could.
vlade
17 Dec 09 at 12:00
Hmm I think you're on shaky ground here.
One obvious problem with the “we don't hear about [x]” argument re Apple is that this is more about the particular firm's marketing/PR strategy than any underlying truth.
Google is a problematic business to analyse primarily because their mission (“organise the world's information”) is so distinct from their revenue streams (selling advertising). But if you're saying the “essence” of Google is great employees organised and motivated to maximise innovation isn't that the same as “What is the source of Google's competitive advantage?”.
Overall I think “essence” is a confusion of separate concepts about culture, business model, valuable/rare/inimitable resources, and competitive advantage which probably blurs the picture more than it sharpens it.
Alex
11 Jan 10 at 01:48