What’s in a Name? Not The Essence of Strategy

6 September 2011 • 0 Comments

The point of this Commentary is to contest the notion that public, private, and non-profit enterprises are so essentially different as to defeat any common approach to their strategic choices. Instead, I argue that the essential dynamic of strategy among these three types of enterprises is identical.

I recently attended the board meeting of a non-profit corporation called to review the agenda of its annual membership meeting. Upon hearing the treasurer’s report of the budget, the meeting took up debate over how best to characterize the positive difference between revenues and expenses for the year, which the treasurer had labeled profit. “After all,” one board member objected, “a non-profit organization can’t, by definition, make a ‘profit’, now can it?” Others, untroubled by this ostensible contradiction, favored use of the term profit for the positive connotations about the board’s financial stewardship that it was likely to elicit from the membership. “I’d worry more about what to call it if the net were negative,” an enthusiast of the term responded. In the end, the board’s president, ever adept at navigating the shoals of needless controversy, resolved that the treasurer should simply refer to that difference as an innocuous increase, as in, “the amount by which our activities for the year will increase our assets.” And thus was averted any further commotion over how to talk about positive financial results in a non-profit enterprise.

The episode caught my attention because of how it revealed the deep-seated convictions people tend to hold about the presumed differences between private commercial companies, private non-profit organizations, and, for completeness, public sector entities. As illustrated at this board meeting, these convictions differentiate enterprises primarily by reference to how each relates to money, attributing special significance to the accounting concept of operating profit. The resulting conventional wisdom holds that private commercial firms are identifiable by the fact that they make money from their operating activities; non-profit organizations are distinguished by their aim of breaking even from their operating activities; and governmental entities will always lose money on their operations. Like so many conventional wisdoms whose appeal lies mostly in simplicity, this one too is as likely to mislead as to instruct. Not only are these simplistic precepts unreliable­ markers of the relevant distinctions—who among us, after all, doesn’t know of a bona fide commercial firm that has run an operating loss during the past couple years?—they also promote the false premise that the strategic foundations and managerial chores of these different enterprises are alien to one another. They’re not.

In my view, what meaningfully distinguishes public, private, and non-profit enterprises is not so much their relationship to money in general and the measure of their operating net in particular; it’s their relationship to stakeholders and the measurement of value they aspire to create. Private commercial enterprises engage a comparatively straightforward stakeholder base—customers and equity owners most prominent among them—on what I would call a transactional basis, and they enjoy the convenience of measuring in money how value gets created in these relationships. I know a private sector enterprise when I see one that is animated by dollar-denominated inputs to its customers’ and investors’ satisfaction. Non-profits engage a more complex array of stakeholders—beneficiaries and benefactors especially—on what I would call a stewardship basis, and they measure the value created in these relationships typically by counting outputs of their products or services. I recognize a non-profit when I see an enterprise animated by a physical count of its work—children inoculated, acres protected, patrons attending, etc. Government enterprises, on the other hand, engage the most unwieldy community of stakeholders—the citizenry itself, both as taxpayers and consumers of what economists call public goods—on what I am compelled to call a constitutional basis, and they measure value creation in terms of the outcomes associated with the entity’s mandate. Besides their explicit affiliation with government, public enterprises also are most easily recognized by how their pursuit of outcomes—safe streets, educated workers, secure borders, etc.—animates their activities and, of course, the often animated deliberation over them.

So what? For my purposes here at Grundman Advisory, the significance of this taxonomy of enterprise types is that it underpins my belief that the dynamic of strategy among them is not disparate but common. That dynamic hardly turns on views about how these enterprises’ management of operating profits may deviate. Instead, it turns on a common strategic challenge all enterprises face, which is one of figuring out how to realize a vision of itself in consideration of (a) the resources it can harness to the work that flows from the ambition, and (b) the stakeholder interests that will act to promote or prevent it. At the same time, when setting out to help these different types of enterprises make strategic choices, it’s certainly important to appreciate the relative complexity and specific identity of the stakeholder interests surrounding each enterprise, which surely will vary. It’s also important to understand how the metrics that regulate an enterprise’s stakeholder relationships differ and how their distinct properties will, of necessity, shape action (e.g., dollars are easy to measure but represent only a means to anybody’s realization of actual value, whereas outcomes are maddeningly difficult to observe but more directly express the ends citizens will value). The players and implements may manifest differently, but the strategy game is quite the same.

As he does so often, William Shakespeare encapsulated this point five centuries ago in concise verse: Upon learning her Romeo’s surname, Juliet famously protests,

‘Tis but thy name that is my enemy;
Thou art thyself, though not a Montague.
What’s Montague? it is nor hand, nor foot,
Nor arm, nor face, nor any other part
Belonging to a man. O, be some other name!
What’s in a name? that which we call a rose
By any other name would smell as sweet;

Though less poetic to be sure, my own protest in this vein is against the tendency to allow the incompatible terms we use to segment different sectors of the economy to obscure the common essence of strategy that underlies them all.

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