An Extremely Simple Way to Think About Business

Though I now work professionally in the artificial intelligence space, some folks out there may not know that I began my educational / professional journey more so in business and leadership. In fact, my bachelor’s degree in business administration, and my master’s degree is in organizational leadership. Wanting to further my business studies after completing my master’s program, I spent 2015-2018 reading a lot of business and leadership books.

Now, don’t let me fool you: that gives me no right to call myself Mr. Executive! In fact, I say all that to ironically note that most of that knowledge has now been forgotten. Or maybe it’s been pushed into my subconscious, I don’t know. All I can tell you is that I don’t remember 90% of the content in my master’s program, let alone the names of my professors. ??

If there’s one thing I can say with confidence, it’s this: there is no “magic bullet” program or book that will make you a top notch executive for all industries. In fact, I’ve now come around to believing the best leader for a given domain is a person with a deep level of knowledge of their field combined with an equal passion for it. That’s actually something I’m working on myself. Though I have a strong passion for AI, I admittedly have a lot to work on in growing in my domain acumen if I want to continue to be successful working for the insurance company that I (delightfully) work for. (And a big thank you to the people mentoring me through this!)

This is not to say, however, that studying business and leadership is worthless. Moreover, I’m here to give you the closest thing I’ve found to a magic bullet in being successful in business. I can even sum it up in a single word: incentives. I was introduced to the concept of incentives as a market force in an undergraduate college course on macroeconomics, and it absolutely rocked my world. It’s a framework that stands the test of time in being highly predictive. Granted, it can be a very tricky framework to get right since different stakeholder groups are incentivized differently, so again, this is not a true “magic bullet” framework. And this makes sense with my previous paragraph: those people who are most knowledgeable in their domain understand the incentive structure the best.

Let’s take a step back to be clear about how I think about the concept of incentives: Incentives answer the simple question, “What do I get out of it?” Now, when I say “I” there, we’re not necessarily talking about a literal first person perspective. I’m talking about all the different stakeholder groups, from your customers to your employees to even yourself. Again, I’m not the expert in your domain, so I’m not even going to pretend like I could give you sage advice for your particular situation. Instead, we’re going to use the remainder of this post to give you the lay of the land on all the different stakeholder groups and how each may be incentivized differently.

Your Customers

Let’s just knock the most obvious one out of the way. Naturally, if you’re not keeping your customers happy, your business goes under. Now, we could go on all day about different ways to consider the customers’ needs, but there have literally been books written on that. Let’s move on.

The Overall Company

It’s easy to automatically assume that a company is most driven by making money. That’s not particularly wrong, but we’re quickly entering into murky territory. Consider this unrealistic scenario: a company has been reporting earnings of $1 billion for the last several quarters, but all the sudden, the company is freaking out as if they’re going under. Why? The company only has one customer, and that customer has decided to retire, no longer requiring their services. In this wild scenario, the company should have been incentivized to find a different revenue source.

The scenario posed above is obviously fictitious, but you can imagine a million different ways in which a company might be incentivized. In addition to appeasing their customers, they also have other stakeholder groups to be mindful of, which we’ll talk about further on down. Just be aware that the way in which your company is incentivized might be more complicated than using revenue as a simple goal post. The incentive structure for most companies is very complex.

An Average Employee

This one is perhaps the most interesting relationship between company and some other stakeholder. The ideal situation with any stakeholder relationship is that there is a mutual benefit going both ways. Between a company and a customer, it generally means the customer gets a good or service in exchange for money. Both parties are mutually satisfied with this arrangement.

This is not necessarily the case for an average employee and a company. To be clear, when I say average employee, I am thinking extremely broadly: from fast food employees to factory workers to office workers. I’ll be the first to raise my hand to say that I’ve definitely worked a job just to make a buck. (Sorry, dad, your HVAC business is hard. ??) I have also known people who will not use their company’s services in case they ever needed to enter into legal action with their employer. It’s no surprise that it’s common to have a Human Resources department.

Additionally, you should be aware of how employees are incentivized by how their roles are formalized. Imagine working for a large corporation in the early 2000s, and people begin getting interested in these new fangled things called DVDs! Now, what do you think the corporate “VCR Technician” is thinking? That person is incentivized to protect themselves by protecting their role. Ideally, you’d migrate them into a “DVD Technician” role, but not knowing that is an option, this corporate VCR technician could sabotage any pilot DVD players or prominently share the values of VCRs. The company’s migration to DVD players, which would allow the company to much more cheaply burn training DVDs instead of dealing with VCRs that tend to chew up videotapes, could be seriously be delayed by this disgruntled VCR technician.

(Funny story: I was on X the other day, and there was a younger person posting about how they didn’t know what the bouncing DVD logo was. I have never felt so aged. ????)

The VCR-DVD story is a bit silly, but the concept is absolutely true and can manifest in a very subtle way. One employee’s success criterion could easily be another employee’s detriment if the roles are not incentivized similarly. For example, software engineering roles often experience this challenge given that other business roles may be incentivized by activities that may require more meetings. Software engineers really do benefit from having dedicated time to focus on their work, so having to attend a lot of meetings can be detrimental to a software engineer’s productivity.

Your Fellow Coworkers

I separated this from the section above because this is more so how you as an individual relate to your coworkers. When I mean coworkers, I mean anybody you work with, whether they be your superior, peer, or subordinate. It should go without saying that you should be nice to everybody, but this has strong ramifications for a business context. For example, imagine you work in a large corporation, and you choose to badmouth a coworker that gets on your nerves. It may not matter if word gets around to that coworker now, but what if years pass and that coworker shows back up… as your boss? As your executive? Well, you’d probably wish you had a time machine! This newly superior coworker is now incentivized to not give you the opportunities you were hoping for.

As somebody who has worked in the same large company for 12 years now, I am constantly amazed about how often I find myself working with somebody whom I had worked with years earlier. Because I genuinely want the best for everybody, I’ve tried to foster good relationships with all previous coworkers, so every time an old connection has resurfaced, it’s fortunately been a happy reunion. You can imagine that if I was a jerk, however, then running into that person years down the road might not be the happiest of encounters.

Separate Departments / Teams

Folks that work in smaller companies may not experience this problem, but I definitely know there are people out there who read this heading and are vigorously nodding their head! To be clear, it makes perfect sense why larger companies have departments and teams. Just like little kids all chasing after the ball at a soccer game, it would make no sense to have every employee perform every work activity. The unfortunate challenge is that then these separate departments and teams then become incentivized differently, and sometimes these incentives are not in alignment.

Again, just like everything else in this post, trying to get these incentives right is very difficult. Generally speaking, when there is a spat between two departments or teams, it’s about who is supposed to be doing what work. That can be for better or worse. Maybe neither team wants to do a piece of work, or maybe it’s the opposite and they both want to take ownership. This is going to sound super obvious, but you really only have two choices here: only one group does the work or both (all) groups do the work. Both choices are very valid, but drilling down on your specific situation, one choice might emerge as obvious. For example, if a group of front desk people said they wanted to perform brain surgery like the neurosurgeons, the hospital would naturally decline the request.

When considering how to balance the work across departments and teams, you need to be especially mindful of opportunity cost. If you’re not familiar with opportunity cost, it’s the concept that if your team does one thing, it’s at the cost of maybe doing something else. You can imagine why this is important to consider. Let’s say you have a company with ten departments, and all of them want to do marketing. Well, who is doing the accounting? Who is making sure the IT systems are running fine? Even if marketing sounds like a blast while accounting sounds boring, the reality is that an efficient company has their departments and teams balanced correctly.

(To be clear, I don’t think accounting is boring. ??)

Investors / Shareholders

Again, this is another example of where we can’t guarantee that their incentives are aligned with the company’s incentives. This is specifically a big challenge for publicly traded companies. Because publicly traded companies often have to report quarterly earnings, you will see companies making radically different decisions as compared to privately owned companies.

This isn’t to say it’s always the best for a company to stay private. Investors are leveraged all the time to help a company grow at scale very quickly. If a company chose not to accept this help, they probably wouldn’t grow and may even have to close their doors. It’s certainly a trade off when you sell off any piece of your company, but the benefits of the trade off may certainly be worth it.

Government

This is not one that instantly comes to mind, but it is a no brainer when thinking about it. All governments have a significant impact on all businesses. They tell companies what they can and can’t do, manage public utilities, and collect taxes. The government essentially sets the guardrails on allowable behavior.

Society

This one is an interesting one, and I intentionally separated it from government. The government creates laws that obliges a company to behave a certain way, but that doesn’t mean that society at large necessarily agrees with these laws. For example, Apple has made the stance to go carbon neutral with all their products within a few years. There’s nothing illegal with the way Apple has been operating their business; they’ve simply recognized that society at large would benefit by everybody going carbon neutral. Conversely, there are activities that society at large may disapprove even if not necessarily illegal today. An example of this was smoking in restaurants in the early 2000s. While it was eventually outlawed, many restaurants took the active stance to ban smoking anyway because their customers and society at large disapproved.

Yourself

I like to save best for last: we can’t forget about yourself! Every stakeholder group we’ve mentioned in this post could be in perfect balance, yet the role you work in could be the wrong one for you. I specifically think about the people who experience burnout here. You could be in the most successful role and making a great salary, but if you’re a parent and not seeing your child enough, you’d probably be inclined to find a new job.

Additionally, you need to be careful with how your family and friends affect your personal incentive structure. It’s important to balance everybody else’s desires with what is best for you. If your parents like telling their friends that you make a six figure salary but you’re miserable in your role, you may need to have a hard conversation with them and maybe be okay with letting them down. Or if a company wants you to be CEO but you don’t think you could handle the stress, you need to be honest with yourself about that and perhaps decline the role.

Closing Thoughts

As I’ve reiterated a few times throughout this post, what I’ve hopefully given you here is a framework for thinking, not a solution in and of itself. If there’s one thing you take away from this post, constantly be asking the question, “What’s in it for this group/person/me?” Don’t assume you know what somebody is incentivized by. As we saw multiple times throughout this post, incentive structures can manifest in very complicated ways and on different levels.

Hope you found this post to be helpful! Thanks for reading!