What Is The Creative Economy?
As part of the preparations for the Drucker Forum which took place in Vienna Austria on November 13-14, a group of speakers spent some time discussing what exactly is “the Creative Economy?
“We have arrived at a turning point,” said the launch abstract of the Global Peter Drucker Forum 2014. “Either the world will embark on a route towards long-term growth and prosperity, or we will manage our way to economic decline.”
As part of this discussion, we asked ourselves: after reviewing all the issues flagged in many blog posts and articles
in preparation for the Forum, what are the three most important issues that the Drucker Forum should address to generate “The Great Transformation” and what is the role of the Creative Economy in it?
Richard Straub and Julia Kirby explained in their HBR article
that current structures, processes, and compensation schemes of most organizations today are quashing motivation and constraining capability. They suggested that innovations in leadership and management could contribute to create economic prosperity.
Thus Peter Drucker called for a human centered view of management with a different mindset toward productivity and the best use of technology. Drucker’s early insistence that the corporation is a social institution, which can harness the capacity and potential of its people only when it respects them, becomes increasingly valid every year as more of the work of the global economy becomes knowledge work.
As Drucker wrote in The Ecological Vision
: “Management and managers are the central resource, the generic, distinctive, the constitutive organ of society … and the very survival of society is dependent on the performance, the competence, the earnestness and the values of their managers.”
Three key issues
After a consideration of the context and a great deal of discussion, our group believes that the three most important sets of questions are as follows.
1. From Maximizing Shareholder Returns to Putting Customers First
Generating value for shareholders is obviously a good thing. If firms serve customers brilliantly and organize creative employees in ways that allow them to express their creative value to the greatest possible extent, shareholders will get rich and society will be better off. Successful value creation and innovation will ultimately increase the value of the company, as remarkable examples like and Alibaba, Amazon, Apple, Google, Haier Group and Salesforce have shown. Yet the right of owning shares implies a responsibility of appropriate stewardship of the resources, recognizing as Peter Drucker did, that private sector firms are still organs of society with responsibilities towards society.
Over the last four decades, however, a way of running large organizations has taken hold that is increasingly showing itself to be counterproductive. Known by the moniker “Shareholder Value Maximization,” the concept can be summarized thus:
A firm should explicitly and singularly focus on and dedicate its management and all employees to making as much money as it can for its shareholders. Such a focus, which utilizes executive stock-based compensation to ensure it, will not only result in the greatest benefit to shareholders, it will through “the hidden hand of the marketplace” result in the optimal allocation of societal resources and the best outcome for society as well. The measure at any point in time of how well the firm is prosecuting this goal is the current stock price, because the current stock price is the truest reflection of the value of the firm.
The single-minded pursuit of shareholder value as measured at all times by the current stock price has led to practical problems. It has contributed to:
It turns out that privately held companies, which are freer from pressures of shareholder value theory, are better value creators
than public companies, and invest more. The German and Austrian “mittelstands” (mid-sized companies) have prospered by relentless innovation.
Ironically, the pursuit of maximizing shareholder value as reflected in the stock price has done the opposite of what it set out to do. If anything, it has driven firms steadily further away from actually adding value to shareholders. The pursuit of shareholder value has mirrored ill-fated pursuits of happiness. The more you pursue it, the less of it you are going to get. So if you want it; stop pursuing it directly and instead pursue activities that are the antecedents of happiness – in Aristotle’s view, leading a virtuous life.
The issues here are systemic. This isn’t about individual corporate managers acting badly in isolation but about a number of parts of society acting in concert—managers, their boards, investors, regulators, the central banks, financial institutions, business schools, rating agencies, the media and politicians—all acting in concert. The case can be made that society that has, as a whole, lost its way. In many respects, corporations have sought to make shareholders happy by leading less virtuous corporate lives – and they have produced the opposite – unhappy shareholders, an unhappy corporate world, and an increasingly unhappy society.
In parts of the global economy, some organizations have been pursuing a different path—a path of continuous innovation and transformation focused principally on delivering value to those for whom the work is being done. This path has many roots and predecessors, including Peter Drucker’s dictum “There is only one valid definition of a business purpose: to create a customer.” One moniker to describe this path is “the Creative Economy
.” A summary description is as follows:
If a firm works in a collaborative way with its employees and partners on continuously adding value and providing solutions to the people for whom work is being done – i.e. its customers and users – due to the resultant success of the company its shareholders will receive benefits much greater than if the firm focused single-mindedly and directly on making profits for its shareholders. At the same time, society as a whole will benefit from having more virtuous and sustainable firms.
Over the last twenty years, firms pursuing this path have been delivering to customers what they are coming to expect, namely, better, faster, cheaper, smaller, lighter, more convenient, more personalized and more sustainable products and services. These firms can be seen as comprising a Creative Economy that is operating in parallel to the shareholder-value-obsessed economy. The Creative Economy is still relatively small but it is growing rapidly and, when implemented well, is highly profitable. This economy is a better balance of purpose and profit. Financial engineering
of various kinds, especially debt-funded share buybacks, has tended to conceal the real decline of the old economy and hence the extent to which the shift to the Creative Economy has already occurred.
Neither the critique of Maximizing Shareholder Value nor the emergence of the Creative Economy put in question the goal of generating value to shareholders. They suggest that there is a better way of accomplishing that. The single-minded focus of the current stock prices as the central measure of performance is in fact very bad way of generating value to shareholders, and almost everyone else. It systematically destroys value for shareholders and society. The critique doesn’t question the goal. It questions the means. It suggests that the goals and practices of the Creative Economy are in many areas a better way to achieve the goal.
Firms should make a shift from maximizing shareholder as measured by the stock price to focusing principally on adding value to those for whom the work is being done, so generating real value to shareholders, employees, communities and the economy as a whole.
This is responsibility not only of managers and their boards but also of investors, regulators, central banks, financial institutions, business schools, rating agencies, the media and politicians.
2. From Hierarchical Bureaucracy To Collaborative Management Practices
Hierarchical bureaucracy through command and control was the dominant technique that arose out of the Industrial Revolution for managing organizations and it was the default approach through most of the 20th
century. However, it is a very poor fit with the emerging economy of the 21st
Century, as explained by Gary Hamel in his classic 2009 HBR article, “Moonshots For Management.”
In the emerging Creative Economy, different leadership and management practices have emerged, including new modes of doing work in self-directed teams, networks, platforms and ecosystems, new ways of coordinating work such as Agile and Scrum, , new values and new ways of communicating. In these organizations, hierarchy is not abandoned. Instead hierarchy is based on competence rather than pure authority and is exercised to enable more autonomy and creativity. The collective effect of these practices potentially is to give people doing the work more freedom to utilize their full talents and passion. The shift in leadership and management practices is central to the emergence of the Creative Economy; it is already under way, has been described in many books
Firms in the 21st century thus have a responsibility to pursue the fulfillment of human talent, and that inevitably means enabling the individual within world of work, wherever possible, rather than diminishing the worker; by enabling the individual to live an authentic life at work rather than be someone they are not in order to fit into an inauthentic culture. Autonomy, empathy, trust, and the use of horizontal networks are all means towards this end. The challenges facing society today require more human talent, not less.
Organizations should shift from the management practices of hierarchical bureaucracy to a different set of collaborative leadership and management practices.
3. From Narrow Financial Metrics To Measures Of Prosperity
The metrics that are still in use in organizations at both the macro and micro level tend to reflect narrowly defined financial goals. They do not accurately reflect the goals and aspirations of firms as organs of society or creators of value for all stakeholders—shareholders, employees, partners and communities. Growth should not be measured solely based on GDP but as the increase of the capacity to solve human problems.
New technology gives huge potential both for developing measures that enable workers to measure themselves (which is good), and for enabling organizations to intrude into the lives of workers and take away self-control (which is dangerous). There is a need to get the right balance.
The focus on narrowly financial measures has also led to self-interested behavior becoming pervasive in large corporations, particularly senior level leaders. The current imbalances in compensation are not sustainable. Unless limits are self-imposed, they will eventually be imposed by society. Roger Martin has argued
that we have to learn to say “enough.”
Different and better metrics are needed in several spheres.
Organizations should shift from metrics that give priority to narrow financial goals to metrics that contribute to prosperity for interests of individuals, organizations and society.
New metrics for macro-economics: Macroeconomics is not focused, as it should be, on what generates prosperity in people’s lives. “For the past century,” write Eric Beinhocker and Nick Hanauer, “the dominant economic paradigm—neoclassical economics—has painted a narrow and mechanistic view of how capitalism works, focusing on the role of markets and prices in the efficient allocation of society’s resources… The economy—a complex, dynamic, open, and nonlinear system—has more in common with an ecosystem than with the mechanistic systems the neoclassicists modeled their theory on. The implications of this emerging view are only just beginning to be explored… But standard measures of business’s contribution—profits, growth rates, and shareholder value—are poor proxies.” It is essential to develop better economic theories and metrics that measure the contribution to prosperity in people’s lives.
New metrics at the firm level: At the micro-level of the firm, metrics in many firms have wrongly focused on maximizing shareholder value (as measured by the stock price) at the expense of other stakeholders. Firms pursuing shareholder value tend to impose rigid and multiple key performance indicators (KPIs) on staff to keep them marching in the “right” direction. Here we need to redesign the KPIs to reflect the different goals and practices.
Better analytical tools: Clayton Christensen and Derek van Beverwrote in HBR in June 2014 that management metrics reflect an assumption was that capital is the scarcest resource, which is no longer the case.: “In our view, the crux of the problem is that investments in different types of innovation affect economies (and companies) in very different ways—but are evaluated using the same (flawed) metrics… A big part of the answer lies in an unexamined economic assumption. The assumption—which has risen almost to the level of a religion—is that corporate performance should be focused on, and measured by, how efficiently capital is used. This belief has an extraordinary impact on how both investors and managers assess opportunities. And it’s at the root of what we call the capitalist’s dilemma.”
Are these the three most important issues? Are they correctly framed? Are there even more important issues that we have missed? Got a different view? I would love to hear from you.
And read also:
Capitalism’s Future Is Already Here
The Great Transformation: A Turning Point
The Great Transformation: Has Capitalism Reached A Turning Point
The Origin Of ‘The Dumbest Idea In the World’
The five surprises of radical management
: This article was prepared by speakers in the session on The Creative Economy
at the Global Peter Drucker Forum 2014—Steve Denning, Bill Fischer, Dan Pontefract, Haydn Shaughnessy—and includes inputs from Nick Hixson. It appeared in a slightly different format at Forbes.com
NOTE ON “THE CREATIVE ECONOMY”
Richard Florida credits Business Week with introducing the concept of the Creative Economy in August 2000. Florida expanded on the theme in his book, The Rise Of The Creative Class (2002) “Today’s economy,” he wrote, “is fundamentally a Creative Economy.” Although, as Peter Drucker had argued, the basic resource is knowledge, ahead of the traditional resources of capital or labor, it is, wrote Florida, creativity—“the creation of useful new forms out of that knowledge” that will be the key driver of the 21st Century economy.
In his book, The Creative Economy
(2001) John Howkins wrote about fifteen “creative industries” that had emerged. Don Tapscott discussed the growing scope and potential of these phenomena from an economic perspective in his books, Wikinomics (2006) and MacroWikinomics (2010).
As the Creative Economy thrived, despite the massive financial crisis of 2009, with the startling emergence of hugely profitable firms like Alibaba, Amazon, Apple, Google, Haier Group and Salesforce, traditional organizations were increasingly unable to cope with a rapidly changing marketplace in which power has shifted from seller to buyer.
As Gary Hamel wrote in his landmark article in Harvard Business Review, Moon Shots for Management, “Equipping organizations to tackle the future would require a management revolution no less momentous than the one that spawned modern industry.” As Don Tapscott said, we are “at a punctuation point in human history where the industrial age and institutions have finally come to their logical conclusion.”
Over time, it has become apparent that the Creative Economy is more than a class of creative workers or a set of creative industries. It constitutes an ongoing transformation of the entire modern economy and society, eventually affecting every person and every organization.
Alternative monikers for the Creative Economy include ““The Big Shift from scalable efficiency to scalable learning” (Deloitte’s Center for the Edge); “The Innovation Economy” (Doing Capitalism In The Innovation Economy
, by William Janeway); “a new management era of empathy” (Rita McGrath) and “The Resilient Economy (Brook Manville)