How should a business be measured?

For a long time, the answer has been “more.” Ever since Frederick W. Taylor did time studies of steelworkers with a stopwatch in 1900, the measurement of business activity – called “Greater Taylorism” by Walter Keichel in his business history “The Lords of Strategy” - has grown ever more central to management. One result of this drive to quantify and analyze has been that senior executives often create numerous profit centers, or isolated groupings of both revenues and expenses nested within large businesses.

The two benefits are obvious. First, profit centers allow these executives to make better decisions. In organizations whose various revenue and cost accounts are not linked, poor economic performance can be hidden by positive results elsewhere, and decision-making is clouded. Second, profit centers help make accountability clear. By giving managers direct profit and loss responsibility, companies can incentivize activity that measurably contributes to the bottom line.

So in most large companies, different business divisions and geographic regions are organized as distinct profit centers. Increasingly, product lines, key customer accounts, or brands are treated as mini-businesses as well, like at P&G, where global brand managers have P&L responsibility. For that matter, why not functions too? Some organizations are establishing transfer prices for supplies and services between business departments (such as manufacturing and sales), and then measuring, and rewarding based on, the income of each.

There’s just one problem. We optimize what we measure. And the entire logic of profit centers rests on the assumption that maximizing the pieces will maximize the whole.

Unfortunately, this shortcut often isn’t true. Exceptional, sustainable results derive from great strategy, and great strategy isn’t additive – it relies on the way individual pieces fit together in a system, so that the whole is greater than the sum of the parts.

Decision scientists know this – in their models, it’s the difference between finding the local optima (the best result within each “neighborhood”) and the “global optimum” of the whole system. For that matter, football coaches know it too; no professional coach would argue that the best way to win a championship is to focus on maximizing each individual player’s performance statistics.

Yet this is exactly how many businesses are run. Rather than sacrificing certain parts for the good of the whole, companies essentially force each division to stand on its own. This approach undermines strategic “fit,” which, as Michael Porter put it, “requires the integration of decisions and actions across many independent subunits.”

For a coherent strategy to work, then, the organization executing it must be measured as a whole, rather than as parts. In other words, if a company is to have a single strategy, it must be driven by a single P&L.

This may sound like an extreme position. Yet some of the world’s most successful companies operate this way. Apple famously has only one P&L, for which its CFO, Peter Oppenheimer, has direct responsibility. And while each of its major hardware product lines is priced to make a significant profit, it bundles in all its key software upgrades, products, services, and platforms for free. CEO Tim Cook explains the logic:

“We manage the company at the top and just have one P&L, and don’t worry about the iCloud team making money and the Siri team making money. We want to have a great customer experience, and we think measuring all these things at that level would never achieve such a thing.”

It’s Apple’s single-company mindset that lets it give away industry-leading software and cannibalize its own products, which in turn has led to its unprecedented success. But that’s not to say a single P&L is always the right answer. Instead, a company should have as many P&Ls as it does distinct strategies. P&G’s Gillette shaving brand has a very different strategy from its Bounty paper towel brand, and Gillette has a different strategy in India than in North America. But although Gillette sells its razors and blade cartridges separately, these products fall under a single strategy. P&G’s profit centers reflect these boundaries.

Of course, companies should still measure a division, product, or function’s profitability (to the extent it can be done accurately) – that’s just good management. But this shouldn’t be the primary basis upon which managers are held accountable for their decisions, or they won’t enact a strategy that looks beyond their narrow interests. Amazon wouldn’t be able to underprice and over-market the Kindle to achieve their larger strategic objective of selling content if the Kindle product manager’s main objective was to maximize hardware profits. Nor would “free” look like such a great price point for Google’s Android unit.

So measure carefully – because if you reward each area of your business for acting in its own best interest, you just might get what you wish for.

So what is culture? Does culture matter? If so, how much time should you spend on it?

Let’s start with the second question first. The primary thing that any technology startup must do is build a product that’s at least 10 times better at doing something than the current prevailing way of doing that thing. Two or three times better will not be good enough to get people to switch to the new thing fast enough or in large enough volume to matter. The second thing that any technology startup must do is to take the market. If it’s possible to do something 10x better, it’s also possible that you won’t be the only company to figure that out. Therefore, you must take the market before somebody else does. Very few products are 10x better than the competition, so unseating the new incumbent is much more difficult than unseating the old one.

If you fail to do both of those things, your culture won’t matter one bit. The world is full of bankrupt companies with world-class cultures. Culture does not make a company.

So, why bother with culture at all? Three reasons:

1. It matters to the extent that it can help you achieve the above goals.
2. As your company grows, culture can help you preserve your key values, make your company a better place to work and help it perform better in the future.
3. Perhaps most importantly, after you and your people go through the inhuman amount of work that it will take to build a successful company, it will be an epic tragedy if your company culture is such that even you don’t want to work there.

Creating A Company Culture
In this post, when I refer to company culture, I am not referring to other important activities like company values and employee satisfaction. Specifically, I am writing about designing a way of working that will:

• Distinguish you from competitors
• Ensure that critical operating values persist such as delighting customers or making beautiful products
• Help you identify employees that fit with your mission

Culture means lots of other things in other contexts, but the above will be plenty to discuss here.

When you start implementing your culture, keep in mind that most of what will be retrospectively referred to as your company’s culture will not be designed in, but will evolve over time based on the behavior of you and your early employees. As a result, you will want to focus on a small number of cultural design points that will influence a large number of behaviors over a long period of time.

In Jim Collins’ massively successful book Built to Last, he wrote that one of the things that long lasting companies he studied have in common is a “cult-like culture.” I found this description to be confusing because it seems to imply that as long as your culture is weird enough and you are rabid enough about it, you will succeed on the cultural front. That’s related to the truth, but not actually true. In reality, Collins was right that a properly designed culture often ends up looking cult-like in retrospect, but that’s not the initial design principle. You needn’t think hard about how you can make your company seem bizarre to outsiders. However, you do need to think about how you can be provocative enough to change what people do every day.

Ideally, a cultural design point will be trivial to implement, but will have far-reaching behavioral consequences. Key to this kind of mechanism is shock value. If you put something into your culture that is so disturbing that it always creates a conversation, it will change behavior. As we learned in The Godfather, ask a Hollywood mogul to give someone a job and he might not respond. Put a horse’s head in his bed and unemployment will drop by one. Shock is a great mechanism for behavioral change.

By: James Folta, McSweeney’s

Hey! Over here! Dude! You made it through your vision quest! Welcome! I’m your spirit animal, Paul.

Yeah, I know the term is sometimes “animal,” but we can be humans. Everyone always expects an eagle or something, but sometimes your spirit “animal” is a dude who works in tech. Which is totally just as cool as an eagle or a panther or whatever. You can call me your “Firefox” if that feels better.

Do you want a coffee or something, by the way? I know that this mysterious, echoing spirit cave seems barren with all its cold and strange moving mists, but there’s actually this cafe here that has pretty great cappuccinos. You gotta ask for the beans from Uruguay, though.

Yes, I really am your spirit animal. But it’s not my only gig; I also work for a little start-up in San Francisco. We’re based in Soma right now but we’re looking at some spaces in the Mission. We’re developing this app that allows you to take a photo of a crossword puzzle hint and it’ll give you more precise hints to help you out. Not just give you the answer, but help you out, you know? Eventually the app gets to know you and you can upload a picture of an entire puzzle and it’ll know the things you’re unsure of. Pretty cool, huh?

I’m here to advise you and help you find success in your life. I can help you with your love life, your career, your finances, anything. I can tell you what time Tartine’s croissants are fresh, when the Google bus stops in Alamo Square, and which Farmville rip-off app release parties are the best.

No, I’m not making this up. You went on a vision quest, walked down the path of self-discovery, and entered the spirit cave to find your spirit animal. Me. Look, I’ll wiki it.

Do you get 4G in here? What the hell.

Here we go: “A tutelary spirit guide helps or protects individuals, lineages and nations.” Bingo. I’m your partner! I’m a reflection of you in the spirit realm. I’m like the back-end developer to your client-side designer. I want to be there for you and help out with whatever you need.

Okay like, are you dating someone? Okay, perfect—I can help you with second date ideas. Dinner and a movie is a classic; Cloud Atlas is still in theaters and, oh man, it looks so cool. It’s got a great score on Rotten Tomatoes. The Wachowski siblings are so good. Re-watching The Matrix changed my life, seriously, changed it. I mean, I know humanity isn’t just a bunch of batteries but it inspired me to “unplug” my bad attitudes and my bad habits. I started waking up at 9:00 and trying to be at work by no later than 10:30. Now I get my coffee at my work’s cafeteria instead of at Four Barrel. And I only play the new Diablo for three hours every day. You know, baby steps.

Sorry, got off track. You could also take your date to this new artisan bourbon bar I just saw a Groupon for. I guess there’s already one in Oakland but they just opened one in SF so people can finally get to it. Perfect date. You guys can have some bourbon, chat, hangout. Boom. I got your back. See?

Anyway, I have to jet. My company’s taking the day off to do this yoga cleanse. It should be cool. Hey, come on—this is going to be really fun, you’re going to love me as your spirit animal. I’ll ping you with an app you can use to contact me in the spirit realm. And add me on Twitter: my handle is @spiritguidepaul. Later!