A New Bottom Line: Unity from the Outside In
In today’s uncertain business climate, market value is shaped as much by intangibles—like leadership credibility, culture, and brand identity—as by financial performance. This article explores how organizations can make these intangibles tangible, creating a shared mindset across employees, customers, and investors that drives resilience, trust, and long-term value. It offers a practical framework for leaders looking to align internal culture with external perception and build confidence in any market condition.
A New Bottom Line: Unity from the Outside In
In a short period of time, we have witnessed the double-edged sword of how business leaders impact market value. Leaders can infuse the markets with optimism, most of them honestly, and increase the market value of their businesses. Leaders can also destroy market value through deceit and mistrust. The new bottom line for business is not just about making money, but also about the intangibles of how this money is made and how business is run.
We have learned that the intangibles of business such as quality of leadership, the ability to make things happen quickly, a clear growth strategy, strong functional competencies, brand recognition, and so on matter in both bear and bull markets. When the dot-com bubble burst, the recession occurred and stories of dishonesty grew, some firms’ market value fell more than others in the same industry. We believe that firms that survived the market credibility crisis did so because their leaders made the intangibles tangible. Intangibles matter most when comparing firms within an industry, not across industries, so the variations in P/E (price to earnings) ratios of firms within an industry offer evidence of leadership intangibles in both up and down markets. Intangibles show up in business by boosting—or undercutting—investors’ confidence in a firm's performance. Baruch Lev, an accounting professor at NYU and the leading thought leader on intangibles, has shown the importance of intangibles as indicated through the market-to-book value (the ratio of capital market value of companies compared to their net asset value) of the S&P 500 from 1977 to 2001, which has risen from 1 to over 6 in the last twenty-five years—suggesting that for every $6 of market value, only $1 occurs on the balance sheet. This data shows that the value of many firms comes as much from perceived value as from hard assets.
Firms like Coca-Cola and Merck have high market value from brands and patents. Technology-based firms like Amazon and Exult have high market value with relatively little in the way of either hard assets or patents. And even traditional companies like General Motors and 3M are increasing market value by focusing on brands, leveraging the web, and restructuring.
Understanding and leveraging intangibles are powerful tools for leaders. When intangibles are defined and operationalized, leaders can make choices that affect not only what happens inside their firm, but also how investors value those decisions. Baruch Lev has offered more precise financial definitions of intangibles. We define intangibles simply as the value of a company not accounted for by current earnings. This definition gives business a new bottom line. The old bottom line consisted of current earnings or P&L. The new bottom line includes both current earnings as well as building confidence with investors, customers and employees about the firm’s ability to deliver in the future. Companies with high intangible value have higher price/earnings multiples than their competitors, and like coaches of successful teams, their leaders have earned the perception that they can be trusted to deliver on their promises about the future. Companies with low intangible value have lower price/earnings multiples than their competitors in the same industry because of erosion in confidence in the firm and its leadership. The good news is that leaders can build higher intangible value for their organizations in both up and down markets.
Intangibles become tangible when they are understood and managed, allowing specific leadership actions and choices to define and deliver them on demand. When this is done, employee commitment, customer intimacy, and investor confidence rise.
The traditionally hard fields of accounting and finance are now coming together with the softer fields of organizational behavior and human resources to help us understand the new bottom line, focused on intangibles and financial results.
To illustrate how to build an intangible capability, we will explore the concept of performance culture. We will demonstrate the value of clearly describing what this intangible is and discuss practical ways leaders can build it. In our book, Why the Bottom Line Isn’t, we offer detailed theory and tools for building this and other intangibles that increase organization capability and value.
Building Culture from the Outside In – A Shift in Perspective
Organization culture is a hot concept these days. Organization cultures that are entitlement oriented or too internally focused lack competitive zeal. Most definitions of culture suggest that it is more than random or isolated activities. Your organization begins to have a culture or a unique identity when its management approaches outlive any one executive and involve more than any single management practice, fad, or era. We prefer to use the term shared mindset for this phenomenon because it represents the essence of what’s really happening. First, shared implies common, memorable, or enduring. A mindset represents a thought pattern or framework that you bring to all your activities. A shared mindset becomes the enduring identity of the firm in the collective mind of employees, customers, or investors.
Why do we include customers and investors in our description of a shared mindset? Our approach to the concept of Shared Mindset shifts a traditional focus on culture from inside to outside. Instead of just focusing on the patterns inside an organization that affect employee behavior, we focus on how customers and investors perceive and respond to the culture. For example, Dell’s commitment to rapid service affects customers as much as employees. Shared mindset also shifts focus to the unity that might exist among employees, customers, and investors and away from somewhat generic value statements about what executives say is important.
A shared mindset exists when customers and investors outside and employees inside have a common view of the organization’s identity. Merging internal and external views of identity means that customers perceive the firm in ways that match how employees perceive the firm. .
What’s In It for Me? – Intangible Value Among All Stakeholders
A shared mindset produces intangible value when it creates an identity or reputation in the mind of employees, customers, and investors that is tied not to a person or product but to the firm itself. This mindset becomes a self-fulfilling prophecy when it affects how each stakeholder behaves toward the firm.
Employees will self-select into firms where they perceive a fit between their personal hopes, values, and skills and the existing mindset at the firm. Employee commitment, productivity, and behavior both shape and are shaped by the identity of the firm. Employees who choose to work for Marriott must realize up front that they will be expected to provide exceptional customer service. Once hired, they accept management practices that reinforce the customer service mantra. Employees who don’t fit with the service agenda are likely to leave. A shared mindset changes and reinforces employee thinking and action.
Customers also demonstrate their commitment to a firm’s mindset or identity. When a firm develops a reputation for quality, service, or price, customers begin to rely on this identity and do business with the firm based on it. This identity of the firm in the mind of its best customers becomes a firm brand and demonstrates the impact of mindset on customer value. Firm brands are not tied a single product, but to the identity of the firm. Recent research shows that firms with strong and visible brands such as McDonald's, American Express, Harley Davidson, Herman Miller, and so forth create higher shareholder value in part because they have a positive identity as a firm in both up and down markets. Possessing a firm brand becomes even more important for Web-based sales. Firms on the Internet with a known identity and positive reputation attract customers much more than unknown firms do.
Shared mindset also affects investors in two ways. First, investors have a mindset that defines a company and its overall intangibles. Investors may gravitate toward firms with positive identities (as with the run-up on Cisco stock in the dot-com bubble) or rush away from those with negative reputations (as with the explosive run-down on Enron stock). Second, investors may be affected by the extent to which employees have a shared mindset. We have challenged a number of executives to allow financial analysts and investors to visit with any employee and ask any question as the shared mindset of employees in different functions and at different levels will communicate as much or more to investors as crafted PowerPoint presentations.
Creating A Shared Mindset
How do you create this outside-in shared mindset? We propose a four-phase process that creates a shared mindset that affects employees, customers, and investors.:
- Create the desired identity.
- Make the identity real to customers.
- Make the identity real to employees.
- Build an action plan for implementation.
Phase 1: Create the Desired Identity
We have worked with over a hundred executive teams to create a desired identity or shared mindset. Some were at the top of an organization and creating a desired identity that relates to the entire organization; others represented a division, a plant, or a function. Regardless of scope, the process for crafting a shared mindset is similar.
First, ask each individual to write a response to the question: “What are the top three things we want to be known for by our best customers in the future?” This question turns attention outside rather than inside by seeing the organization through the eyes of the customers. It highlights the best customers, not the average ones. It focuses attention by asking for three answers, not an unlimited number. It emphasizes identity by asking what the unit is known for not what it does. And it points toward the future, not the past or present.
Second, collect the responses and categorize them. For example, a team of ten people will give you thirty total items. Sort the thirty into common answers. This might mean that of the thirty, you have seven that add up to “service,” six “value,” and five “reliability,” and the other twelve are not in these three categories. It is important to sort rigorously. For example, some people will write things like “service, reliability, or ease of doing business” and imply that they all mean the same thing. Not so. At this point in the exercise, the goal is to see the extent to which a shared mindset exists among the top team, which includes rigor of language and ideas.
Third, add the total number of responses in the top three categories (eighteen in this example) and divide by total responses (thirty) for a rough measure of shared mindset (67% in this case). Our rule of thumb is that a desired level is 80%—which is rare on the first round. Generally, even when firms have strong cultures, executives use differing language and even differ in the aspects of the company they regard as crucial to its success when seen through the lens of a customers.
Fourth, talk about themes in the results. Cluster and define themes that emerge from the responses and redo the exercise to see if an 80% consensus can be reached. Reaching 80% consensus generally takes a couple of hours maximum. After debate and dialogue, the executives can usually agree upon what they want to be known for by their best customers.
Fifth, put the themes into words that resonate with customers. For example, at Domino’s Pizza in the early 1990s, we did this exercise with the top fourteen executives. When asked the top three things they wanted to be known for, responses included service, reliability, good product, good value, talented employees, easy access, and many more. The unity score was about 40–45% after Step 2. On discussion, they came up with themes around quality, service, and talent. Then they put these themes into customer language with the following desired mindset: hot, fresh, tasty pizza delivered on time by friendly people who drive safely.
Sixth, check out the articulated mindset with customers to make sure it is right. This final step in building a shared mindset—making sure it resonates with target customers—is probably the most important. If the desired mindset will not cause customers to pick your firm over competitors, it is the wrong one. This means having executives share their mindset with customers in one-on-one meetings, in focus groups, and in other customer contact and research methods to assure that it will influence their buying choices.
Phase 2: Make the Identity Real to Customers
Given that the desired identity should have meaning and impact for targeted customers, leaders should find ways to make the stated identity real to those customers in their terms. Phase 3 describes a concurrent effort to make it real to employees so that employees have the right mindset and skills to deliver on the customer promises. Making the identity real to customers comes from specifying points of contact—touch points—between the firm and the target customer, then finding ways to make the desired identity real in each one.
For example, at Domino’s Pizza, executives picked four touch points between the firm and the pizza-buying customer: the call, the delivery, the pizza, and the box. To communicate service during the call, they worked to answer the call by the fourth ring, have a friendly greeting, use caller ID to verify name and address of customer, and make sure they thanked customers for their patronage. The delivery was on time because the drivers had maps and drove in areas they knew, and it was accomplished by friendly people who dressed in clean uniforms, had correct change, and used a positive script in communicating with the customer. The pizza was hot, fresh, and tasty because it was made of good quality ingredients, packed in heat bags to maintain warmth, and delivered quickly after cooking. But as executives thought more about the customer contact, they realized that the call lasted about 30 seconds, the delivery exchange about a minute, and the meal about 10 minutes, but the box often sat around customer kitchens for hours (and in many cases for days). So they chose to use the box for advertising their firm brand and identity. Rather than merely have the box give their name and say “our drivers carry less than $20 in change”—which might communicate an attitude of suspicion toward customers—they placed coupons, slogans, and commitments about the pizza on the box itself.
Phase 3: Make the Identity Real to Employees
Ultimately, employee daily actions should reflect the shared mindset. We have found several critical factors for leaders who want to make the mindset real to every employee including talent, rewards, and training and development.
1. Talent Flow
The treatment of talent sends messages to employees, customers, and investors. Moving talent into, up, through, and out of the organization communicates the mindset. Hiring new people who embody the mindset and promoting employees who live the mindset—and removing those who don’t—become critical tools for embedding culture. Those who are not hired, promoted, or removed observe what is happening and adapt their behaviors accordingly. Southwest Airlines rigorously screens flight attendants. It looks for employees who have technical skills, but even more it seeks those who are predisposed to engage with passengers, doing the required job with humor and enthusiasm. And this type of screening becomes the most critical decision of a merger or acquisition—for the survival of the combined company, it’s essential to assess talent and ensure that the right talent stays and the wrong talent leaves.
2. Rewards
Reward systems both change and reinforce behavior. The goal of a reward system is to turn goals into measures of behavior and outcomes, then allocate rewards based on the extent to which employees behave in the right way and deliver the desired outcomes.
For a quick look at your firm’s current mindset, take a look at its performance management system. The appraisal questions show what your firm values as defined by what it rewards, that is, its real mindset—which may be quite different from the one fondly espoused in vision statements and other earnest pronouncements. It’s also useful to invite customers to review the performance management process and report the extent to which the behaviors and outcomes on the appraisal document reflect what they as customers want the firm to be known for.
3. Training and Development
Designing and delivering training courses sends messages about what matters. At the same time, it offers leaders skills and tools to act on those messages. An audit of the content of training and development experiences should show that these investments focus on the desired mindset, both conceptually and pragmatically.
Phase 4: Build Action Plan for Implementation
Shared mindset changes thinking and action of employees, customers, and investors. When your employees behave in ways that customers would like them to behave, employees, customers, and investors are well served. In the fourth phase, the ideas from preceding phases translate to action. To be successful, action plans need to be specific, start small, and have leadership support.
We often ask leaders to look at the ways that they could make the culture real to customers and employees and pick two or three specific areas they could focus on. Prioritizing a few things and getting them done is more useful than talking about a lot of things and accomplishing little or nothing.
Conclusion
Building a performance culture ensures that every time your employees interact with your customers, that their actions are consistent with what is desired. When this happens, customers expect to receive this experience from your company and are disappointed if it does not happen. We have described four steps necessary to achieve this shared mindset: articulate your unity of identity (the desired experience that customers should have), make this identity real to customers at every touch point, make this experience real to employees, and finally, build an action plan for implementation.
When a strong and desired shared mindset exists between your firm and its customers, tangible and intangible value is created. Customers are more likely to do repeat business, the right kind of employees are most likely to be attracted to your firm, and investors have greater confidence that the growth plans of the firm will materialize in the future.
Our discussion of shared mindset fits in the context of a new bottom line, one that is focused on both intangibles and financial results. We believe that intangibles can become tangible and that leaders can and should create intangible value. When leaders understand how they can build intangible value, they can begin to identity specific actions they can take to define a new bottom line. We have illustrated how culture can be one of the capabilities that create intangible value. In both bull and bear markets, intangibles have begun to redefine business success. Leaders who move quickly to this new bottom line will have more success than those who do not.
If you’re ready to put these ideas into action, our team at RBL can help. We work with organizations to build leadership capabilities and performance cultures that align internal behaviors with external expectations and create lasting value across stakeholders. Contact us to explore how our consulting offerings in leadership development and cultural transformation can support your business in navigating uncertainty and accelerating growth.