Issue 03 of our print magazine is available to buy now

Issue 03 is available to buy now

A Price to Pay: Alex Edmans on How Businesses Can Make Strategic Trade-Offs

A Price to Pay: Alex Edmans on How Businesses Can Make Strategic Trade-Offs

Professor Alex Edmans shares how leaders can prioritise better – and why it won’t make everyone happy.
By Amy Butterworth
24th Aug 2023

You can’t please everyone. Alex Edmans, Professor of Finance at London Business School, makes that clear in his 2020 book Grow The Pie: How Great Companies Deliver Purpose and Profit

While Edmans affirms that business doesn’t need to be a zero-sum game – it’s more than a game of winners and losers – he counters this with a measured take on the limits of what purpose can bring to a company. There are going to be trade-offs in any business, but for Edmans, it’s about choosing the right ones, and managing them effectively. 

How can companies prioritise? 

“Often leaders think that purpose is about trying to serve everybody,” he tells us. “But that’s impossible.” In reality, this misconception of what purpose means is what holds back many CEOs from putting it into practice.

But what about the companies that get it?

“Take French energy company Engie,” Edmans suggests. In 2016, it launched its three-year transformation plan to become a leader in responsible energy. Its “new vision of the energy world” involved prioritising low-carbon energy and deprioritising carbon-heavy plants – one of these being its coal mine and power station Hazelwood, based in Australia.

“A doctor doesn’t need to be a doctor and a lawyer, teacher and anything else: being a doctor can be enough.” 

Alex Edmans

“It made the tough decision to close down this plant that same year – a plant which 750 employees relied on for job security,” he tells us. As a reputational cost for the company, how did leaders know if they were prioritising correctly? 

For Engie, the focus was clean energy, and its target was becoming a leader in responsible energy; closing Hazelwood made sense to fulfil these aims. “It decided that as an energy producer, the environment was even more important than its employees,” explains Edmans.

This isn’t an admittance of the failures of purpose-led business, stresses Edmans. Rather, it allows businesses to operate without carrying the burden of thinking they must do it all. “Purpose is not about being all things to all people,” explains Edmans. “Often people think purpose is a synonym for altruism, but the word purpose actually means being focused and targeted.” 

“Think of it like a personal purpose,” he goes on to say. “A doctor doesn’t need to be a doctor and a lawyer, teacher and anything else: being a doctor can be enough.” 

But when making purpose-led decisions, “how does a leader know if she’s making the right trade-offs?” Edmans has come up with a number of principles to guide leaders on which investments to make and which to not.

The principle of multiplication

If an organisation was to spend £1, would this generate more than £1 of social value to the stakeholder? If the answer is yes, then it’s something a company may prioritise, says Edmans. 

But how do you measure social value? For Edmans, it isn’t the same as profit. A leader will need to make some assumptions about the monetary value of a social endeavour. But it’s only as presumptuous as finding the financial NPV (net present value) of an initiative, which leaders are already accustomed to.

By having a clear methodology to purposeful business, it prevents things from getting too nebulous. It gives leaders structure and ways to compare, allowing them to make grounded decisions. 

The principle of comparative advantage

“It’s about focusing on investments that you have a unique expertise in solving,” says Edmans. 

He posits Vodafone as a forerunner in this way of prioritising. Its purpose is to use technology to enhance socio-economic progress, and its endeavours are firmly rooted in this – without being distracted by other, albeit important, social causes such as climate change. 

“Climate change is absolutely important to Vodafone, and it will do what it can to reduce their carbon footprint. But the most important thing for them is the positive use of technology.”

“It’s about focusing on investments that you have a unique expertise in solving.”

Alex Edmans

For example, in 2007 Vodafone launched M-Pesa, a branchless banking service in Kenya which brought mobile banking to hundreds of thousands of people who were previously unbanked. There was a negative carbon impact from doing this, but it was outweighed by the fact that it would significantly boost financial inclusion across many countries in Africa.

This investment generated a much stronger positive impact than if Vodafone were to simply donate money to a charitable cause. Identifying the most impactful charities isn’t Vodafone’s expertise, and neither do they promise to come up with solutions for the climate crisis. But bringing financial inclusion to a wider population through technology is well within Vodafone’s capabilities. 

The principle of materiality

“The stakeholders that an investment benefits must be material to the business for purpose to lead to profit,” says Edmans. While multiplication and comparative advantage allow a company to have a significant impact on stakeholders, materiality means that this stakeholder impact ultimately benefits shareholders.

Businesses shouldn’t have to masquerade as a jack of all trades; doing so just causes them to underperform. For energy company Engie, the environment was even more important to their business than employees, which is why it took the difficult decision to close down Hazelwood despite the ensuing job losses.  

But while Engie followed the principle of materiality, it didn’t lose sight of its humanity. After making the difficult decision to close the plant, it managed to act altruistically by offering a $20 million worker transfer scheme to support displaced employees.

You can’t be everything to everyone, nor would you be better off for it. In business – and in life – you can’t do it all.