Bill Hatcher
July 28, 2011 | Business | Bill Hatcher

Return on Ideas

In the 70’s, Harvard Business School professor, William E. Fruhan, advanced the postulate that the single, overriding obligation of a business is maximization of shareholder wealth.  Under this theory, the corporation is not responsible for social or environmental costs beyond those incurred as a result of unavoidable regulation or those that can somehow be justified as increasing the return on capital.  As the corporation is supposed to be socially agnostic, discretionary investments are choices left to be made by shareholders with their returns.

Return on investment (ROI) has become the underlying measure of shareholder wealth creation.  Over the past three decades, this interpretation of the raison d’être of business has narrowed to where the modern firm is seen as little more than an income statement and balance sheet.  Indeed, very little American wealth creation in 2011 derives from making things but rather from the trading of abstract instruments.  The banking industry, which for hundreds of years was the primary source of capital for business creation, now derives just 8% of its profit from primary lending.

At A to Z and REX HILL, while we maintain financial reporting systems that are state-of-the-art in the wine industry, we have never employed an ROI analysis.  Similarly, while we consider the measures of pH, TA and Brix in winemaking, we do not make wine by the numbers.  For us, ROI is more aptly to be described as Return on Ideas.
Few ideas are bound to alter the course of our business; in a mature industry, we would be fortunate if one paradigm-changing idea emerged every three years.  Most ideas will languish, some will fail—we have endured our share of screw-ups over the years.  However, if we are not willing, as we are, to accept if not encourage failure, we will have no chance at that once a thousand day idea.  And, in the end, our return on investment exceeds the industry.

The horizon of a thousand days correctly implies that we are far more concerned with the strategic success of the business than we are with exploiting short-term opportunities.  Despite the volatility of grape prices, we pursue long-term grower relationships that are stable for all parties.   One of our sales directors recently turned down a million dollar order with a big box retailer because it wasn’t the right decision for the brand.  Importantly, he felt empowered to do so.

But, perhaps most important, we believe that a culture that embraces failure is one that places creativity at the forefront of its values and, correspondingly, is one where people come to work every morning knowing that they don’t simply perform a repetitive function but are encouraged to come up with the thousand day idea and, if it doesn’t work, the worst that can happen is a good-natured roasting at the monthly staff meeting.


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