Editor’s note: Eric Jackson, a technology consultant and developer, is a regular contributor to Local Tech Wire. His column appears on Tuesdays.

BLACK MOUNTAIN,A recent Business Week book review has this statement about certain practices among pharmaceutical companies: “– they do increase revenues, which, after all, is the goal of business” (BW 4/19/2004).

Well, not exactly. First, profit might be a better target. Besides, the current consensus is that the goal of business is to increase shareholder value.

Indeed, the reviewer does not forget the shareholders: “Of course, drugmakers charge the highest prices the market will bear for their products, just as other manufacturers do. Anything less, and they’re not doing their duty to shareholders.”

Fine, as far as it goes. But this too seems a bit narrow.

The issue is broader than a single review. An earlier article highlights the problems that Costco has with Wall Street (BW 4/12/2004). The company is not just profitable, it actually beats Wal-Mart’s Sam’s Club on key profitability and productivity measures. It roughly matched Sam’s Clubs total sales last year with a third fewer employees, pulling in nearly 25 percent higher operating profit per employee. Wall Street’s reaction? Costco’s latest quarter results were answered with a 4 percent decline in the stock value. Comments one analyst in the article: “At Costco, it’s better to be an employee or a customer than a shareholder.”

Excuse me?

The problem, it seems, is that Costco has a bad habit of providing good wages and benefits for its workers: average hourly wages for full-time employees are almost 40 percent higher than at Sam’s Club, and health coverage and retirement benefits are extended to 35 percent and 27 percent more workers, respectively.

The same thinking that makes maximizing revenue or price primary business goals also leads to the principle of “employee cost minimization”: if you pay your workers more than the least the employment market will bear, you are not doing your duty to your shareholders.

Even if it costs you more, and gains you less, in the long run.

Blindness and short-term thinking

Where does this kind of blindness come from? Certainly it reflects short-term thinking and a tendency to see business as a zero-sum game — if one group wins, all others must necessarily lose. It also indicates a focus on first-order effects. If we cut salaries, the obvious immediate effect is that costs go down and profit goes up. You must consider secondary effects to realize that employee motivation will probably decrease, leading to increased turnover and lower productivity while increasing training costs. The effects on profitability are then less clear since the relations are more complex.

I suspect the most important underlying issue lies here. Finding ways to deal with complexity is an issue for all of us — we must develop methods for easing or avoiding it in order to function effectively. It is possible to do this in ways that avoid the dangers of oversimplification as well, but it is not easy.

That is perhaps why the overwhelmingly common means of dealing with complexity is to retreat into binary thinking, in which things are good or bad, black or white, us or them.

This tendency first became clear to me when I served on the board of a non-profit organization a few years ago. Over and over proposals for programs and activities came to the board and were approved because they were “good ideas.” Unsurprisingly, the vast majority of these good ideas went on to fail for lack of interest and support.

This underscores one of the key problems of binary thinking — it is inimical to decision-making on the basis of priorities. If things can be only good or bad, we lose the ability to choose between good, better and best.

A second consequence is that it discourages consideration of context. This is why secondary effects are so often invisible. Without the context on which they critically depend, questions about secondary effects are not just unanswerable, they are unaskable.

Binary thinking also leads to disconnection and polarization. With only two choices, linkages over-constrain the system. We resolve this by considering each point in isolation — prices, payroll costs, revenue, shareholder value, etc. The result is that, rather than debating priorities, discussions tend to line participants up on opposite sides at the expense of conversation and the possibility of learning.

Finally, binary thinking produces a strong tendency toward extremes. If something is “good,” then obviously more of it is better. This is probably part of the thinking on Wall Street when it punishes a Costco for its profits — low costs are good and so lower costs are better. Costco decided to forgo an opportunity to further decrease costs; clearly something is wrong.

Avoiding binary thinking means finding effective ways to allow complexity in. There is no formula for this, but here are a few things that can be kept in mind.

Use plurals — consider multiple goals and measurements together and think about their relationships.

Think about all stakeholders — successful businesses are those that manage to find a balance that meets the needs of all their stakeholders: shareholders, customers, employees (and others: the press, regulators, communities, etc.).

Hypothesize — thinking through what-if scenarios encourages deliberate consideration of consequences and increases the chances of taking the next step to discover secondary effects and beyond.

Highlight context — assume that every decision must be relative to a context and consider what that relation might be in any specific case.

Find ways to solicit different views — I pound once more on my current favorite topic of diversity.

Ideas? Suggestions? Contact Eric at eric@deepweave.com

Eric Jackson is the founder of DeepWeave. He has built his career pioneering software solutions to particularly large and difficult problems. In 2000, Eric co-founded Ibrix, Inc. He is the inventor of the Ibrix distributed file system, a parallel file storage system able to scale in size and performance to millions of terabytes.