The Word Profit has Provoked a Wide Range of Issues and Emotions among Respondents & Businesses around The World. It also Launched Debates, and many readers Argued for Measures of Success other than Profit, writes Prof. Jim Heskett, Baker Foundation Professor, Emeritus, at Harvard Business School.
Charles Green (founder and CEO of Trusted Advisor Associates) continues the discussion by suggesting, “The really interesting question raised is: if profitability is higher when pursued as a by-product than when it is pursued directly, why then do managers (irrationally) choose to pursue profit directly rather than indirectly? I think the answer is to be found more in psychology than in economics.” Does that account for the increasing interest in the field of behavioural economics? What do you think? H. L. Hencken once said, “For every problem there is a solution that is simple, direct... and wrong.” This brings to mind experiences with leaders of the most profitable organisations that I have observed. Almost to a person, they treat profit as a by-product of other things to which they devote most of their attention, things such as a focused strategy that delivers results to carefully-selected customers while pursuing policies and practices that leverage results over costs, hiring people with the right attitude (one that fits with the organisation’s culture), and proper training and organisation (often in teams). Financial targets are given no more or less emphasis than targets associated with employee and customer engagement, often by means of some kind of balanced scorecard. Rewards and recognition – whether based on the performance of the entire company, teams, or individuals – reflect this philosophy. The idea is to create what my colleague, Michael Beer, calls a “high commitment, high performance” (HCHP) organisation.
This idea has been addressed at length in a new book, Obliquity, by British economist John Kay. You might guess that Kay thinks profit as a “direct goal” is overrated, otherwise he wouldn’t have much substance for a book on the subject. Kay argues that business problems cannot be solved by drawing a straight line between cause and long-term effect because they are so complex, a manager’s information so incomplete, the competitive environment so complicated, analytic techniques so inadequate, and the number of things over which a manager has control so limited, that it is impossible to make the connection with any assurance. As Kay puts it, “The mistake is to make inferences about the relationships between outcomes and processes when we cannot observe and do not understand the processes themselves.” The argument is that those things that contribute to long-term shareholder value will be revealed and achieved by realising intermediate goals or through some kind of overarching mission and vision that helps an organisation achieve long-term shareholder value as well. Of course, it assumes that we know what those things (missions, visions, intermediate goals) are and that we have some understanding of how they contribute ultimately to shareholder value.
There is some empirical evidence to support Kay’s thesis. For example, Fortune’s 100 Best Places to Work regularly produce more profit than a matched set of competitors. Kay’s response to this would probably be, “What does that prove?”
If it can be demonstrated that this approach yields more profit, why doesn’t the leadership of more organisations pursue profit through “indirect” means? Or is it, as Kay might ask, as simple as this? Can this philosophy be carried too far? Is it compatible with the need in a public company to “make the numbers” every quarter? Is it dangerous or misleading to give too much emphasis to the idea that profits are a by-product of many other policies and practices? Is it wise to communicate this concept to all levels of an organisation? If so, how is this best done without confusing people?
Is profit as a “direct goal” overrated? And if it is, why then is it so frequently found among goals?
Coordinated by: Steven Philip Warner
This idea has been addressed at length in a new book, Obliquity, by British economist John Kay. You might guess that Kay thinks profit as a “direct goal” is overrated, otherwise he wouldn’t have much substance for a book on the subject. Kay argues that business problems cannot be solved by drawing a straight line between cause and long-term effect because they are so complex, a manager’s information so incomplete, the competitive environment so complicated, analytic techniques so inadequate, and the number of things over which a manager has control so limited, that it is impossible to make the connection with any assurance. As Kay puts it, “The mistake is to make inferences about the relationships between outcomes and processes when we cannot observe and do not understand the processes themselves.” The argument is that those things that contribute to long-term shareholder value will be revealed and achieved by realising intermediate goals or through some kind of overarching mission and vision that helps an organisation achieve long-term shareholder value as well. Of course, it assumes that we know what those things (missions, visions, intermediate goals) are and that we have some understanding of how they contribute ultimately to shareholder value.
There is some empirical evidence to support Kay’s thesis. For example, Fortune’s 100 Best Places to Work regularly produce more profit than a matched set of competitors. Kay’s response to this would probably be, “What does that prove?”
If it can be demonstrated that this approach yields more profit, why doesn’t the leadership of more organisations pursue profit through “indirect” means? Or is it, as Kay might ask, as simple as this? Can this philosophy be carried too far? Is it compatible with the need in a public company to “make the numbers” every quarter? Is it dangerous or misleading to give too much emphasis to the idea that profits are a by-product of many other policies and practices? Is it wise to communicate this concept to all levels of an organisation? If so, how is this best done without confusing people?
Is profit as a “direct goal” overrated? And if it is, why then is it so frequently found among goals?
Coordinated by: Steven Philip Warner
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age WomanIIPM's Management Consulting Arm-Planman Consulting
IIPM Prof. Arindam Chaudhuri on Internet Hooliganism
Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
