02 Jul 2010  What Do YOU Think?

Is Profit as a “Direct Goal” Overrated?

Summing Up: The word profit provoked a wide range of issues and emotions among respondents, says Jim Heskett. It also launched debates, and many readers argued for measures of success other than profit. (Online forum has closed; next forum opens August 5.)

 

Summing Up

Why do managers choose to pursue profit so directly? The word "profit" in this month's column provoked a wide range of issues and emotions among respondents. It set off several debates. They ranged from definitions of "acceptable" profit to profit's effect on decision-making and even to the future and viability of capitalism.

One debate concerned the primacy of profit as a goal. Deaver Brown led this argument by saying, "Profit is the only legitimate goal of a corporation …," pointing out that it serves many important functions for us as employees, citizens, and others. David Zemanek added, "Isn't that why they call them 'for profit' companies?" Ann Brown said, "There's nothing wrong with profit as a goal. What's important is how you achieve it." (Tony Hayward's replacement at BP, announced on July 26, may be a timely illustration of that point; BP is very profitable, but there is official evidence that it continues to compromise safety.)

Gerald Nanninga, on the other hand, argued that profit is a default measure, commenting that "It is easier to measure and reward a goal of 'producing a profit of x' than it is to set goals around creating value faster than costs (his preferred goal)." Deepak Alse reminded us that "the world of business … is an unbounded system! … The 'Corporation' is in effect an acceptance of the idea that profit seeking should happen through indirect approaches." Mark Nadler commented, "Operationally, profit as a final goal is probably impossible because of principal/agent problems and lack of information and knowledge. This makes intermediate targets that affect profit important." Steve Brogan, meanwhile, offered an interesting analogy: "Anyone who has ever gotten involved in serious marksmanship understands that there is a difference … between the intended target and the 'aiming point.' " In a pessimistic and somewhat lamenting tone, Tom Dolembo ventured another reason: "I suspect profit, in the pure capitalist sense, is obsolete … we're just not capitalists anymore … profit is just another archival number to be doubted."

One argument for measures other than profit as "direct" goals is the complexity of the corporation and the difficulty of drawing a direct line between any action and profit. Raymond Suarez said, "In a world characterized by increasing complexity … reconsidering profit as being the sole and superior criterion for business success, is the only rational approach to take." On the other hand, Dan Wallace argued, "The presumption that problems are complex is a self-fulfilling prophecy … the most profitable and successful companies I know are rigorous … about driving simplicity and … driving out complexity…."

Charles Green continues the discussion by suggesting, "The really interesting question raised is: if profitability is higher when pursued as a byproduct 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 behavioral economics, as suggested by the recent writings, discussed earlier in this column, of George Ackerlof and Dan Ariely? What do you think?

Original Article

H.L. Mencken 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 organizations 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 organization's culture), and proper training and organization (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) organization.

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 realizing intermediate goals or through some kind of overarching mission and vision that helps an organization 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 organizations 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 organization? If so, how is this best done without confusing people? Is profit as a "direct goal" overrated? Why then is it so frequently found among goals? What do you think?

To read more:

Michael Beer, High Commitment High Performance: How to Build a Resilient Organization for Sustained Advantage (San Francisco: Jossey-Bass, 2009). (The Mencken quote is from Beer's book, p. 79.)

John Kay, Obliquity: Why Our Goals Are Best Achieved Indirectly (London: Profile, 2010).

Comments

    • Anonymous

    Profit and Greed are hardwired to the human condition.

    It is through nurture that this sometimes visceral anomaly can be transformed and can takeon a shape of its very own.

    Let it be known that decent profits do need to be made by corporations and enterprises, BUT they must be made decently--a decent profit, decently. There is a very thin line between what is considered adequate profit and what is regarded as corporate and personal excess, thus management structures and the general masses alike must not make profit generation a direct goal of any enterprise or business undertaking.

    The direct profit motive is indeed overrated, and we must effort to "swing-back" the pendulum of ever-growing excesses. Corporate citizenship and its obligations to its society members must never take the back seat to an ever-growing excess profit-motive regime by corporations and enterprises alike.

    Make a decent profit, decently, and never measure your end profit performance measures and compensation pools as any indication of your true worth to the world and to society as a whole, as, as often is the case, one's end profit performance and bonus pool will always truly be over-valued in comparison to the minuscule "value-added" generated by one's works to generate those very profit directives and compensation pools.

    Are senior management structures worth their pay grade? Profit as a "Direct Goal" is indeed overrated.

     
     
     
    • Huda Almidani
    • Consultant

    I think the essence of business management is generating profits by indirect means in short and long term as long as the shareholders of these businesses want them to do so.

    However the increasing complexity of business environment requires companies to take care of their future capability of making profits as well as their present capability that involves, among other important things, the genuine addressing of their stakeholders' interests, by attention to vision, mission and intermediate goals.

    More and more, companies are needed to adhere to principles that build their competitive advantages, and constantly be aware of global market dynamics for interactive execution of their strategies.

    They are less and less able or desired to gamble, and pursue dangerous strategies that hamper their flexibility for changing strategic direction and allocating resources priorities, even if these dangerous strategies have better likelihood of generating profits in the short term.

    This is also true for public companies, shareholders need to be educated about these dimensions, and encourage them to be a force in strengthening this trend instead of putting pressures on CEOs who want to protect their interests in the short and long term, and governments also need to monitor trends of damaging value for stakeholders in the favor of the greed of shareholders.

    I think articulating the financial goals is a mean to check, over time, the actual results of pursued strategies, practices and leveraging processes. Management teams need to constantly monitor the effect of compromises they make on their ability of making profits; this is exactly what BSC provide.

     
     
     
    • CJ Cullinane

    Without a "profit" motive a company will not survive and grow! The best example of the outcome of managing an organization without a profit orientation is Greece, and yes the United States. Now I am not talking about excess short term profits but consistant long term profit and growth. Short term quick money is not the "profit" of growth. Profits should fuel long term growth and create loyal customers and employees.

    Managing without a concept of profit (or at least a break-even) leads to ineffective managers, large pensions that cannot be funded, unproductive workers and large deficits (sound familiar?). There is no such thing as a free lunch, someone has to pay the farmer to raise the food and someone to process it. Short term profits at the expense of the workers and customers is not real profits but it is graft and will be short lived (banking industry sound familiar?)

    I believe a profit incentive is needed for the long term success of an organization.

     
     
     
    • Joseph Ndedde
    • Accountant, Financial Resources (UK)

    In the context of business, profit is the excess of revenue over costs. With this comes the zeal to satisfy investors and give them substantial returns on their investment. Substantial in the sense of comparison with similar entities within the industry.

    The drive for profit has indeed over the years been overrated, attributable to the materialistic nature of man. This may indeed sound philosophical and is, but the truth is that many corporations prefer salesmen/women who bring in monetary value regardless of the manner and underlying ethical issues wherein such sales have been made.

    In this era of capitalism, 'the winner takes all', the drive for profit is ever increasing. Hidden action and moral hazards are lurking in the corners of offices, where corporate officers take actions that on the short-term is profitable for the organization, but the long-term effects regressive. An organizational culture may not necessarily be communicated to employees by a written memo, it is discerned in the attitude of seniors, directors and leaders of corporations. Employees then enact these to satisfy their superiors, a basis for the extravagant bonuses and golden hellos.

    Profit connotes materialism, wanting not needing, the difference to 'living well'. In corporate management, the introduction of Executive Share Options not only incites the recipient of to employ strategy in performance, but also provides a basis for potential capital gains on disposal. This more often than not, increases the recipients' zeal to outperform the market. We have seen the results of such action are.

    Looking around, we see a lot of businesses that are pristine capitalists, and the only basis for involving in CSR is for public show, some marketing stunt.

    Therefore, in response to the topic question, YES, profit as a direct goal has been overrated. We need to apply 'decent' profit as the previous writer has stated, but even that 'decent' brings in ambiguity, and is subject to the interpretation of the head honcho.

    We need to ensure an ethical approach to business and emphasize on intrinsic value rather than material wealth acquisition.

    Thank you.

     
     
     
    • Anonymous

    Interesting question raised.

    When corporate management structures look in the abyss and there is nothing staring back at them [no shareholders, no investors, no one], it is at this defining moment that they will find their true character.

    Yet, ironically, even after the actualization of the defining moment, management structures will continue into the abyss. The defining moment will not keep them out of the abyss as success makes a man or women who she really is.

    Is Profit as a "Direct Goal" Overrated? Yes it is. Create something tangible for society and do not buy and sell off others for the sheer profit motive or financial target performance levels.

     
     
     
    • Marlis
    • researcher (education), IFE

    Profit as a direct goal is good as long as it isn't an exclusive goal and only if it permits sustainable development of the organization and its context, thus preparing future profit and well-being. A society of wellness and care are more important than immediate profit... at least in my view. An economy aiming at profit in the long run is one of its conditions. The big problem is the incapacity of complex thinking (Edgar Morin), the alternative: profit OR social and environmental accountability. It's certainly both ! If only for our children's sake ! Yet our economy being in a rather pathological state, I suppose my views are not everybody's.

     
     
     
    • Deaver Brown
    • Publisher, Discount Audiobooks

    Profit is the only legitimate goal of a corporation, which is supposed to be 100% run for the benefit of the shareholders. When writing my Director audiobook, I discovered the only legal obligation of a the Directors was to represent the shareholders--not management, employees, community, or others. Directors could adopt other goals, but that was not in the charter. As Peter Drucker said, "Focus for results."

    What does this mean about employees? Community? Others? If ill-treated, profits will not come. See BP, Enron, Citibank, Kmart, and a host of other failures.

    I have been a serial entrepreneur all my working career (except 3 years of boot camp at GF for which I am forever grateful). Those "rip" off financial guys, who have always gotten more $ than my partners or me, are essential for capital. Personally they would be better off in 10 year treasuries (they don't need the interest; it is the principal that is the problem for the rich...).

    Those middle men/people are essential to our businesses. Let's not forget them. It is a lot more fun to build products and services; finance is like combat pay--you are doing something that really isn't any fun at all, beating up people for "more" is not a pleasure, so we do have the fun on our side. They deserve more money because they have less fun. And we need them.

    Harvard has had two Org Design leaders in a row now. They talk about Leadership as Kennedy School does (and they had input in the decision). Leadership from our era was about profit and enjoying oneself along the way. Being nice to your stakeholders comes with the territory (the non-profit side). Steve Jobs, Howard Schultz, and Jeff Bezos have leadership. They sell things. They make things.

    As Dr. Johnson said, "Nothing is quite as innocent as a man in the pursuit of money." Profit is like that.

     
     
     
    • Anonymous

    Profit is as much a cost of doing business as is interest or labor or raw materials. Management must generate an appropriate level of profit to reward the providers of capital, or that capital will go elsewhere. It is naive to think that a business can survive for long without offering a competitive return to its investors. Only big public companies whose managements are not strongly governed by shareholders can entertain delusions that profit is optional.

     
     
     
    • Gerald Nanninga
    • VP, Retail Ventures, Inc.

    Long-term profits are a result of doing two things:

    1) Providing something which is perceived to be of such value that someone is willing to pay you for it; and 2) Producing that something at a lower cost than what people are willing to pay you for it.

    Therefore, if you want to be profitable, you need to focus on creating value at a faster rate than you create costs. It's as simple as that.

    Any attempt to bypass this focus and go directly to a goal of "making a ton of money" without a focus on adding value faster than costs will ultimately fail.

    The fun part is the fact that there are many ways to add value, depending on who you want to target and what problems you want to solve for them. Companies need to choose where they want to add value and then make the appropriate trade-offs so that the value is high enough to win in the marketplace without creating excessive costs.

    Of course, this is hard work. It is easier to measure and reward a goal of "producing a profit of X" than it is to set goals around creating value faster than costs.

    But just because it is difficult does not mean it should not be done. Saying we should abandon goals because we do not have precise relationships between cause and effect would be like saying we should paint our windshields black and drive blind because we do not know precisely what is down the road. Even imprecision is better than blindness.

     
     
     
    • Eric
    • Sales

    Who decides what is "adequate profit" and what is excessive?

    Surely some profits appear grotesque at first glance, but when considering the risks of the industry which generated them, the same excessive profit may be quite necessary (ie, BP Oil).

    Surely a singular, even direct, goal of profit can be dangerous. But, if we're honest, is it not the point of every goal?

     
     
     
    • Eric le Roux
    • Principal, Global Strategy Consultants

    Proft is both the measure and reward of success. Success requires deep understanding of market needs; inventiveness in developing customer solutions and creating business competencies to deliver those solutions in increasing volumes over the long-term, with the agility to adapt to changing dynamics while not destroying cash generation. This is the expectation of business leaders. The generation of profit only, without such transformational leadership to build sustanability, will ultimately NOT be rewarded by shareholders!

     
     
     
    • Anonymous

    YES! Profit as a goal is overrated.

    Seems lots of corporations are interested in creating something for profit, rather than something of value to the customer. They now find that people, their customers, no longer having the means to buy just anything, have stopped buying those things that don't have long lasting value to them.

    Investors seem to invest for profit too, rather than in the value being produced, which seems really dumb, because when the products fail to provide value, so will their investment.

    M&As are usually about dumping unprofitable assets rather than strengthening the two (other than selling off duplication,) or involves a strategy of getting rid of competition, when maybe the company being merged or acquired has a better product, thus depriving the customers they seek. Other than profit to the principals, mergers generally don't bring enhancements for the customers.

    Our system is out of whack, and at least in this country (U.S.) people are waking up and are buying ONLY value, not peripherally, stuff that will be thrown away before the warranty ends...well, except for fireworks for the 4th of July.

    When everything needed but food and shelter can be found at the thrift stores (or used car lots) in order to survive, we have to know our opulent living is in trouble.

     
     
     
    • John Arnott
    • CEO, ADG

    I think that profit as a direct goal is terribly overrated and is the principal cause of the current recession.

    I am a consultant helping firms develop vision/mission/strategies, and then convert them into tactics that are understandable to all stakeholders both in supply chains, internally, and in distribution channels. I have had the good fortune to work with over 200 such firms.

    I think we must remember that we live in a society in which commonwealth and health are a benefit to all of society, not just the wealthy. If the very wealthy feel that they must exist in gated, isolated communities, everyone loses. I do not advocate socialism - we have seen that that does not work - but a balance somewhere in between would be better.

    I see a direct parallel with my clients. I generalize, but small and medium sized, privately held companies tend to have a very clear sense of purpose which is much easier to communicate because it is so viscerally held. And privately held firms have the luxury of not being beholden to quarterly results, permitting a longer term perspective for profitable growth.

    Larger firms with professional managers generally seem to have a much more difficult time establishing vision and mission statements because between the BOD, management, (and possibly some lingering founders) there are simply too many opinions as to what the 'raison d'etre' should be. Consequently, communicating it to others can be problematic but I do firmly believe that it is this sense of purpose that motivates people, not (so much) money.

    It is that sense of purpose that triggers the desire to be part of the enterprise, that determines the calibre of people the firm will attract, that determines to what degree the enterprise will succeed, that leads to profit and growth. Not the other way around.

     
     
     
    • David Wittenberg
    • CEO, The Innovation Workgroup

    It is not only important, but absolutely essential that the organization focus on profit. As Gerald correctly noted, profit comes from creating value, which comes from benefiting customers.

    The more complicated issues come in strategizing and executing to maximize profit, that is, making trade-offs along the way. Money spent on employee engagement or community projects (CSR) may not have a direct impact on profits, but management may estimate their indirect benefit as greater than their costs.

    We face this issue in our innovation work. Many companies focus exclusively on short-term results. We remind them that the payoff for innovation investments often takes longer, but only innovation can produce quantum leaps in profits.

     
     
     
    • Deepak Alse
    • Manager - Consulting, Wipro Consulting Services

    It is to some extent heartening to see that we slowly have consensus being built around the concept that the world of business( indeed all of the world) is an unbounded system! This is not a 'Simple ' system.

    In an unbounded system, any objective can only be achieved through a constant recalibration of direction and energy. Information Technology is making the entropy of information assymetry more powerful than it ever was in the history of mankind. The theory of business has now shifted from 'Occam's Razor' to 'Einstein's Razor'.

    Profit as a direct goal would be suitable in a world where cause-effect relationships were linear and based on the industrial revolution driven approaches focussed on converting raw material into usable commodities. All businesses are generating their competitive advantage from the entropy of knowledge & its conversion into processes and systemic structures. We are hardwired to understand and make tactical maps out of complexity. Historically,human beings have dealt with complexity in groups and depended on individuals to execute. The 'Corporation' is in effect an acceptance of the idea that profit seeking should happen through indirect approaches.

    What we need is a new mental model, a model that focusses on 'Business Systems' as living creatures. If profit seeking is a sustainable journey and not a 'quarterly' result, 'Value Add' will be less focussed on short term 'profit-taking'.

    Almost everyone in the organisation has his or her own theory of how profits are achieved.The challenge is in how we build organisations much like nature builds cells and organisms - With enough space for evolution, for creation and destruction.

    Leadership that focusses on Vision, Communication, Goal Setting & commitment to executing as well as change plans, these are the things that make Obliquity work for organisations! The key insight that leaders need to retain is that there is no such thing as an 'Autopilot' in the business of leading - So we cannot believe in linear cause-effect..Leading is a lot like captaining a yatch in mid-sea; profit is not a goalpost, it is an outcome of constantly remaining alert & inspiring the team at the steering wheel!

     
     
     
    • Ajay Kumar Gupta
    • Management Professional, Master in Management, AIM, Manila

    Today profit is the core issue of organization. All the strategies and policies revolve around profit and leave the important segment who makes all these thing possible i.e. people. People dimension is often missing in strategy and policies. Decisions, efforts, ethics and morality find no place in strategy today and also they are less appreciated and valued. On the other hand, profit is rewarded keeping aside its impact on people or society.

    So, what is the true indicator of success or being in fortune 500 list. Is it profit, market share or revenue growth? Traditionally organizations emphasis primarily on profit and secondary on market share and revenue etc. This approach and concept needs to be widely debated and discussed because profit is the outcome and to achieve it we need to evaluate efforts and decisions. Profits by any means and every means can not be termed as a true indicator of success. We need to see the means- profit by any means or profit by ethical means. We should include means as a parameter to rate the profitability and not the profitability alone.

    Today almost all the failed institutions around the world are the classic example of unethical decisions and focusing only on profit by any means. I strongly believe that profitability rating should be based on moral decisions and ethical dimensions.

    Unfortunately, today business and organizations reward outcome and not decisions. Profitability should be valued along with efforts and decisions. Global financial meltdown and worldwide recession are the outcome of our preconceived ideas of looking only at profit and nothing else. CEOs and top management are more responsible to overrate the profitability. Their pay is usually linked with the profit and they find it as a strategic approach to increase their salaries, perks and allowances. If Top management is ready to take voluntary cut in their salaries then major lay off can be prevented up to maximum extent. unfortunately, to reduce the burden on company they lay off but don't usually cut their pay.

    Today, we need to analyze the parameters of rating systems. Organizations put more weight on tangible outcome than intangible parameters. There should be mechanism to includes all the parameters under tangible and intangible while rating and placing company in fortune 500 lists. Rating like profit and leadership effort, profit and leadership decisions, profit and social impact should be taken into account. There is an urgent need to change reward system that emphasizes on tangible outcome and not the moral decisions and ethical dimensions.

    Some questions also need to be addressed like: 1. How to rate the company with the highest profit with anti social activities? 2. How to rate the company placed in fortune 500 list having high attrition rate and taking unethical decisions? 3. How to rate the fortune 500 company, whose CEO, who has never donated to any charity organization, and donates huge sum to charity fund run by his own family members?

    All theses questions are related with profitability, reputation and rewards. And they have greater impact on society and people. So all these factors should be addressed to make reward system more transparent and our rating system more ethical.

     
     
     
    • sam klapholz
    • ex.v.p./owner, sharon young inc

    Fear drives many decisions, and as a result creates misguided goals.

    In a public company, your stockholders want results and as a manager, if you do not set "profit" as one of your key goals, then those stockholders may take issue with that. So the fear of losing your position elicits "profit" as your priority, it sounds good and makes everyone happy. Even in a private company, the same mistake can be made by a linnear thinker who only see's the world in black and white. The problem with 'profit' as a direct goal is that it does not give everyone in the orginization a real focus, something they can translate into how and what they do everyday.

    We also used to make "achieve our financial goals" the number 1 priority every year, with another 3-4 priorities coming later, in effect, minimizing the others. Several years ago, when we started our new busienss, we made a change. Our new priority is "To make our customers the center of our universe". and our mission statement (we are in the womens apparel business) is "To make a product that will perform for our customers", very short, but also very all encompassing to everyone in the orginization.

    As we focused on these, and a few others like, "Expand our levels of distribution", and "Find ways to improve our processes", along with regular quarterly meetings to communicate what we meant and how each individual plays a role, the change in our 'results' was phenomenal.

    Did all this happen because of the one change in priorities, probably not, but since i lobbyed to make this change vehemently, i do believe that keeping eveyone focused on the one simple common denominator, that everyone can understand and which will have the most positive effect on our current and future business creates a group mentality that creates unity and enthusiasm.

    Not everyone thinks in terms of numbers, and in some, to ask them to be responsible for 'profit' when they do not make any financial decisions is ludicrus and insulting. But ask them to do their "own" jobs more effectivley and with the satisfaction of the customer in mind, they can relate to that.

    BTW, our EBIDTA has hit record levels that we've never seen before in over 37 years in this industry. (sorry about any typo's)

     
     
     
    • Wayne Brewer

    I think profit is both overrated and over-blamed.

    Profit is a proxy for value creation and is contingent upon managing the risk and reward equation well. For businesses that create value and systematically reinvest to compound value creation into sustaining growth, profit feeds continued growth.

    As the only goal, profit is overrated, because if profit is the only goal, then shortcuts are very tempting. Businesses can boost short term profits by cutting R&D, but R&D is the prime enabler of the ultimate goal of value creation, for which profit is a by-product. This kind of shortcut harvests already created value, forsaking future value creation. The more severe shortcuts move into the realm of fraud and theft.

    Profit is over-blamed for issues where greed is usually invoked as the cause. Can't greed, by definition, only exist where risk of loss is either ignored or does not apply? In this way, I think blame, instead, lies in regulations or rules that allow risk (i.e. negative consequences) and reward to be decoupled.

    To the questions of how far into an organization to communicate profits are a by-product and not the end goal depends on how deeply in an organization you are able to engage the intellect of the employees. The more, the better, in my opinion.

     
     
     
    • Jamie Hsu
    • Professor, Lawrence Tech Univ.

    We can assess the adequacy of profits by looking into the 'reason' for it and the 'means' of getting it.

    Why does a business need profits? Is it to enrich the bonus and income of executives and owners? or to provide long term jobs for employees, to generate dividends for share holders, and to contribute to the society. The latter certainly makes the focus on profits justifiable.

    How are the profits generated? On the back of the employees, short changing the custromers, or damaging the enronment? These certainly will violet the motto of 'earn decent profits decently'.

    By examing the 'whys and hows' of profit generation, we can then judge the relevancy of focusing on profits.

     
     
     
    • Pieter de Beer

    No, it is not overrated, with the exclusion of Public Service (government departments).

    Any other way the staff or workforce will have an argument to share in teh profitx before tax. For example: a coproration with a vision to be "the preferred employer in the industry" will have a hard time convincing employees that they do not have a claim to higher remuneration levels when the organisation was financially successful.

     
     
     
    • Anonymous

    Profit is an obligation that a responsible company has to its customers, employees and shareholders. All three groups want to know that the business will be around for a while. Only profitable companies can endure over time.

    There is no such thing as excess profits in a free market. Companies and individuals should be able to compete and be rewarded for success and also punished for failure. Profit provides incentive to take reasonable risk in that environment.

    Profit is a good thing. Making a profit should not be confused with selfishness. It is more accurate to say that profit is possible when our self-interest is bridled so that the needs of others are well met.

    If a business does many things well but is not profitable it will not survive. Businesses managed solely by the bottom line lack the depth to be truly great. When enterprises balance the profit motive with a drive to serve others everyone wins.

     
     
     
    • Mark Nadler
    • Professor, Ashland University

    Conceptually, it's important for management to understand that profit is their final goal. This avoids problems like trying to maximize customer service or minimize product defects. Operationally, profit as a final goal is probably impossible because of principal/agent problems and lack of information and knowledge. This makes intermediate targets that affect profit important such as employee engagement, product development, etc.

     
     
     
    • Hugh Quick
    • relaxed at home

    I share the view, much expressed, that most people are not in business to make money. If they try that, many fail. I see it more from the worm's eye view upwards than cosmic understanding downwards. When they get old many people like to think they have done more than make money.

     
     
     
    • Ann Brown
    • Change Leader, Providence Health Care

    There's nothing wrong with profit as a goal. What's important is how you achieve it (decently and fairly) and what you do with the money when you have it. If you want to take care of your people, reward your investors or contribute to community, it's profits that make it possible.

    I agree with Hugh, as we get to the later days of working we like to think we have made a difference somehow ... as well as making money. After all, if we didn't do that there wouldn't be any relaxing at home :)

     
     
     
    • Raymond Suarez
    • President, Quality Management International

    Profit as a direct goal is a decision, a value, a choice to be made.

    It's part of our American culture, so much so that to question it seems irrational, unpatriotic and sacrilegious.

    The reason so many executives and companies aim for profit directly is because we all have been taught that doing so is the only right thing to do for our shareholders, stakeholders and society. Public financing of our corporations as an ultimate capitalization strategy clearly contributes to this value set. Bigger is better, growth is essential, profit is good, end of discussion, or so goes the familiar argument.

    To choose other criteria and objectives for organizing and directing business activities represents liberation from such orthodoxy. From balanced scorecards to triple bottom lines, whether one believes in the supremacy of profit or not, to believe that there are no other options or alternatives is self-limiting and socially doctrinaire.

    In a world characterized by increasing complexity, interconnectedness, and scarce natural resources, and where sustainability of life as we know it necessarily requires a CHANGE in how we think about and organize ourselves, reconsidering profit as being the sole and superior criterion for business success, is the only rational approach to take.

     
     
     
    • Philippe Gouamba
    • Vice President of Human Resources, Skyline Windows, LLC

    Profit as a "direct goal" is overrated. Two examples come to mind: the juggernauts we all love and hate: Microsoft and Google. These companies were not founded with profit in mind. They came about as the result of a passion, a hobby, an application of great talent. In the world of HR we all dream of and talk about those individuals that are fortunate enough to do for a living that same activity which they also love; activities that they would be willing to do for free. It is well known that Bill Gates' passion, curiosity and genius in the computer software field has turned out to be quite lucrative. It is the same with the success and passion that Larry Page and Sergey Brim at Google have shown the world.

    Just as with athletes, some play for the love of their sport and are thankful to be able to thrill the world with their unique talents. Money and profitability just seem to find these blessed individuals. Other athletes play to eek out a living. They worry about money as they hope and pray that their talent does not desert them.

    The people or the companies that make profit their direct goal are those that have somehow lost their way and lost their passion. As a company becomes established, its focus changes into a growth and survival mode. That is when profits become more important than innovation. Creativity is stifled in favor of a safer buck.

    Company founders usually start with a fiery passion around an idea for which they risk everything; rarely do they begin with profits in mind.

     
     
     
    • Steve Brogan
    • Principal, Pegasus Consulting

    In my humble opinion (IMHO), and 30 years of experience as a management and organizational consultant, there are two great myths or fallacies that regularly lead to results that are troublesome and sometimes even fatal for the organization in question. The first is that profit (and its related obsession 'maximizing profits') are the natural and overall goal of the corporation. The second is that the corporation exists solely, or at least mainly, for the benefit of its shareholders - because, after all, 'they are the owners'.

    These in turn regularly and consistently produce two organizational 'scotoma' (blind spots) - one an over-focus on the short term, and the other an over-focus on financial and other quantitative measures. (Both of these were and are major contributing factors to our recent financial crisis and ongoing economic difficulties.)

    Regarding the second fallacy - the larger, more important (and more noble) purpose of our organizations, way beyond any obligation to shareholders, is to 'do the work of society' - providing housing, food, clothing, and automobiles; education, entertainment, and health care, etc. - to its members.

    Some of this work can best be done by government (at a local, state, regional, or national level) and some of this work can best be done by large quasi-governmental organizations Modern examples might include the Federal Reserve system (established in 1913), Fannie Mae (1938), and Freddie Mac (1970).

    The other large category, of course, is made up of our private companies (which, let's remember, are also formally and legally chartered by society) - and especially our large multinational corporations, which Peter Drucker famously noted at one point were starting to take on the power, character, and reach of nation-states.

    Thus, it is quite legitimate for us to expect such legally chartered corporate entities to have and attend to objectives larger than merely maximizing shareholder return. After all, shareholders are only people from whom we 'rent' money - admittedly at a variable rate. They are essentially a special category of creditors They do deserve a fair return - but they should not become the entire center of our universe.

    Anyone who has ever gotten involved in serious marksmanship understands that there is a difference - due to elevation, windage, and the specific weapon - between the intended target and the 'aiming point'. Experience from the Total Quality movement supports the argument that, to achieve long-term profitability, the real aiming point should be creating true and significant value for customers rather than shareholders. This, in my opinion, is where the idea that 'profits are a result' originates from.

    Conclusion - the overall implication is that a true corporate leader has the job, responsibility and opportunity to consistently balance the short-term, the medium-term and the long-term; and to also balance all the critical variables related to true success - both 'soft' and 'hard', both quantitative and qualitative.

     
     
     
    • Yan Song
    • Program Manager, Abbott Laboratories

    Profits and Capitalism is a thing of beauty, in the same sense as Newtonian laws of physics are. Witness what has happened to my birth country, China, in the last 30 years. It has transformed and continued to transform the fundamental human conditions that have stagnated for thousands of years. I am very proud of my Chinese heritage by the way.

    By the same token, every human invention or tradition, no matter how great, has its limits and there will be a time for renewal or even revolution. It happened to Newtonian physics in the twentieth century (even though it's still widely used in numerous practical applications). I am persuaded that the same needs to happen to Capitalism in the twenty first century or humanity would suffer a serious regression or even destruction (more likely from self-inflicted wounds such as nuclear or biological wars than environmental catastrophes such as global warming or over population). But it cannot be done until the greater thing of beauty comes along to replace the profit motive as Relativity and Quantum theories did to Newtonian physics. In my judgment, the fairer lady has not fully arrived yet and, relative to Physics, it will take longer and cost more (human suffering and sacrifice) to implement. It's fundamentally about realigning our value systems and human beings are known to r esist such changes with zeal and devotion!

    For this reason, it can indeed be dangerous, misleading and confusing to "announce" profit as a by-product in an organizational setting. Human societies and organizations are extremely complex, much more complex than physical or biological phenomena. For example, there are plenty of islands of feudal tribes in American corporations that depend on capitalism for progress. Some day, we will learn how to segment organizations for cultural transformation as well as we do today for marketing consumer products. Until then, we should be content with glimpses of the fair lady and go about revealing and capitalizing on her beauty when and where we can and, most importantly, learn to perfect our methods, a new science of human values and cultural change. That does require us to venture beyond the bottom line, which we all do anyways but rarely advertise to others. What would really speed things up is if we could create networks for organizational and cultural innovation. For example, the retired HBS professor, Chris Argyris, pioneered a method of double-loop learning that seeks to align profits with other human values systemically. I wish that his work was on the MBA curriculum when I attended business school in the late 1990s and early 2000s. Is it on the HBS curriculum now? Let's hope that it does and the work continues to put us on a more sustainable course to fulfill human values greater than profits alone.

     
     
     
    • Manasvini
    • Learning Products and services, Rumi Education

    In the traditional sense, all capital-oriented systems aligned to the "American" work ethic should be aiming for profit as a direct goal. It's what the corporation was "born to do".

    But even in such a system, if Profit arrives minus some other things - happy people, sense of purpose, 'social impact', and responsible use of resources for example... I don't see how how it can be sustained.

    Or why it would be worth the effort, for that matter.

     
     
     
    • Sudheer Thaakur
    • Professor, BITS Pilani India

    The problem is with our paradigm. Organisations are supposed to maximise profit. We all know profit is only a consequence of actions and secisions that we take. It is only a feedback on quality of our decisions. So how it can be the purpose of our choices. We need to change the paradigm. Yes profit or surplus is necessry to maintain the ability of organisation to function by replenishing what it has used up. So instead of profit maximisation it has to be profit sufficiency. Profit sufficiency has two components . One is to replenish waht it has used up and second a premium for acting into future which is beset with uncertainty. The two components can be calculated. Whereas 'maximum profits' can never be calculated and it only feeds into greed with all its implications for human behaviour including unethical and criminal conduct. Once managers mange for profit sufficiency a determinable measure and not for maximisation we should see managers managing for long term sustainability and not for short term maximum profits even if these are fatal to organisation in long run However for such an idea to take root we aslo have to discard the myth of shareholder capitalism. In a world of financial capitalism where production of real good and services has already take a back seat there are no long term shareholders interested in long term health and longevity of organisation. Shareholders by and large represented by money managers are only interested in arbitrage totally inmindful of the organisation.

     
     
     
    • Shabbir Merchant
    • Chief Value Creator, Valulead Consulting, India

    The equation is simple:

    Profit + Purpose = Sustained Value Creation for all Stake holders

    Profit - Purpose = Greed

    When we look deep in the Fortune Great Places to Work List, we find these organisations to adopt the first equation.

     
     
     
    • Tom Dolembo
    • Founder, NewNorth Institure

    Two thoughts. One, the most powerful economic force has become China, which is not capitalist and does not recognize profit in the context of Wall Street. India remains undefined. Two, the locus of financial power has shifted from New York to Washington. Profit = taxes, more or less, and the shift from what has been a profit based economic system to an essentially governmental/non-profit-NGO system makes the idea of pure capitalism a quaint subtext to what we're looking at as business people.

    Roland Christensen wrote "Fear and Greed" on the board, saying we as managers have a mission of finding the balance between them. He didn't mention profits. The locus of fear is pointing toward both Washington and Wall Street, greed has voted for the Fed and Congress and their bountiful generosity.

    I suspect profit, in the pure capitalist sense, is obsolete. Not only is the avoidance of tax and regulatory influence a pathological objective of boards, but we're just not capitalists any more. Between the Enron type corrupted financial statements and the much hyped bogus investment banking practices still implicit on the Street, profit is just another archival number to be doubted. In the end, the call is political, not financial. Keeping one eye on the Fed policy, and one eye on the fall elections is a better bet than reading profit analyses in Barrons.

    One can't steer a ship by looking at one's shoelaces.

     
     
     
    • Anonymous

    A change in prescription in response to respondent #31.

    Prescription 1:

    Profit + Purpose = Greed

    where, Purpose = Profit. This is the true and often over-looked equation.

    2)

    Profit - Purpose = Greed

    This equation is a no-brainer.

     
     
     
    • Geeta Brahme
    • Lecturer

    It is natural human behavior that always will first thinks about the profit or the benefits they will get in return for services they provide. In fact, profit cannot be a general concept in actuality, because all other factors revolve around it indirectly. They have to think of issues other than profits, say, the employee, consumers, society at large. Such related policies always pay an organisation indirectly. Once you satisfy these necessities,y our goodwill is created in the market and you can hatch this opportunity, and share prices will definitely show a positive response.

    Finally, I feel that just thinking for the profit in general without considering other factors is not a good sign.

    If profit as a goal is channeled properly, it will surely give monetary and non-monetary benefits to the organisation.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC (India) Private Limited

    While we talk of various utilitarian expectations from a corporate in order to ensure that the greatest happiness of the greatest number is its guiding principle of conduct, this will be possible only if profit motive is seriously focused upon. Stakeholders, promoters and shareholders in particular, examine existing or anticipated company financials primarily from the angle of the returns derivable on their investments. Thus, earning real profits, year after year, has to be ensured and this in fact is the most important obligation cast upon the Board and Management.

    So long as no underhand means are adopted and there is absolute transparency in the proper earning of profits, there is no limit to the extent of the earnable profits. "Adequacy" of profits, in my view is not,therefore, a misnomer.

    Once this basic goal is achieved, company can proceed to participate in creating inclusive growth of society by providing monetary and non-monetary help to the needy sections. We may have talked of these desirables in our mission statements or elsewhere but, I venture to say, in absence of adequate cash fliow, the high ideals cannot be translated into actual action.

    Yes, we have also to be conscious of long-term sustainability of the company and short-term gains have to be achieved in such a way that the long-term goals are not compromised.

     
     
     
    • Anonymous

    It is difficult to get a man to understand something when his salary depends upon his not understanding it. Profit as a direct goal is overrated. The magnitude of selfishness is underrated.

     
     
     
    • Tom Janus
    • Retired

    After reading all the cogent commentary, I was struck by the absence of another simple equation: Revenue -Costs = Profit. Since I am an unabashed believer in free enterprise, then I will do the following: Price my products so that I can sustain my company's future and pay no taxes on profits. In my cost structure will exist funding of research and development for corporate sustainability and money for sustaining my employees when a catastrophic event occurs in their life. Since my 'earn decent profits decently' also meets the 'adequacy' of profits standard, which is zero profit, then I can justifiably state that "Profit as a "Direct Goal" is not overrated.

     
     
     
    • Anonymous

    I have always believed in numbers as well as the mathematical equations and logic that lead us to reason the Truth.

    1. Greed
    2. Moral Hazard
    3. Correlation
    4. Underappreciation of Risk Management
    5. Weak & opaque Underwriting Standards
    6. Undue reliance on Credit Rating Agencies
    7. Cheap Credit
    8. Mortgage Fraud
    9. Flawed Home Pricing Model Assumptions
    10. Archaic valuations of complex trading products
    11. Volatility generated by Hedge Funds

    1x2x3x4x5x6x7x8x9x10x11 = Overrated Profits

     
     
     
    • Clinton Coker
    • Director Global Excellence, SunGard Global Services

    Profit for profit sake is not a sufficient means for operating an organization. The perspective that is required is a multi-facted perspective on customers, employees, supplier/partners, AND stakeholders. This perspective expects organizations produce an economic return to its stakehodlers AND expects customers to be positively overwhelmed AND employees career's to be fulfilled, AND supplier/partner agreements to be to be upheld. Profit is niether a direct nor indirect goal. Rather, it is an interdependent goal.

     
     
     
    • Thomas Stephens Jr
    • Human Resources

    Is profit over rated, probably not. The importance of profit in business, I believe, is clear and has an honorable place in our economic society. This is not to say however, that there are not other factors equally as important.

    For example, there is cash flow; without it payroll would not be met, the utilities not paid, well, you get the picture. Then there is satisfying the need of a customer. When you stop and think about it, satisfying the need of customers defines the purpose of being in business. While there are other factors of important to sustaining business, I generally see these three as vital.

    Now, here comes the balancing act. I would use as an analogy a three-legged stool. The question becomes, which of the three legs is most important? Or said another way, can one leg be over rated with respects the others. To accomplish the purpose of its creation, all three legs are required. The same is true in business respecting profit, cash flow, and customer service. The loss of one leg on a stool would cause deep concern in the stools continued viability. The loss of either fundamental underpinning of business activity, profit, cash flow, and customer service, could and likely would, spell the collapse of the entire structure.

    Therefore, to answer the question of which leg is most important; that would be the broken one. Is "one" over rated, maybe by the neophyte; but for those who rival in the complexity of competing interest and issues, it is understood that balance is key.

     
     
     
    • Anonymous

    As I read through a lot of these responses, I think I see them pointing to a familiar and unifying philosophical question...

    "Do the ends justify the means, or is it how you play the game?"

    Seems like "how you play the game" is the only long term way to win according to the profit analyses of the Fortune 100's Best Places to Work outpacing their peers. Is the leadership of the peer group companies whose profit is not inline with the best places to work just shortsighted, or do they know they are taking a truly less profitable path?

    What would happen if everyone ascribed to "how you play the game?" Would both the Fortune 100 Best Places to Work and their peer groups have similar profitability?

     
     
     
    • Margie
    • Lecturer

    Profit as a goal is very different from profit as a reward for the value added.

    Striving for profit as a goal encourages cutting of corners, myopic vision and exclusion of stakeholders, in the absence of sound governance and self discipline.

    Since this is an idealistic expectation, it is better to teach our managers that profits should be good when they are earned and deserved as a reward from stakeholders in return of the value generated and contribution made.

    In a way, isn't it like intrinsic and extrinsic motivation? Children try to top the class because they crave for parents' approval. But instead, if they start loving their subjects and studies, they would not only gain high position and approval, but much more. The trouble is, "much more" is ill-defined and is subject to vagaries of life.

    Ditto the case of profits - with only one exception. No matter how entrepreneurial, creative and well-intentioned one is, if the venture does not turn profitable soon enough, the creativity and innovation cannot give life to the business. So, the Spartan attitude towards profits is also not very good.

     
     
     
    • David Zemanek

    Unless we're talking about non-profit companies, making a company that without the goal of profit sounds like making a boat without the goal of it being able to float in water. Isn't that why they call them "for profit" companies?

    It seems what others wish to discuss is how the profit is made and what are the by-products of a particular company's activities in the course of pursuing profit.

     
     
     
    • Eddie Jiang
    • HR Director - China Rx, GlaxoSmithKline

    Profit is definitely important as the company. As without profit, the company will not survive.

    However, if profit becomes the only or most important component of "Direct Goal", it would be quite dangerous to the company.

    Profit driven strategy is a conservative strategy. It will significantly impact on company's performance management system and lead to certain behavior of hasitation in investment. Thus will become a hurdle for growth.

    Although "Fortune's 100 Best Places to Work regularly produce more profit than a matched set of competitors", but we need to do some further analysis on how many of these companies set profit as their direct goal? And how are their competitors do?

    The foundamental concept of TQM is the assumption that if you got every tiny part of the process executed with high quality, you'll get high quality products. The KPIs and direct goals are focused on the detailed processes, not necessarily the final products.

    Similar to that, the companies' direct goal should not be emphasized on profit too much, but rather the contributors to that. My suggestion is that profit being one of direct goals should count no more than 50% of the weightage.

     
     
     
    • Anonymous

    I recall reading somewhere that the only reason for profit(s) was to ensure that the organization continued into the future...a future of uncertainty.

    From my perspective the issue is not profits but who receives the "value" of those profits.

     
     
     
    • Anonymous

    Well said. Decent profits made decently! profit not as direct goal! I hope the analyst community reads the research. They seem to value profit above everything else, more the better and measured quarterly.

     
     
     
    • Nancy75
    • Manager, Kuet

    Actually it's general human nature. Men always look for benefits. In order to succeed in the competitive market each and every person of the company should work hard. They should be motivated and well-paid as well.

     
     
     
    • Miki Saxon
    • CEO, RampUp Solutions, Inc.

    Tony Hsieh is adamant about not focusing on profit, but that didn't stop him from building a billion dollar company.

     
     
     
    • Charles H. Green
    • CEO, Trusted Advisor Associates

    The issue being raised here is not whether profits are important, or whether greed is an essential ingredient of the human condition, or of the moral nature of capitalism.

    The really interesting question raised is: if profitability is higher when pursued as a byproduct 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. Most people fear losing what they have more than they fear not getting what they want. Put differently, their risk aversion is higher than their risk appetite.

    This fear imbalance gets activated in an environment that is short-term oriented. If I get in and get out fast, if I meet the quarterly quota, if I get mine before you can get yours, then I may not get as rich as I might otherwise -- but I won't get fired. I don't have to outrun the wild tiger, as the joke goes, I just have to outrun you.

    This kind of thinking has been encouraged over the past several decades by, among others, consultants and business schools. We have trained people to evaluate decisions in terms of present-value monetized terms. We have modularized all aspects of production, so entire businesses can be outsourced, and relationships turned into quarterly recurring transactions. We have celebrated competition as the core value of business; this has bled into the belief that zero-sum game outcomes are somehow necessary. They're not.

    Most clients I talk to acknowledge the insanity of short-term-itis, but then proceed to blame others for building a system over which they have no control. Depending on who you talk to, it is the sales manager, the CFO, CEO, the Wall Street analysts, the pension fund managers, or just plain "my boss" who have constructed an inescapable prison. The impossibility of "bucking the system" seems obvious to nearly all of them.

    So, why do people choose to sub optimize by choosing short-term over long-term behavior? Herd behavior, the fear of being ostracized, and then overweighting of the downside relative to the upside. It's a volatile mixture.

     
     
     
    • N. Helwig
    • Student

    I am reminded of a statement by Arie De Gues: companies "need profits in the same way as any living being needs oxygen. It is necessary to stay alive, but it is not the purpose of life".

    Social businesses such as those in the Grameen group present a new way of seeing profit. In social businesses, initial investments are repaid gradually but no dividends are paid. Profits made are put back into the business to expand the company's reach and improve services/products.

    Profit remains a direct goal but the focus on maximizing profit for shareholders is removed and replaced by maximizing impact and achieving the social objectives as set out by the company's mission.

    Decent profits made decently?

     
     
     
    • jan wennerlo
    • consultant, jw communications

    It all depends on what one means by "profits"- with what? To whom? The future will definitely reframe the subject depending on human development - taking into account needs, attitudes and know-how of tomorrow's requirements.

    Maybe we will ask ourselves this question within a period of 100 years or so. But it's a good thing to start the discussion now based on a creative search without facts needed.

     
     
     
    • Sherpa

    Perhaps the truest answer to the question posed would be to closely examine successful and unsuccessful not-for-profit organizations. Modeling the for-profit business plan after the Brothers Mayo might not be a bad thing to do at all.

     
     
     
    • Crystal Andrus
    • Founder, www.crystalandrus.com

    Jim,

    When talking about business, profit is of course one of the goals. But it is just one of many goals. I think building and sustaining a brand is much more important.

    So, Yes - Profit as a direct goal is overrated.

    Thank you for standing up and taking notice.

     
     
     
    • Edward Hare
    • Retired Director...Strategy and Planning, Fortune 250 Manufacturer

    It's all about "values" isn't it? Whether individual, organizational, or societal. I think we're witnessing the effects of an unhealthy level of obsession with profits and materialism. The quick buck and instant gratification just don't seem fast enough anymore.

    It's too bad money (aka, profits ... or "performance") is the preferred measurement tool to gauge worth and "success". There are so many other considerations of real importance ... but they're not as accepted, easy to use, well understood, or subject to manipulation as
    money. Character, integrity, reputation, making a positive impact, doing more good than harm .... They're so much more troublesome to measure but oh so important. Too bad we can't seem to lay them out for all to see as neatly as numbers on a P&L and balance sheet.

     
     
     
    • Phil Clark
    • Clark & Associates

    Maybe the question should be different. Can business avoid the pressures of the human drives of bonding and aquiring and stay successful? Profit is just one measure of success in business to satisfy our personal desires of having more and showing success. Whether employee, owner or investor ... we want to be successful. Can a focus on profit only distort business decisions and threaten its long term success? Absolutely! Can a lack of focus on ending the year with money in the bank end a company? Also yes! Perspective, deciding what is success, and finding a healthy balance is the most difficult job facing business leaders.

    What leaders focus on tells more about their human drives than company policy. If a leader is overly driven to fulfill his human drives it can distort decisions and potentially harm a company. We can debate if profit is overrated or not ... it remains in the hands of individuals, not academia, to resolve this issue.

     
     
     
    • Kehinde C
    • manager, mkt hoppers

    I've seen companies lose their profits because they made "making profits" a direct goal of the company. They deviated from their core values and goals of providing goods/services to making profits. They are worse off for it. I do understand that profits should be monitored but to make it a goal distracts from the main objective of the company.

     
     
     
    • Arun Saxena
    • Knowledge Engineer, A Top Software Company

    Businesses are primarily set to earn profit and a ROI greater than from other investment options. Technology, strategy, management expertise, leadership are tools to help achieve that primary purpose. great work environment, talent attraction and retention policies, innovation etc. are just ways to ensure competitiveness. Profit is the primary.

     
     
     
    • Drew Williamson
    • MBA, Arizona State University

    The question for me is not whether profit is a legitimate direct goal -- it clearly is. The real questions for me revolve around how we generate those profits or in business school speak, what are "drivers" of profit. To me, sustainable profits are driven by factors such as customer satisfaction, ethical behavior, efficiency, vision, and employee satisfaction. As long as you seek these goals concurrently, then the goal of profit may be successfully pursued with a vengeance.

     
     
     
    • Bill Shirley
    • President, In Seach of Eagles, Inc

    Many, many years ago, the Dean of American Management Theory and Practice Peter Drucker stated:

    "The Purpose of Business is to create and keep a Customer." Drucker goes on to make the case that a focus on profits is harmful ("The Essential Drucker").

    Of course, profits are essential. However, they are the result of focusing on what is truly important. With the exception of the rare monopoly situation, all sound businesses have adequate access to physical resources and financial capital. The only thing that distinguishes the highly successful business from all the others is management's leadership ability. That is, its ability to create and hold a customer is directly proportional to its ability to attract and hold fully engaged, creative and innovative talent: highly productive "human capital." (High quality human capital attracts high quality financial capital, not the other way around.) Success is related to the human capital competitive advantage!

    For Authentic Leaders, profits are the results of their focus on relationships.

     
     
     
    • Robert McCormes-Ballou
    • Director, Supply Chain Diversity, Office Depot

    First let me state (hopefully the obvious)- Not every great idea is new or comes from our western point of view. Yes, profit as a direct goal is overrated. In 1932, Konosuke Matsushita stated that "the mission of a manufacturer should be to overcome poverty, to relieve society as a whole from misery, and to bring it wealth."

    More details available in book by John Kotter entitled "Matsushita Leadership: Lesson from the 20th Century's most Remarkable Entrepreneur."

     
     
     
    • Nicolaas Oroh
    • Doctoral Candidates, Parahyangan Catholic University

    As a matter of fact "profit" is one of the most important elements in measuring firm's performance if not the ultimate goal of any business organization.

    However, there are other strategic points to be "monitored" and "controlled" by any business organization if it wants to survive in the future.

     
     
     
    • Dan Wallace

    Professor Heskett answered his own question in his preamble, where he stated that the most profitable organizations he knows are the ones that treat profit as a by-product of other things. Of course. Per Eric le Roux's comment, setting a profit goal amounts to asking, "How successful do we want to be this year?" There's nothing wrong with that, but it's also not something you can manage because it's an outcome, not an input.

    A pole vaulter probably ought to have a goal for how high he wants to jump. But what would managing that even look like? What he can manage are the inputs that lead to that goal - how he trains, the equipment he chooses, the coaches he works with, etc. The same goes for business.

    To me, the two most interesting aspects of this thread are:

    1) The energy and passion of many participants in commenting on what amounts to the morality of profit. I'm happily going to leave that one alone.

    2) Author John Kay's underlying premise that the reason profit as a direct goal doesn't work is that the business issues are so complex and the linkages between inputs and outputs so obscure that trying to manage to profit is a fool's errand (my words, not his). That one I can't leave alone.

    First, it has been my experience 25 years or so that while some business problems and challenges indeed are extremely complex, the vast majority actually are pretty easy to solve once you get the question right. The presumption that problems are complex is a self-fulfilling prophecy.

    Second, the most profitable and successful companies I know are rigorous (ruthless?) about driving simplicity and transparency in their business models, driving out complexity, making sure that everyone understands his or her role in the organization's collective success, and empowering people to create new pathways to success. While it's not necessary to link that success to a higher purpose or value, really great companies do that too. Is that moral statement on their part? Perhaps. But there's a ton of evidence that people work better, smarter and harder when they care, and that they care most when their work is connected to a higher purpose. For most people, some form of "Make the world a better place" is that higher purpose.

     
     
     
    • Fernando das Neves Gomes
    • Consultant, independent

    Dear Professor and all business review members and friends,

    I think we can't undervalue the importance of the product's starting point, "the market price", the amount target consumers pay. Everything else we do inside a company is to produce competitive products, at a competitive price, and grow, according to culture (quality, environment, society, employers), mission, and the vision the CEO/owners have.

    The problem: markets without rules, factories without a future, with no brands, products under production costs, other market competitors. This means that in markets we have a natural cluster that rules market expectations. If we grow in values, increasing product and customer value, and final results, we are winners. When consumers pay for one product they pay for all action and communication that can make all the difference.

    Thanks. Best regards,

     
     
     
    • Dave Wisland
    • Motivational consultant, Wisland Marketing LLC

    To concur with some previous comments, Albert Einstein once stated that the question is the answer. Once the right questions are asked, the solution is just a matter of mathematical rigor. "What if or What next?" is inherently more valuable than "How to or How much?" Our entire financial crisis was not caused by desiring gain, but by elevating the priority of the speed in which it is attained. When quarterly profits trump the needs of the customer, we all lose.

     
     
     
    • Ravindra Edirisooriya
    • Senior Accounting and Finance Major, Missouri Southern State University

    People qualify profits as decent profits, reasonable profits, unbelievable profits, insane profits, ill-gotten profits, short-term profits, long-term profits, and with many other adjectives. All the above definitions refer to the accounting definition of profits. Recently, I read in another article about three basic profits based on accounting profit, employees' social profit (employee job stability, moral etc.), and environmental profit (sustenance or degradation) which is a more applicable definition of profit than accounting profit.

    Economic profit includes the opportunity cost of the entrepreneurs' time in addition to accounting profit but leaves out the externalities such as the social impact (on employees, neighborhood, city, region, country social fabric) and environmental impact (carbon footprint, release of currently unknown toxins and undesirable by-products, rapid exhaustion of limited earth resources).

    None of the above definitions of profit are complete in my opinion. Profits are the aggregation of fruits of land, labor, capital and entrepreneurial time by people and corporate citizens. While making a large and rapid aggregate profit, if the people and corporate citizens push the earth beyond its tipping point to an ill formed system(s) is it worth the profits? Why do we not see the obvious? Are we programmed to fail or succeed?

     
     
     
    • Anonymous

    Why shed light on the Blind if they are blind to begin with? Profits are good and righteous for a company's growth, but at what expense to the moral imperative of making it decently and without the leverage factor of the 80/20 rule?

    Work-in should directly equal compensation comp structures.

    Work-out should equal "value-added" to a Cause.

    Profits as a "Direct" goal are overrated. Make a decent profit decently, this cannot be stated any better.

     
     
     
    • Gerard Bremault
    • CEO, The Centre For Child Development

    As the CEO of a charitable, non-profit organization in Canada providing medical rehabilitation to children with disabilities, profit is clearly not our primary driver. So, my comments may appear less than pertinent to a debate related to the primacy of profit. Nonetheless, I find an interesting parallel in relation to the "obliquity" or "high commitment/high performance" approach.

    Within our setting there are likewise many variables that are difficult to control in optimizing results for children. What we can do is optimize the inputs that appear to the best of our knowledge and experience to optimize those results. That doesn't change the fact that optimal results are what we're after; those results however are highly dependent on the high commitment/high performance of our clinicians, family members and the children themselves in making a wide array of choices and following up with the related actions that have the greatest likelihood of producing the optimal results.

    Without the commitment and passion that drive the ongoing execution the results won't arrive nor will the ongoing refinement of the therapeutic and supporting organizational processes occur to continually align process as closely as possible to optimization of results for children. That takes a very serious, whole-hearted commitment.

     
     
     
    • T Gale
    • TGT Seminars

    The definition of profit could vary depending on the context. There is monetary, material, spiritual, moral etc. All the stakeholders in a corporation can be identified as: The shareholders, the employees, the ancillary services needed to maintain the business, and of course, the loyal customer, or client. Anyone who has any "stake" in the success of the Co. If all were to understand and respect the needs of each other then profit could certainly be the prime goal. Where one stakeholder profits inequitably compared to others, this is where negotiations ensue. Of course the biggest obstacle to this Utopian image is greed and selfishness. Too bad.

     
     
     
    • Maryam
    • Data Analyst, WFB, N.A.

    To engage in a transaction of any kind, one's motivation to be better off after the transaction must exist. To be 'better off' simply means to have gained by an increment. Whether the increment is large or small, the gain will be present. Whilst the rate of change could be positive, there will be profit gained.

    Without this latter motivation, a business would not survive long, alas it would run out of resources. Unless such business operates as a non-profit, the gain as profit is a direct goal.

     
     
     
    • Anonymous

    Is Profit as a "Direct Goal" Overrated?

    In my professional and personal wisdom gained over the course of 25 years, I have held one maxim true above all others...

    One must first EARN priority status, to BE priority status.

    Period.

     
     
     
    • Fidel M. Arcenas
    • Consultant, TiEZA

    To profit or not is not the question. But when an organization considers its existence and the value of the goods or services it provides to its consumers, it must look beyond profits as the driving force for its longevity. GE, for example, invests heavily on its human resources, and on creating a corporate culture for innovation and excellence. In the end, this is what makes a business organization weather through even through the most turbulent times.

    An organization that sustains a dynamic and committed working force; one that relentlessly seeks to add value to its products or services will inevitably reap the profits it deserves.

     
     
     
    • Joel MacAuslan
    • CEO & CSO, STAR

    The arguments about "should" miss the point.

    That is, we already seem to have a consensus that profits should be an outcome of other broadly valuable activities: servicing customers, managing capital and labor efficiently, investing in employee skills, supporting the community, etc.

    But for publicly traded corporations, that is NOT what our rules actually demand. They demand that investors be financially compensated even at the expense of those other broadly valuable things. Every quarter.

    Similarly, the buyout rules for private technology companies that are capitalized for purely financial returns, as by venture investors, require that the companies focus on narrower performance. In this case, it is performance that will be financially compensated, especially if the buyer is publicly traded. Community support won't. Even customers and employees may not, if the patent portfolio, a form of capital, is valuable enough to be the primary financial attraction.

    This isn't because the investors are evil, or the executives are stupid. It's because, otherwise, the price of the company -- whether public stock or corporate suitor's willingness -- falls. Managers lose some of their compensation. The company loses its market of suitors or becomes subject to takeover by a public competitor that does not "bother" with those other activities. (There is an obvious exception for companies, even public ones, that are controlled by single individuals or families, owners who may have other interests that transcend immediate financial rewards.)

    To see whether this financial-value aspect is driving the problem, ask yourself: Do large organizations that are NOT subject to this effect do better at generating broadly valuable outcomes -- including owner wealth? I would start with the following:

    SC Johnson (Wax) Company: family owned, with strong support for their communities, employees, and customers. And yet enough profit to be satisfactory to the family for over 100 years.

    Berkshire Hathaway, CEO-controlled, with very long-term performance requirements on the subsidiaries. And yet very large returns to the long-term investors.

    Ford Motor Co., family controlled, the only "Big 3" US car company to remain viable and solvent through the Great Recession.

    This doesn't even include the other for-profit organizations where the same metric might apply: deliberately low-profit companies, sometimes called "B corp's." The name of the game for them is self-sustaining profitability and broad societal value, without regard to trying to reward the investors better than other companies (financial investments) would.

    And all of this doesn't even include the non-profit world... which, BTW, has changed the world at least as radically as any for-profit company. Ask yourself: How would the whole world be different if the US government had been subject to takeovers for short-term (quarterly) economic performance reasons over the last 200+ years? Or the Christian church for the last 1500 years? That isn't because they were managed for financial returns. It's because they are very long-lived organizations -- long-lived precisely because they DON'T need to be managed for purely short-term financial performance.

    If we want companies to have broad societal value as their primary goal, to the exclusion of SHORT-term profitability, then we must stop penalizing them in the public stock markets. Or at least recognize that going public, or being bought by (most!) publicly traded companies, is usually NOT broadly useful to society, and should not get favorable societal treatment, whether in tax policy or in reputation.

     
     
     
    • Nash Peerbocus

    The articles raises interesting " philosophical questions" about how we organize ourselves in society. Is profit overrrated as a goal? By whom? The incentive to cut cost in order to maximize profits is a feature of a competitive industry. This economic incentive in and of itself does not yield an "ethical" guide on profits. Currently "ethics" is outside the realm of economics. Ethical Economics is a term yet to be defined.

     
     
     
    • Gerard Danford
    • Academic, Haaga-Helia University Finland

    Profit OR How Every Employee Can Impact Profit

    Cognition of such broadbased goals is little understood at the individual employee level (excluding senior/middle management). More time should be spent on devising means to help all our people understand such concepts (profit) in their everyday work.

    Profit is a credible goal, but for a shopfloor worker who might have a big impact on the outcome, might it not be better to reframe (cognition) the goal. For example, 'what can I do to make a positive impact on profit in my job. For the 100's of decisions made by me every day, which ones have the biggest impact on profit.

    Great places to work are also great places to be engaged. By reframing the concept of profit in a way that everybody understands, we can engage all of our people. Profit is a noble and worthy cause. By making it more complex and abstract we alienate people.

     
     
     
    • Anonymous

    What powerful and insightful responses. There are currently 15,700,000 results for Ethical Economics for the Google search engine. I disagree with the statement "Ethical Economics is a term yet to be defined."

    From an academia point of view, the world does not follow the law of economics, it rather follows the silly laws of finance. Profit is a finance creation, let us not forget this.

     
     
     
    • Tim Smith
    • Managing Principal, Wiglaf Pricing

    Serving customer needs is the purpose of a business. If a business doesn't serve a need, it fails to exist. When it does, then it can exist. Profits are a requirement for doing for serving a need, not the goal in and of itself.

    Listen to Levitt or Drucker, they will both tell you the same. Putting profits first is like putting the cart before the horse. Customers are the focus of a business, creating and capturing profitable customers. Customers that aren't profitable are not customers, they are leaches.

    Hence, the argument that profits are the core of a business is exactly backwards. Customers are the core of a business. Serving customers profitably.

     
     
     
    • Y.G. Chouksey
    • Professor, International School of Business & Media, India

    Whether profit as a direct goal is overrated will depend on whether the objective is profiteering or profitability. Profiteering is reflected in excessive greed which induces the business managers to sale low quality products at high prices in monopolistic conditions, exploits human resource in a surplus labour market and indulges in unethical practices to enhance shareholder value. The sub prime crisis and major US banks' role in the same as also capricious avarice of top management to reward itself in spite of non-performance are the consequences of profiteering, a synonym for overrated goals.

    Profitability is concerned with profits earned through ethical means and made available to share with all the stake holders--employees, customers, society and investors in an appropriate ratio.

    The emphasis on processes alone could be a risky proposition unless they are linked to the desired outcome. The complexity of the connecting mechanisms is not a sufficient ground to think of profit as an anathema. Making profit to lubricate the business strategy and distributing the same in an equitable manner among all the stake holders makes a good case for profitability as a direct and desirable goal.

     
     
     
    • Clyde
    • Owner, Landscaping Contractor

    In basic terms, profit IS ironically abstract. Its about power and not well-being, sustainability, or innovation.

     
     
     
    • Anonymous

    Profit, though an essential reward for entrepreneurship, needs to be closely married with liquidity and continuity.

     
     
     
    • David Physick
    • Principal Consultant, Glowinkowski International

    This is an interesting subjct to return home to in the UK after 10 days holiday in the US where I encountered the two extremities that this discussion is considering. The 'profit is everything' is exemplified by the coverage on TV by some of the business TV channels with screens. At the other end is some of the content of the exhibits in the Smithsonean American Indian museum.

    One quote I have kept on file for many years, attributed to Cree Indians, is "Only when the last tree has died and the last river been poisoned and the last fish been caught will we realise we cannot eat money", which was exemplified in a piece about one tribe only taking sufficient salmon from the river during the spring breeding to feed the village. It would be easy to suggest this is not profit focused but, actually, it is extremely profit focused but very long-term, i.e., perpetually.

    One comment I picked up in USA Today during my holiday indicated the analysts (this quarter) were marking down stocks that had reported good earnings (profits) but reduced revenue (income).

    In the UK, I am a member of the 'think and do' tank, Centre for Tomorrow's Company, which has just started a series of lectures about values and value. Stephen Green, Chairman of HSBC, gave the first talk, which was reported in the leading UK newspaper, Daily Telegraph, see http://www.telegraph.co.uk/finance/economics/7878097/Milton-Friedman-got-it-wrong-on-profit-being-the-only-aim-HSBC-chief-Green-argues.html. Stephen argued that profit is necessary but not the primary aim of businesses, i.e. concurring with Arie De Gues quoted by N. Helwig (article 50).

    It is also worth referring to a seminal article published in HBR by Charles Handy in December 2002 (I think) about the purpose of business in which he too remarked profit is a means not an end.

    A number of commentators have mentioned human nature. Power, being number 1, is very important to many people. That is fine but perhaps the issue we are using the wrong yardstick at the moment to measure success, i.e. monetary calibration. In physics, speed is different to velocity, which relates to rate and direction. Yes, we need profit, i.e. speed, but we also need a genuine sense of direction, too, otherwise with 9 billion of us on the planet (and go see some of the pictures of the world taken from the moon, which are on show in the Smithsonian Air and Space museum that show the fragile, blue orb) the Cree Indians will be proven correct.

     
     
     
    • Henry Maigurira
    • Executive Secretary, Pachi Global Foundation

    An interesting revelation of what I would refer to as a new way to thinking about problem solving in the business environment as a measure to a goal-oriented, structured way to profit making. To me personally the logic is a call for more attention to corporate social responsibility or philanthropy. Although there is no direct connection to these issues, I would build on this notion as a way to complement profit making by corporates as a compound of other activities that go unsaid, such as a role in shaping corporate social responsible programmes and philanthropy.

    This also speaks to leaders of big corporates, who must take on a role of working smarter in being responsible when setting goals for their profits and achieve impactful and meaningful corporate social responsible programmes and philanthropy.

     
     
     
    • Anonymous

    It's good to have profit and the things that money can buy, but it's good, too, to make sure that one hasn't lost the things that profits can't buy.... Think about it.

     
     
     
    • Anonymous

    Love of profit as a direct goal is the root of all evil, hardship, and envy.

    In one of the richest countries on the world, in one of the most abundantly resourceful countries in the world, we still face the systemic hardships of poverty, hunger, and lack of opportunity in this great country.

    Let us take the profit-motive decently to the next dimension and beyond.

     
     
     
    • Devin Patel
    • Student

    Profit as a direct goal is by no means overrated. However it is becoming less of a priority.

    As many have commented early, our human nature is to compete and advance. Profit is a measurable indicator.

    I believe the real question is - When does profit become less of a priority?

    For example, after a great idea the question is how can I monetize this?

    Let's take a look of a timeline of a company. The early stages, profit is a high priority. To stay in business and to keep your vision alive you must create profit (or show signs of promising profitably).

    If the company is successful and begins to grow then profit becomes embedded in different goals. I find that almost any corporate action can be derived to the bottom line.

    And once a company reaches its final stages, after experiencing large profits and growth, it can have the ability to fund or create diverse ventures which may or may not relate to the profitability.

    However, in our generation more and more progressive companies and actions have taken place to challenge how high of a priority profit is.

    Many large organization are created for the sake of common interest or to provide a service i.e., Wikipedia, Linux, ruby rails, etc. This shows that profit is becoming less and less of a high priority. Though the funny paradox is many of these "open source" tools are used for profit gains.

    In summary, I truly believe that profit as a direct goal changes relative to the circumstance. Ideally it would be lovely to run a company solely on meaning and vision. But, sadly, we must take into account reality's way to measure success...and that is profit.

    SIDENOTE:Dan Pink gives a great lecture on what motivates us. Interesting study:

    http://www.youtube.com/watch?v=u6XAPnuFjJc&feature=player_embedded