Reinterpreting Profit: Constraint not Goal

Mon, Oct 31, 2011

Commentary, Theory

We all know that the primary goal of any company must be to maximize profits, right? Maybe not.

James Allworth, in his recent article on the Harvard Business Review, describes how Steve Jobs, together with hundreds of other companies, took a giant step towards creating the company of the future by upending the assumption that profit was sacrosanct and that everything else came second, turning the whole assumption upside down where “products, not the profits, were the motivation,” and where thousands of individuals could pursue products with a passion.

Taking this a step further we could say that the problem has been assigning meaning to a corporation from the perspective of a very small minority, the shareholders, and even then, only concentrating on the short-term gain of investors.  This is understandable in the context of venture type investment, where investors are focused on an exit strategy.  It almost reminds me of the first investors, pooling their money to send a ship to the Americas, and being able to terminate and take profit once the ship returned.

If however, we recast the meaning of a corporation to account for the point of view of its employees and customers, and also shareholders committed to the long haul, we can come up with a completely different definition, namely that profit should be seen as the fundamental constraint under which a corporation must operate, and that the corporations main product or service is its primary goal.  In effect, profit forms a kind of boundary within which a corporation is free to innovate and create, and that such a boundary can be expanded and pushed back, if what is happening inside the corporation is able to generate the resources to expand the boundaries of the corporation.

Going with this definition, we solve fundamental problems with motivation, customer satisfaction, long term viability, innovation, and social responsibility.  And the short term gain also follows, since if a company is healthy it will generate the profits that are necessary for its survival and satisfaction of its shareholders.  But the difference here is that since profits are not the goal, changing corporate behavior, services, and products, will not be delayed because it is taking a back seat to profits, and instead of catastrophic change, such as that experienced by General Motors and Chrysler, change can become part of the corporate life, such as that experienced by Apple.

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