Rethinking Profit

(Đọc bài viết bằng Tiếng Việt)

Profit is becoming the bad word of our age because corporations are seen as being obsessed about achieving higher margins at the expense of workers and society. Many people blame greed for being the cause of the corporation’s obsession with profit. But this is a limited view as it ignores the reality that the principle measure of good economic performance is based solely on the ability to generate profit for sustained growth. On its own, profit is certainly important and necessary. Without it, there can be no investment in jobs creation and innovation. What needs to change, though, is how the markets, value the type of profit that business leaders produce. Without an in-depth review and a holistic change in the way we use to evaluate and generate profit, we will most certainly see a return of the 2009 economic crisis, triggered by the market’s need for higher profit margins.

Far from being a goal, profit is the result of great leadership and teamwork. Therefore, it is certainly not very smart to look at the decline in terms of profit as a sign of poor performance without reviewing other factors. However, only a few exceptional companies in the world had ever escaped the ire of investors and retained their support even with low profit margins, most notable among them: Amazon. Jeff Bezos managed to expand Amazon’s services and offerings through many years of low profit, but he astutely sold his vision of dominating online commerce. But few leaders can match his example, so CEOs are oft-dropped after another year of decline in profit margins. This is a pity because it takes time for vision to take shape and build a great team. This was the reason why Michael Dell decided to take Dell private again so that he could restructure the company quietly and emerge stronger than ever. But Michael’s action also proved that the stock market, is no longer relevant in its role as a place to support good business models. It has become a place for unrealistic projections and in a day and age of computer-aided investment instruments: the market has grown this incessant appetite for almost instantaneous financial rewards which is not sustainable. It might be time to create another kind of exchange that supports good business models and sustainable valuations.

Until that time comes, perhaps it is important to redefine the kind of profit we should be looking out for when it comes to evaluating companies, one that will pave the way for sustainable growth and development. Through our experience, we realised that when companies are generating the following 3 types of profits, they build a strong foundation for themselves and have the power to reshape industries and the world:

1) Strategic Profit

This is defined as profit generated from the investment of people and resources in potentially game-changing sectors. In reviewing the performance of companies, we saw that not all profits are equal and that it is important to see how companies are growing their pie in areas of new opportunities. We have seen that when companies rely excessively on traditional cash-cows and are not motivated to secure profit from new sectors, they can suddenly be caught flat-footed. This was what happened at Nokia and Blackberry, who were certainly not losing money during their prime.

Every business needs to look at where their profit is coming from and how to direct the best talent to identify growth areas and be disciplined in turning these new ventures into profit centres. The other extreme is; some companies are rather pleased that they have got resources invested in these new growth areas but have yet to produce a profit. This is dangerous as it almost means that there is no priority at senior management levels. This is a trend happening at Google, and if things do not go well with online advertising, things can change fairly quickly. So the sustainable way forward is: seek to secure different strategic paths to grow your profit to ensure a better future.

2) Spiritual Profit

This is defined as the ability to generate new meaning and conviction so as to redefine the cause of our time. Everyone is in the business of doing things for profit, but few are able to recast their actions as calls for change in their industry. But those who managed to do so, eventually led their respective industries. This was what happened at companies like Apple and Amazon; they saw their actions as part of a wider battle to reshape the definition of their respective spaces. Apple won by redefining the role of the PCs and Amazon is winning by redefining the concept of delivery of goods and services.

You can measure how much spiritual profit companies are generating by reviewing their public statements, speeches and presentations. Pay close attention when they share insights, see how far they go in terms of understanding the changing needs of the market and their role. Then link these to the products and services that they have delivered, are these a reflection of the change in direction. Finally look at the composition of their talent pool, how has it evolved in order to fulfil the vision as set out by the CEO. Once the organisation’s vision is in place with the relevant products and services, has the ability to attract the right talent to join its cause, it will trigger an almost insurmountable wave of popularity and media endorsements.

In this way, you can measure the rise of Xiaomi’s spiritual profit from how they define the market that they are in. Lei Jun, the CEO of Xiaomi does not only see their products as winning because of low prices, he sees them as phones that have been designed completely around the user. Xiaomi’s engineers speak directly to consumers, gathering feedback to tinker with the software so as to enhance the user experience. As a smaller company, just 3 years old in the business, with such a clear vision and the ability to attract Hugo Barra from Google, it is certainly a highly profitable business in terms of ‘spirituality’ as it is gaining traction quickly.

3) Social Profit

This is defined as the ability to generate a whole new eco-system of partners who profit from the business model. Bill Gates did this through the Windows platform and Steve Jobs achieved this through the App Store. Few companies have risen as leaders without creating a new wave of partners and suppliers.

You can measure how much social profit a company is generating by reviewing if their business model allows them to redefine their relationship with partners. In the case of Apple, in addition to developing software, they have always worked with other larger software giants like Adobe and Microsoft. But the App store changed everything, as it made it accessible for smaller companies and individuals to come on board and develop mobile applications for the iPhone and eventually the iPad. This model of directly allowing people to review and buy these apps marked the rise of Apple. So it is not only about great products but the ability to raise a whole new social network of partners who will profit from your model. A study by TechNet in 2012 concluded that Apple’s App store supported the creation of almost 466,000 jobs in the US. This included employment numbers from ‘pure’ app companies like Zynga and app-related positions from large software firms.

In broader terms, it is important not to produce profits for the sake of the markets but to produce the kinds that will result in better innovation for the betterment of society and create opportunities allowing more people to succeed which will in turn strengthen the longevity of your organisation. These 3 types of profits, should they ever be considered as a more holistic form of measure in terms of the value of companies, will result in a more sustainable growth.

Read the full article here.

Lastly, it has been great for Shiraz and I to be able to share our insights with the readers of Ceylon Today through this column for almost a year. Unfortunately, I needed to take a break from this column so that I can make a concerted effort to finish the book about innovation in Asian companies. It will be eBook format and will be released towards the end of 2014. Do look out for it by following our twitter account @consulus.

Thank you and may your companies shape the world.

Lawrence Chong is the CEO of Consulus, an innovation consultancy specializing in helping Asian companies transform their business models to rise up the value chain through business design, organisational development and designing new brand experiences. Consulus’ country representative in Sri Lanka is Shiraz Latiff who is also the CEO/Lead Consultant  of Hummingbird International, a regional knowledge house specializing in coaching, consulting & outsourcing through global partnerships & collaborations.