Issue 3.1 | September 2011
In this Article: why an exclusive focus on profit creates a dangerous distraction from value creation.
Apple does not exist to make a profit. If it did, it would never have made the ground-breaking iPod nor the ensuing iTunes, let alone a magnificent series of breakthrough products in laptops, smartphones and tablets. In fact it would have remained unprofitable and it would not now be ricocheting around the list of top three richest companies in the world (by market value) along with Exxon and PetroChina.
As counter-intuitive as it sounds, profit fixation is bad for business. Profit is simply a measuring device. It nets revenues from operating expenses and what’s left is a number that measures the value created. Economic Profit (EP – also called Economic Value Added), also accounts for capital and tax for a more accurate assessment of wealth created for the shareholder. But profit measures not only value to the shareholder, but to the buyer, from whom all revenues flow. Implicitly, profit also measures the efficiency with which that value was created.
When a company makes profit its primary goal, its entire system becomes oriented to the number instead of the real output that the number is supposed to measure. Typically, the result is excruciatingly short-term thinking that focuses on cost-cutting and aggressive sales tactics at the expense (financially and more broadly) of creating truly substantial and sustainable value. You see this in the utter silliness of the company that brags of its continuing profitability in a recession, when in fact its revenues are falling and it has just indiscriminately laid off a third of its talent. Such a company isn’t actually creating value, it has simply saved its financial skin in the very immediate term. Profitability derived primarily from efficiency is superficial and unsustainable. It is one-dimensional value.
Three-Dimensional Value and Profitability
If a business wants to be profitable, it should not focus on profit. It should focus on value creation. Profits will follow. If you cannot create value for the customer, you will not create it for the shareholder.
Value is created when your company pays serious attention to three sources of demand. This is three-dimensional value, a richer form of value altogether, for it is not just based on efficiency (a common focus of businesses), but on the main ingredients to value creation: the unique qualities that make up the soul of your company, and the deepest needs and desires of potential customers.
To create fully-orbed value you need to pay very close attention to the soul of your company. Jay Elliot, a former colleague and biographer of Steve Jobs, says that the recently retired Apple CEO believes that, “You have to be burning with ‘an idea, or a problem, or a wrong that you want to right.’” and that ,”Great products only come from people who are passionate.” Apple’s customers did not know what they wanted any more than Henry Ford’s horse-riding market knew they wanted a car. Apple has a passion that drives – that demands – a quality of innovation that in turn wows the potential customer. What does your company actually care about and what can it be really good at, and how can you bring something of great worth out of that unique source of incredible vitality and strength?
The second source of demand is the world of the customer, the potential end-user – the one who has to perceive the value and pay for it. Apple could not have brought its “insanely” well crafted products to market if they had not been attentive to the signals that revealed the felt needs and priorities of everyday people. Elliott remarks that Jobs’ commitment was to “create an [intuitive] experience so satisfying that the user would feel an emotional attachment to it”, and that, “Every opportunity starts with an unmet need. If you can build a product to meet that need, it becomes a ‘must-have.'”
At heart, business is an utterly human enterprise – it is the connecting point between the passion and ingenuity of one group of people and the needs, desires and experiences of another group of people. The deeper the connection with the priorities (not necessarily articulated) of the potential customer, the more substantial and complete the solution, the greater the value your company has created.
The third source of demand is the shareholder. The demand of the shareholder for maximum returns is a demand for efficiency, not just value creation. Efficient processes do not only lower costs, they decrease waste. The benefits accrue to multiple stakeholders, not just shareholders: think, for example, of Wal-Mart’s greening of its supply chain and packaging systems, etc., which benefits buyers (cheaper goods), the community and environment in which Wal-Mart operates (reduced damage) and, of course, the shareholder (increased wealth).
A fixation on profit is deadly to value-creation. It drives shareholder wealth in the short-term only and creates a mere echo of value. I wonder if this is the root to RIM’s woes of late. Perhaps they are not working as purely as they once did from their passion and towards the needs and desires in the market, but are instead concerned only with a number.
Rich, three-dimensional value arises where there is synergy between the deepest needs and priorities of the market with your company’s passion and skill. At Apple, according to Elliot, “The goal was never to beat the competition, or to make a lot of money; it was to do the greatest thing possible, or even a little greater.” The measure of Apple’s greatness is, of course, how astonishingly profitable it has been.
Another soul insight from www.soulsystems.ca.
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