Saturday, March 19, 2011

Profits: Goal or Fuel?

There seems to be two schools of thought regarding the purpose of a business and the pursuit of profits. The traditional financial management approach teaches that the primary goal of a business is to make money. Many, if not most, business leaders unapologetically state this as their purpose. After all, if you're not profitable you won't stay in business for very long.

Most of the 100-year-old companies, however, appear to have another view regarding the role of profits in their business: they see profits as the fuel that keeps their company running rather than as their purpose or reason for being in business. As Max DePree, former CEO of Herman Miller, Inc. writes in his book Leadership Is An Art, profits are the result of the company achieving its goals. Companies that have survived longer than most tend to define their purpose in terms of what they do and how they do it; and they often admit to making decisions that sub-optimize profits in the short term. But make no mistake, these companies are astute managers of their financial resources. In fact, being conservative in their financial management (evidenced by practices such as maintaining low debt levels and building cash reserves) is one of the common traits that has enabled these companies' long-term survival.

My study of old companies indicates that in these organizations profits are seen as the fuel that enables "living" a long corporate life; core purpose is described more broadly as the value they add to society, not simply the money they make for investors or owners.

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