Profit and Profitability

Many incidences we have faced in our strategy workshops, where we have to explain the difference between profit and profitability. Yogesh Jain of Niche Quality Systems Pvt Ltd, who is partnering for the DNA development service in Indore region has witnessed most of the confrontations related to profitability.

The question, what is the aim of doing business? Elicits an immediate and instinctive answer… ‘to make profits’ from most of our workshop participants.  Anything other than profit seems to be unthinkable for both business owners and managers.  This is the point where we struggle most to make the key players of the business think beyond profit.  One aspect that we push them to go beyond profit is ‘profitability’.

When we say that ‘profitability is healthier measure of business than profit’ is not welcome by most of the business owners, partially because they do not understand the difference between these two and due to the sentimental attachment they have towards the term ‘profit’.  

Why this strong sentiment?  We feel …….because everyone in the company pays attention to profits. Most of the key business teams have a revenue / budget / profit plan, each department / functional head owns an important element of that plan and progress is watched closely by them in the review meetings.  All managers work strenuously to meet these targets. Yet, even if each manager meets the budget targets, the company seems to be a lot less profitable.   

I remember sitting in a review meeting of a distribution company several years ago. The business owner of the company sat at the head of the table and looked at the four to five managers sitting on both sides of the table. Each manager, in turns began..’ here are my numbers’……. After presentation, they had discussions on implications of the numbers presented and finally all adjusted their numbers and a consensus was reached. This was the half yearly plan.   

In the following quarter the Sales manager grew the top line and met his quota. An additional sale came from new customers who ordered frequently in small amounts. The gross margin on these orders did not cover the distribution cost. Other customer ordered products that were out of stock locally and had to be couriered from other regions.

Two things were noticed in this situation. First both the Sales manager and the Logistic manager were on target; the sales manager grew revenues and the Logistics manager met his target because his budget was based on an average cost that allowed these inefficiencies with a hope on future business. Even though these managers met their numbers they failed in managing the profitability.

Second, these uncommon sales and orders could have been made much more profitable through some very simple business oriented twists, which would have benefited the customers as well as the company. These twists require only a business acumen and execution - not extra financial capital. Our strategy workshop highlights this point to a large extent.

As a discipline, we need to see Profit and Money as two different things. It is certainly possible for a firm to make a huge profit and have no money. It is equally possible that company is flush with funds but is suffering from losses.  What happens when an organization shows a profit?  There will be a line of people standing in a queue waiting for a share of profit.  Some organizations get into trouble because they don’t make profit. And others get into trouble because they make profit.

But successful businesses stand on two pillars. One: the ability to generate profit. Two: the ability to manage cash flow. Managing cash flow is very much related profitability. But this is missing in most of the companies… profitability is unseen and unmanaged!

 Contributed by Sasikanth Prabhu

Any business team always can win

Just now Common Wealth Games (CWG) in India is finished and there were some excellent competition among teams.

The two test matches between India and Australia were too excellent and India emerged the winner.

In sports, teams engage in a fierce competition and one team usually wins the game and there are one or more losers. The winning and performance in sports give thrills to the spectators, organisers and to the players. In the end one team feel elated by their win and the losers feel depressed.

The team- work in sports is a coordinated activity of individuals to reach the desired goal / performance. Because of the amazing effect the group of people in sports and games bring to the performance and results, the metaphor of team is borrowed to the business / organisational context too.

But it is to be noted that the metaphor of team has different connotations. In war and sports the team is meant to win over the opponent. There is always an opponent to be subdued.

But in business it is not so. A win-win outcome can always be crafted. But we are illusioned to think that in business too we need to pursue a win-lose end. In actuality it is a win-win game. This is the most simple but significant distinction between a business team and other teams. Business is more a cooperation / win-win game

Business is about creation of wealth or creation of value. And a team is required to achieve this goal. An apparent competition exists among the similar business organisations in capturing the value from the limited set of customers, which is called market. Every organisation wants to gain maximum / more from the defined market than the other players. In that race a fierce competition is seen. But if you observe everybody gains from the market and, some organisations gain relatively more.

Business is a positive sum game, (not a zero sum game or a negative sum game as in sports). The teams are meant always to win and all players can also be winners.

There are certain principles to be followed in business. By adopting them any team can win

Wishing all a business win.

Contributed by Sasikanth R Prabhu

Listening to a Professor from IIM, A

I had an invitation to attend a dinner meet with a professor from IIM, Ahmedabad, organised by CBRC (Centre For Business Research and Counseling) at Kochi on 26th January 2010. He has about 25 years of experience in management education, but looks younger in spirit and in body. One of the dinner participant mentioned an observation that rarely the Professor's elder family members have grey hair.

It has been a great experience listening to the unfiltered and authentic dialog with the Professor. We the small gathering from CBRC were immersed in the discourse by the Prof. for almost two hours.

The Professor highlighted the themes of value creation and the importance of intellectual capital in a B School. According to the Prof. every B school must differentiate itself from others through the demonstration of their unique intellectual capital. He suggested a B School must build intellectual capital by taking up sponsored research projects from governments, Industries and other funding agencies, by providing Executive / Management development programs and by doing consulting projects with the industry. A B school should be a sequel to these activities. He informed us that IIM, A was fully engaged in Executive development programs before starting the Post Graduate Program.

He said one of the key aspect of education at IIM, A is that the students are put to such experiences so as to develop independent thinking and ability to bring new perspectives to the issues under consideration. He confidently said that any student who attend the PGP at IIM, A will achieve this state by the end of first year.

By interacting with Professor, we were all able to experience a slice of stimulating life at IIM, A. It was a very engaging and fruitful evening. Thanks to the Professor for spending time with us.

contributed by: sasikanth prabhu

What is a product?

When we look around, a myriad of products are seen. For instance, sitting in your bedroom you can list dozens of products present there, such as pen, desk,book,table lamp, fan, bed, cot,mirror etc. Just think! Why we call these as products? This is an important question that demands answer from each and every business organization in the world and this question must be answered sincerely.

The term product is used by all to communicate and it connotes to all more or less the same way. Usually the term 'product' is used as a generic term to describe what is being marketed or sold - whether it is a good, service, idea, person or a place. Another definition goes thus - a product is set of tangible and intangible attributes including, packaging, color, price, quantity, brand , reputation of the company etc. But these ideas of product does not help an organization to position its business. I order to create a stable and durable position in the market, the businessperson should clearly and esoterically understand what is a product.

Let us now therefore take an example: a particular kind of shrub is growing all over road side. Now the question is , "Is this shrub a product?". Most people will say 'no' because it is freely available and no one would want it. But one day someone imagined it as a drawing room decorette. Soon the shrub is places in the corner of the room with an artistic touch. Many visitors of the house appreciated the plant and its arrangement.

Let us consider this example and ask ourselves, at what point the shrub changed its character from a useless thing to a decorative item?. It is when the idea was introduced and given a perceivable form. Thus the product is idea in a form. In this example the product is: the arrangement of shrub in a decorative manner.

But a product is not simply an idea in a form. You may have picked the shrub from the road side and arranged in a decorative manner, but nobody expressed interest / desire for it even after it is exhibited. Until somebody says they want it, the thing does not become a product. This means that there must be a demand / value for the idea in form before it can be said to be a product and this demand / value is provided by the customer. If any products are sold to the customer without any inherent demand / value, then it is no less than hoodwinking. Through demand / value, a link of interchange is established between business-as-product and its environment-as-customer.

The recognition of the product as an idea in a form with a demand/value is very valuable to a business organization. Giving form to ideas that has value in the market should be the central and dominating activity of a dynamic business organization. A business devoted to the identification of central ideas, formulation of strategies for moving swiftly from ideas to operations i.e. giving form will differ qualitatively in structure and in activity from a business primarily concerned with management of money and other resources. The former is dynamic, adapting and enduring while the latter is static, rigid and monotonous. This esoteric definition of product will have transformation effect in restructuring the business.

(This is an article by Sasikanth Prabhu in 'Passline' January 1999)