A Passion for Profit
This is the time of year when most well-managed companies engage in that annual ritual known as strategic planning and budgeting. In Corporate Finance 101, a corporation is characterized as an entity established for the purpose of generating a profit. However, in the No.1 bestseller The Purpose Driven Life, author Rick Warren professes, “The highest achievers in any field are those who do it because of a passion, not duty or profit.”
My experience tells me that Warren is right. In fact, the companies that seem to be the most successful are those in which the owner or CEO is passionate about the company’s service or product and he or she is able to inspire a similar passion throughout the workforce. Profit is more often the byproduct of a passion, rather than the passion itself.
Don’t get me wrong, I am not one of those touchy-feely types. I believe a business exists for the benefit of the owners. In fact, I was into shareholder rights before shareholder rights was cool.
In the late 1980s, when all the anti-takeover laws were being promulgated to “protect” corporate constituencies such as employees and the local communities, I was leading the charge in the Bush Administration to preserve the capitalist system as we knew it — one that clearly stated that the constituency that ultimately mattered most was the owners.
But to serve the shareholders’ interests — to maximize profits — a company needs to have a higher purpose. The difficulty arises when we are taught in MBA school that management’s primary objective is to maximize shareholder value.
While this mission sounds straightforward enough, it is anything but. The tendency is to focus too much of the planning effort on achieving short-term profits and not enough on creating the capabilities and the culture required to achieve great success, which ultimately leads to the highest shareholder value.
In recent years we have witnessed a plethora of case studies in one-dimensional management of the bottom line in which the company lost sight of its higher purpose, including ENRON, WorldCom, Krispy Kreme and, more recently, Marsh. For a while, these companies achieved enormous profitability. Unfortunately, they became entranced with the bottom line and began to fabricate profit rather than create shareholder value.
Any business, from a sole practitioner to the largest company in America, should have a fix on its passion if it wants to maximize profits over the long term.
Is there any question what Sam Walton’s passion was? He was passionate about delivering the most basic consumer products at the lowest possible cost. By relentlessly pursuing this passion, Walton created the most efficient retail distribution network on the planet and he built the largest company in America in a single generation.
Have you ever eaten at a Houston’s restaurant? By noon everyday of the week the one across from my office has a line. Yet the Ruby Tuesday’s next door is empty. I bet Ruby Tuesday’s spends more time in planning and budget meetings.
Most of us who have been around Atlanta for a while remember when the employees of Delta Air Lines had a passion for their business. They made customers feel important. Years ago the flight attendants actually pitched in and bought the company a new airplane. Employees and customers alike were part of the Delta family.
What is Delta’s passion today? I listened to Leo Mullin speak at an event hosted by Catalyst magazine’s sister publication Business to Business a week before he was canned. He explained that his number one goal as CEO of Delta was to avoid bankruptcy.
He shared how he was tracking every financial measure possible in order to preserve cash. This from the man whose company had the most dysfunctional labor cost structure in the country. And his way of leading by example in solving the problem was to create bulletproof pensions for himself and his senior management team.
Obviously, he got very lost in the numbers, and Delta lost its reason for being.
Derek Smith, CEO of ChoicePoint, also recently spoke at a Business to Business magazine event. I had already started writing this article, so I listened carefully. He clearly articulated his passion: to make the world a safer place.
ChoicePoint is assembling the data necessary to find and track individuals who are a threat to society, from child molesters to potential terrorists. The company, which Equifax nearly shuttered a few years ago, now has $750 million in revenues. During the entire speech, Smith did not mention a single number.
Contrast that with the presentation Bob Nardelli, CEO of Home Depot, made to the Harvard Business School alumni. He presented a mind-numbing litany of PowerPoint slides full of numbers and pie charts. I got the sense that it didn’t matter whether his company’s product was hardware or jet engines, it appeared to me that he looked at all businesses through the numbers.
Since Nardelli took over the helm at Home Depot a few years ago, the stock has declined in value. Meanwhile, over the same time period, the stock of Lowes, which essentially sells the same products to the same customers in the same markets, has doubled. Bernie Marcus and Arthur Blank had a passion for customer service. Since their departure, something seems to have been lost at The Home Depot.
I am just as guilty as anyone. Despite a world-class business school education, I had to learn this lesson the hard way. I have spent nearly 25 years working with successful businesses, but it wasn’t until I started my own seven years ago that I learned the power of a higher purpose. I began with an innovative business plan to build the largest middle market M&A firm in the nation. I built the best technology for valuing and selling companies in the country. But what I lacked was a true purpose other than getting big and making money. I didn’t get very far.
Eventually I grew weary of dealing with greedy clients, a couple of unethical employees and a difficult market. At that point, I seriously contemplated pursuing my passion of teaching.
Before making the jump, I decided to abandon my goal of growth and start doing only the type of work that I was passionate about, which is helping business owners transition the ownership of their companies. I fired some clients (seriously), replaced several staff with individuals I selected primarily on charter, and I started enjoying my job. Not surprisingly, my profitability soared to record levels.
As you head into the annual ritual of strategic planning, or even if you have just completed it, I suggest that before you define the next year in terms of growth, whether it be in market size or revenues, make sure everyone has a clear vision of the passion of the business. Then, when you execute on that passion, don’t be shy about pricing your product or service accordingly and the profits will follow.
Michael Jacobs, Author
Michael Jacobs is the CEO of Jacobs Capital and Professor of the Practice of Finance at The University of North Carolina at Chapel Hill. He's the author of several books and a certified speaker.
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