Big Profits and Greatness

Big profits do not say anything about the greatness of a company.  In fact, big profits can change the focus of an organization so dramatically that it peters out into competitive irrelevance over time.

Consider two large companies.  One stated in their annual report that they aim for a 35% increase in profit for the next financial year.  The other company stated in their financial report that they aim to increase the profit by only 5% for the next financial year.  The management team of the first company has also been given a so-called stretch target and was asked to aim for a 40% profit increase “so that we can at least make 35%”, stated the CEO to the staff in one of the quarterly town hall meetings of the company. 

At the end of each company’s financial year, the results spoke for itself.  The first company announced a profit increase of 31% instead of 35%, blamed the recession, and announced company-wide job cuts.  The second company, also in the same economic cycle, announced a profit increase of 7% and stated that they are going to expand.

In the following year, the first company noticed a decline in market share (more than half of their market share was lost in a matter of 18 months).  Having spent hundreds of thousands to understand why market share was lost, a startling fact was discovered.  Customers lost confidence in the company because they became so numbers-oriented that they forgot about the real shareholders in their company.  To paraphrase one of the previous American presidents “it is all about the CUSTOMER, stupid!”

Customers also complained that the quality of staff at this company deteriorated.  Obviously, management was shocked to hear this news and believed that the view “is only that of a disgruntled few”.

Closer examination showed that this company has cut its training budget dramatically so that they could deliver on the 35% profit increase they announced so boldly.  When the CEO was advised by the HR manager that this step could have an impact on customer service, the debate was settled by the CEO’s remark “we have great people working for a great company”.

On the other hand, the company that announced a single-digit profit growth also announced a doubling of their staff training budget despite a raging recession.  They understood that the lifeblood of their company is well-trained employees that can interact with customers.  They also understood that an educated workforce is one of the biggest constraints of doing business in South Africa.  Last, they understood that South African consumers are becoming more sophisticated and that customer focus in South African companies is generally lacking.

The World Economic Forum’s Global Competitiveness Index underscores the view of this company very clearly.

Although there has been an improvement since 2008 in educating our workforce, not enough has been done to make a significant change.  Companies who are not going to invest in the education of their workforce will not be able to sustain themselves for long.  In 2011, South Africa took the 31^st place (out of 142 countries) in the world in terms of customer sophistication.

However, customer orientation and, by implication, customer service levels offered by companies do not match customer expectations.  In the same year (2011) South Africa was in the 67th place (out of 142 countries) in terms of customer service.

All of the above leave Skopus Business Consultants with one question.

Do high profit growth targets mean true organizational greatness?

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