How Important Is Profit?

Some colleagues and I are in the midst of a (potential) new startup, and one of the questions we are exploring is around principles and philosophies for running the business. One element I contributed was that profit, while important, cannot be the underlying motivator for what we do. What’s important is the product/service, and the execution to build and deliver the same. It’s trite, but it is about “doing the right things” and “doing things right”. But does that mean I’m against profit? Does this mean that I think “profit” is a dirty word or something? Not in the least. I just want to see it put into the right context, and when it is, good things can follow. When it isn’t, disaster is usually lurking.

My Views On Profit

A business needs to be profitable, if not initially, at some point in the near future. Profit is important. A quote (whose attribution I have lost) sums this up well for me:

Profit is like health. You need it, and the more you have of it, the better off you are. But it isn’t the reason why you exist.

I remember hearing this back in 1986. It struck a chord. It doesn’t mean that profit isn’t important. But it is an outcome, and not a goal. I developed my own, less eloquent, thought on profit.

If you aren’t in business to make a profit, you are either bored, stupid or rich.

Harsh, perhaps, but I believe it is true. Some people do things because they are bored, and have nothing better to do. Better to be active and inactive, and something monetarily unprofitable could turn into something else that is profitable in the future. Alternatively, you could be stupid (or you could substitute “generous” or “charitable” or “naive” here), and not realize where profit fits into the bigger picture. Lastly, maybe you’re rich, and its the job and not the money that matter most. For most people trying to build or run a business, they aren’t bored, they aren’t rich and hopefully they aren’t stupid.

I believe that profit is important. You need profits to grow the business, reward the people in the business, and to return something to the shareholders. A business that isn’t ultimately profitable isn’t one that will survive. But working for the sake of profit first is a mistake. I have two examples where the focus on profit is different, and the results show accordingly.

The Tale Of Apple Computer

Apple is famous for its healthy margin of profit on all of its hardware products. Most products return a profit to Apple of 30-40%. But does that mean Apple is obsessed with profit above all else? I would say no. What Apple is obsessed with is a product and ecosystem where they can charge a premium price. The fact they can charge a premium, and the profit it returns, is an outcome of this decision. When was Apple in the most trouble? When they stopped focusing on the product, and focused on the bottom line. Steve’s return included a return to focus on the product. Build a great product that people want, and want badly, and the profit will take care of itself.

This shows in Apple’s products, as well as their approach to the surrounding ecosystem. This is both good and bad. On the one hand, Apple products generally work very well together. The software they run works well on the hardware, in part because the permutations and combinations for hardware are limited. The downside, though, is an ecosystem that is somewhat closed and shut-off to the rest of the world. It isn’t totally closed, but the openings are certainly small.

Again, Apple cares about profit, but they operate based on the assumption that it is a natural outcome of the way they do business. The company isn’t run by accountants. It is run by product people. Apple is an excellent example of what happens when you focus your efforts on product. The result is a family of products people are willing pay a premium for. You don’t have to sell at a discount, or cut the price, to move units. That premium, in turn, results in profits that are greater than some very large company’s total revenues.

Contrast To General Motors

General Motors has not been run by a true “product person” since 1953, when Charles Wilson (himself an electrical engineer) left the company. Since that time, the CEO’s and presidents have primarily been salesmen, accountants, finance people or business school grads with limited “real car” experience. Basically, GM was run by “numbers guys” and not “car guys”. For GM at its peak in the 1960’s, this didn’t matter much, because product was still king. GM was the most dominant car manufacturer in the US, surpassing more than half of all new car sales in the early part of the 1960’s. Each division basically ran itself, and except for a few edicts from “on high” (e.g. no car could have more horsepower than the Corvette), each division did it’s own thing. At this point, no one was looking for “cost efficiencies” or “synergies” all that much.

But as the 1970’s approached, and gave way to the 1980’s and beyond, GM lost its way. It became obsessed with two things: the bottom line and an attempt to build “scientific processes” to design cars. The product got the short end of the stick, and the car guys became less important, as the analysts and accountants gained in prominence. GM’s one and only obsession was to make a profit, and they wanted fool-proof ways to design product that would guarantee sales. These design processes were tuned such as to create a car that they could presumably sell for a premium, but would be built as cheaply as was feasible.

The result? The Malaise Era of the 1970’s and 1980’s, and then the era of beige, dull, boring and sometimes weird cars that more and more people overlooked through the 1990’s and into the 21st century. GM’s dominance and importance in the US car market dropped, to the point where they now represent about 20% of all new cars sold, a far cry from their overarching dominance in the 1960’s. It came as a result of boring or uninspired cars, an over-dependence on re-badging (using the same, identical car for as many as 4 different brands, with only cosmetic differences) and a focus on cost over quality.

When GM finally entered bankruptcy protection in June of 2009, it had started to turn around the product side of the business. Bob Lutz, an outspoken and energetic car guy, had been deeply involved in the re-vamping of Cadillac. One of the results was the CTS, which was a true competitor to BMW, Audi, Mercedes Benz, Lexus and Infiniti. Lutz also influenced a change in how cars were designed in the rest of GM. He pushed the analysts to the back, and let the car guys come forward. Feedback from customer focus groups (which brought us gems like the Cadillac Catera and the Pontiac Aztec) was de-emphasized. A common design language, and a focus on product quality became driving factors in the aesthetics and content. A focus on product, and not profit, resulted in increased sales and GM commanding a higher price for their cars. That in turn resulted in real profits returning, starting in 2012.

But GM has started to stray again. The company is still run by accountants and analysts, and the car guys are reportedly getting pushed further back in the food chain. It appears, but I have yet to confirm, that the numbers people believe that the profitability is because of other factors. It’s simple, and it’s obvious: the product improved, and consumers responded. If GM goes back to their old ways, counting beans and not paying attention to the sheetmetal, then another fall is around the corner. It happened at Chrysler twice. GM is in no way immune.

What Does This Mean?

While these are only two examples, I think the message is clear: focus on your product, and your execution around it. Building a great product isn’t, by itself, enough. Palm had great product, but their execution faltered. HP’s takeover didn’t help that in any way. Nokia had great product, albeit a little dated, and fumbled the ball on execution. Even RIM had great product, but again, fanned on the shot when it came to actually running the business. A good, or even great, product isn’t enough. History is littered with great products hampered by lousy execution.

You need the execution to go with the product. Done right, you can command a premium price, and if you have’t messed things up, profit should eventually be the result. For a new business, though, you have to be realistic about when profitability will occur. Expecting it in the first year is overly optimistic. It isn’t that it isn’t possible. It is just unlikely, because what profit you might have made will probably need to be put back in to grow the business.

Again, you need to be profitable. Unless you are running a charity, you have to eventually make more money than you spend. You do have to keep an eye on your bottom line, but the numbers are like the speedometer or fuel gauge on your car. It is useful and important information, and you have to keep on top of it. But you control where the car goes with the steering wheel, brake, throttle and transmission. Profit should be an outcome, but not your goal.