Conventional wisdom says that profit is, well, the bottom line. Under this way of thinking, the most important task for any corporate leader is to create and increase profits.
This focus on profit as the be-all and end-all is why companies downsize rather than retrain, outsource rather than hire locally, cut quality to keep prices low, and demand free overtime rather than pay fairly.
What’s ironic is that these all-too-common strategies, while they may have created short-term profits, are not viable in the long term. There are three reasons for this:
1. The “same old, same old” get old fast.
When every company executes the same business strategy, their products and services tend to become identical, creating a price war that makes profitability ever more difficult to achieve.
A perfect example of this is the PC business, where a dozen companies (Dell, HP, Packard Bell, Sony, Acer, etc.) were making functionally identical products and competing who could offer the lowest price.
To do so, they all executed the same strategy, sourcing their components from the same suppliers, cutting their domestic workforce, scrimping on customer support. As a result, profit margins shrank to the low single digits.
Meanwhile, PC buyers have no brand loyalty and rightly so, considering that all the PC companies (with the notable exception of Apple) make cheap products and treat their customers poorly.
By focusing entirely on short-term profit, PC manufacturers set themselves up for the disruptive innovation that resulted from smartphones. No PC company (again with the exception of Apple) had employees smart enough or capable enough to make that leap.
Like so many companies in so many industries, PC industry executives spent way too much time worrying about their bottom lines and not nearly enough time hiring and retaining the talent that would have allowed them to make the transition.
2. In a connected world, the truth will out.
In the past, companies could treat their employees like crap and nobody would be wiser. The mainstream business press was too busy lionizing cost-cutting CEOs to report on how those strategies were affecting real people.
The Internet, however, has broken the hammerlock that the mainstream business press once possessed. Today, everything ugly a company does to its employees immediately shows up on the Web.
For example, Disney recently tried to replace 35 programmers with H1-B immigrant workers who’d work for comparative peanuts. Disney even demanded that the IT workers to train their replacements in order to receive severance pay.
Ten years ago, this kind of ugly behavior might have passed unnoticed and unreported. Not any longer. Disney was forced to back down when story became public knowledge lest it damage their brand.
The same thing is happening to other consumer companies. For example, bad publicity about starvation wages and unpaid overtime has forced even WalMart and McDonald’s to raise salaries and change policy.
Consumers-many of whom are themselves victims of the profit-at-all-costs race to the bottom-have rightly begun to directing their anger to companies that consistently treat profits as if they’re more important than people.
3. Loyal employees outperform contractors
Unless you’ve been inside a time capsule since 2010, you’ve no doubt heard all about the “on-demand” economy. The poster boy for this concept is Uber, who has built an empire by hiring contractors rather employing people.
Some on-demand companies, however, are now questioning the wisdom of the hire-contractors on the cheap strategy. According to the New York Times, for example, when former Apple retail exec Ron Johnson pitched his startup Enjoy to investors:
“I said there’s a good chance that one day there could be a change in how the law qualifies these contractor jobs – and I’d rather be taking the high road from Day 1 and not be subject to that business risk.”
The article goes on to point out that hiring your own front-line workers is the “ultimate expression” of the “full stack start-up” where companies “aim to control every part of their service rather than just the technical aspects.”
In other words, the only way to create a sustainable competitive advantage business world is to have high quality employees, something that’s impossible if you’re farming everything out to contractors.
The execs who wrongly believe leadership consists of managing the bottom line rather than people always claim that despite all evidence to the contrary, “we consider our employees are our greatest asset.” It’s lip service, of course.
Ironically, though, it’s true. In the end, it’s people not profits that make or break a company.
Originally published on Inc.
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