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Profit’s Three-Legged Stool

What must a company do to become and remain profitable?  By: Henry Fitzhugh Camp, March 27, 2015



We all know the necessary elements for sustainable profits. They are Gross Profit in excess of Operating Expense, supported by lower relative Investment than competitors. The first two result in current profits while the last makes it sustainable, despite the intentions of the competition. But, generically, why does the market allow a company to charge more than its costs? More than that, through what means does a company extract its profits? And, finally, how does the organization hang together coherently? I see the answers to these Why, What and How questions as the legs of a three-legged which supports sustainable profits.  

Stool

•   VALUE is the answer to WHY?  It is the most important supporting leg. Without the VALUE provided to customers, they will not voluntarily continue to buy the company’s products or services. Moreover, everything else can be quite a mess and still support profits in proportion to customers’ perception of the VALUE they receive.

•   STRUCTURE is the answer to WHAT?  It seems obvious to me that if you want to deliver Value well (and by “well” I mean without an excessive waste of the potential profits) you will STRUCTURE your company to exploit the Value delivered, considering both the short-term and long-term. Necessarily, the Sales < Value relationship is maintained otherwise there is no business proposition. The only question is what part of the perceived Value delivered can be maintained as profits. Competition, often attracted by even the smell of profits, diminish potential returns over time for a given level of Value delivery.  

•   The third leg is the PEOPLE who populate the Structure. It is PEOPLE who determine the extent of Value that is delivered. PEOPLE are the answer to the question HOW? My sense is that if management finds PEOPLE who are well suited for their roles (including the managers themselves) and supports and protects them (so they can focus on their work without being constantly distracted by a perceived need to guard their wellbeing) powerfully synergistic cultures and fantastic outcomes are possible.

Dr. Eliyahu Goldratt is the best I have found on the Value leg with his generic definition of a decisive competitive edge: building the capability to deliver, to large enough markets, Value no significant competitor can or will match, as well as the capability to capitalize on such delivery, all without exhausting the Company’s resources or undertaking real risks. Goldratt then fashioned a logical process for discovering counterintuitive (at least multi-year protectable) solutions for the core problems of a broad range of different industries. Further, he posited that there are breakout solutions for every business and they can be found iteratively for the same company without theoretical upper limits.  

Dr. Elliott Jaques

For Structure there is a rich body of work from Dr. Elliott Jaques. Unlike Dr. Goldratt, I never met Dr. Jaques before his death early this century. I became familiar with him through his numerous books. As I understand it, he began his career as a psychoanalyst and subsequently became interested in the underlying causes for psychological distress. Clearly, much attention has been focused on a person’s upbringing, family and parental influence due to the famous work of Dr, Freud. However, Dr. Jaques recognized that there is also a strong influence on a person’s satisfaction with their life due to their experiences at their workplace, where they spend many hours each work day. From an organizational psychology perspective, this area fascinated Dr. Jaques. He was fortunate to have a long standing association with Baron Wilfred Brown, the chairman of Glacier Metal Company, Limited in England. During his 30 years consulting at Glacier, he recognized the role of simple basic structure in the function (and dysfunction) of corporations.  

For the People leg, take your pick. There are a rich number of resources one can tap, many which are interchangeable with others. Conceptually, it is important to understand that People are different and that is a wonderful thing, because jobs defined as necessary within the desired Structure require different skills, attitudes, interests, intelligence and personalities.  

  • The required skills for most jobs are usually trivial obstacles, as long as they are not difficult to quickly develop. The advantage of hiring a person with the necessary skills is limited to the short term – the time it takes to get them productive.
  • Attitudes are much more important. They can be teased out using interview questions, especially those which draw specifics from the candidate of what they have actually done in the past – habitually, as opposed to what they think is the ideal thing to do in retrospect. Although habits can be changed, don’t expect it to happen easily, better to hire what the Structure needs.
  • Interests can be described as what psychologist Dr. Efrat Goldratt-Ashlag calls “what People love.” She claims interests are identifiable after-the-fact by a person’s realization that they have experienced a loss-of-time. Give people work they find joy in doing and you will love the Value they produce.
  • Intelligence is readily measured for comparison purposes.  
  • I use the inexpensive and well proven Wonderlic Dr. Elliott JaquesWPT test. But, in spite of what many people believe, more is not always better. Professor Mihaly Csikszentmihalyi describes a Flow Zone where a person’s capabilities are well matched to the work they must do to satisfy the needs defined by the Structure. Challenge People too much and they suffer from stress. Challenge them too little and they become bored. Therefore, there is a sweet spot – a range of appropriate intelligence – for every position in the Structure.
  • Perhaps most interesting is the role of personality, because it is so rich and nuanced, in finding People for positions in the defined Structure. I use Predictive Index (PI) to inventory personality. I also like Enneagram and DISC. I make it a rule to share what I learned with employees and candidates for jobs, because I don’t want People to worry that I am using what I learned against them. Rather, they should know that the rationale is to fit them to jobs for which they are well suited. Jobs have personalities and there are also tools for determining these, for example PI’s sister tool the PRO. Test every candidate and match them to the jobs or, if you’d rather, deal with preventable turnover and wasted potential profits.  

Taken together these inexpensive efforts (both in terms of time and expense) pay off handsomely in Value delivered from what Dr. Jaques calls a Requisite Organization.

Strengthen the Value proposition, ensure the business case is viable and then design a Structure to deliver and capitalize on the benefits provided. Promote, hire and recruit the right PEOPLE to implement and activate the requisite STRUCTURE so that the Company’s main focus is delivering its intended VALUE. The outcomes are unlimited growth for as many companies as care to play.

How’s that for a rosy future? Lack of funds in the government treasury forcing battles over which social programs are most desirable? No problem. This prescription drives profitability to an extent that the aggregate taxes paid by companies overflow the treasury. The excess can pay off sovereign debts. When that is gone, the surpluses can be rebated back to tax payers and support a reduction in future tax rates. Nice. Less tax burden proportionally, better government services and more discretionary income.

 
6 Comments
Good stuff,Hank!!
Dale Boden -
Henry, very succinct and to the point. Well done! I would emphasize (managerial)methods that are already implied within structure. However, leading and leadership are taken too often for granted. Many books and articles assume that if the rationale is there, the logical buy-in inevitable; hence the change will happen. Well, it doesn't. This blog goes a layer deeper into the minds of people, naming Freud and Jaques. But neuroscience research shows there is more to it. I recommend dwelling
Mark Stemberger -
H: A great picture of real profit. When meeting a client company, I used to find the 'structure' leg missing. Today, it's most often the 'people'.
I like the perspectives. I am working in developing a Supply Chain for the OEM automotive sector in the SE United States. Hope you and the family are well.
Dan Johnson -
Thanks. Your point on value and structure hits home, particularly regarding competition and the potential to diminish returns and hence reduce value. Understanding the People part of the your equation is a real challenge for an outsider investor, and makes the value (price) component paramount for us.
Tom Corea -
??????? Lamnine LPGN ? ???????, ? ???????, ???????, Ukraine Cka?? evg7773 15-23-28 USD ? ???????. ??????? $ 31



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