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2 Defining Corporate Health
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THE MYTH: Healthy companies have lots of profit.
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Of course healthy companies have profits. But saying that companies are healthy because they show a profit, is just like saying people are healthy if they have a pulse. Companies can show very high profits, yet routinely miss golden opportunities. Or even worse, they can have fantastic profits and forsake their future by taking those profits out of the company. Why does this happen so commonly? There are three reasons. |
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First, any accountant will tell you that profit and loss are relative conditions, and that according to the way the pluses and minuses are tallied, you could turn a loss into a profit, or a profit into a loss. There may be any number of financial reasons to do this, and a good accountant can be worth their weight in gold when dealing with these financial management issues. Unfortunately, far too many Western companies mistake financial management issues for strategic development issues. |
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You see, profit is an arbitrary condition, not directly related to the marketplace or to a company’s day to day performance or even to their customers. Used in isolation, accounting figures provide no real context for strategic decisions — decisions that plot the course for the company in the future. (The Problems with a Profit Focus) |
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Profit and loss can tell you how to handle financial matters inside your own company or with shareholders, or how to handle tax matters with the government. But finance has very little to say about strategic issues within the real competitive environment of the market place. Consider this: If profits go up, is it because your customers are happier than they were before, or is it because a competitor went out of business? In fact, increased or decreased profit may not have anything to do with managerial decision making. Remember, profit and loss provide financial insight, which is very different from strategic insight. |
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Second, profit and loss describe what has happened in the past. They may tell you a few things about your performance, long after that performance has been delivered. But these records of the past have nothing to say about the future – its trends, opportunities or threats. This is because the future is not written. There are no guarantees. If companies want to get a firmer grasp on the future, they must look forward and seek out opportunity, not look backwards into their bank accounts. |
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Third, and perhaps most dangerously - when a company focuses on its profits, it tends to measure all things in relation to how they effect the bottom line. If that bottom line is measured quarterly, semi-annually or annually, most expenditure is expected to return some contribution to that bottom line within those very short periods of time. |
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The problem here is that the short-term focus on profit makes it hard to justify investments that have a long-term impact. Instead, what is needed is leadership with a longer-term view of strategic objectives. (Total Quality Leadership for the Future) Because the most important investments any company can make regard its long-term needs, a focus on profit gives a company a very dangerous and potentially fatal case of "short-sightedness". |
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Think of it like this: The future is what you see through the windshield, and the past is in the rear view mirror. By focussing on profit, a company chooses to stare into the rear view mirror, while hurtling forward at dangerous speeds. To make matters worse, focussing on profits can have a hypnotic effect, distracting you from the future at hand. If profits are good you are even more likely to rest on your laurels, giving the competition an opportunity that you do not need to give them. Please do not misunderstand – profits are good. But focusing on them too intently can lead to all kinds of missed opportunities, faulty decisions, and yes, losses as well. |
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