Some businesses grade their performance on year over year, “same store”, comparisons. That means if sales are up over the previous year, taking into account the same number of production units, the business is doing well. If there are more production units, which could be new stores or production plants or employees in production, then sales ought be up more than enough to cover the new means of production.
I see this as “rear view mirror” thinking. It is looking at yesterday to determine whether today is good or not. This has some merit as long as the flaws are taken into account. The most serious flaw is the missing comparison to the industry. If your business is up 20% over last year but the industry is up 40%, are you doing well? Maybe not. Even if 20% is good enough for you, it may reflect a dangerous trend you need to spot before it’s too late.
Comparing results to industry is a Jack Welch thing. CEO Welch brought this thinking to GE when he decided to compare GE units to their position in specific industries rather than simply comparing their own year-over-year performances.
That was smart. That change in thinking made GE a lot of money. A unit that failed to dominate its industry was closed or sold. Survival of the fittest. Maybe fattest. Bully for GE. Bully for Welch.
I propose that we take an entirely new look at not just how we measure business, but what the goals ought to be going forward into the era of Asia.
I do not like the focus on growth. Growth, as the sole measure of health, is not, well, healthy. Measuring growth drives a business culture of ‘more’. We want more sales, more profit, more everything!
Why has it never occurred to anyone that growth as a goal in itself is not sustainable? A small business can grow. Sure it can. It can expand and expand and expand growing larger and larger. Until? Maybe the founder can escape with a buy-out offer. And then? Cut to growth! Trim the fat! Get lean and grow!
The large business? A very large business like Hewlett-Packard faces challenges as it tries to ever grow. To produce more sales and more profit it is forced to add business units and diverge into new, untamed territory. Look at the number of businesses E-Bay has acquired. Most of those floundering units, purchased under the dictatorship of Madame Whitman, are failing. (Paypal is the exception)
HP announced the lay-offs of 27,000 people this week. The growth strategy is not working at HP. Actually, very little is working at HP. Hopefully HP’s new board will change that. Whitman will get the credit if it all works out. But I doubt it will. HP is a very sluggish giant. Wouldn’t it be cool to see HP open a plant in the U.S. and build laptops here? Would you buy a laptop Made in the USA? I would.
It’s a painful cycle to chase growth. HP will cut further under Whitman’s axe. And by shrinking the business there will be an eventual return to profitability, perhaps. I see this as the bleeding and leeching of the 21st century. Draw the blood from the patient and if he survives, take credit for the cure. If he dies, well, he was too far along to save.
I propose we look at industry by industry profitability and each business strive in its own way to better the percentage or margin of profit respective to its industry. To hell with growth. Focus on the profit. Make money by making insanely great stuff or offering insanely great service or, is it possible?, both! Don’t worry about growth. Sure, if a business wants growth, target small growth, sustainable growth and then cap it at a future point. Stop this cycle of growing to collapse.
With the profits, invest in technology and top-flight personnel. Work on R&D. Get the next product line ready. These are the things that will solidify the future of a company, not growth. Strive to be the best, not the biggest and a business may find itself the biggest.
Note the sad comment from my previous post that GM is (was) in business to make money, not cars.
Had they been in business to make cars, they would be a far stronger company today.
Ask yourself this: Is your business there to make money or to do what it does?
Yes, you want to make money. But money is the measure of success of what the business does.
Make a great widget, get your marketing right, work hard and add a little luck and the money will come. Set out to make money and failure lies ahead.
Set out to be the best and to contain growth, and success is almost sure to follow.