Is Profit All There Is to Strategy?

posted by WMC

Almost every profit-earning organization I meet with struggles with the question of where does profit fit into strategy.  Is it the ultimate driver of strategy? Michael Porter (Harvard Business School) would say that it is.  Should it be a part of the vision, mission and goals?  How are financial targets woven into a strategic plan?

Surely there’s a lesson to be learned from non-profits who seem to be able to come up with a vision, mission and strategy without having to hold out profit as the ultimate outcome. Of course, non-profits need to remain sustainable and this usually ends up as one of their actionable goals.

The common aim of most for-profits is more profit.  But how much profit is enough?  And what is profit?  It’s held out as a tangible objective but in reality it’s often an arbitrary and manipulable number.  For example, it can be driven up deliberately for short periods of time, only to ‘tank’ in the future.    Tax accountants confirm that it is not an absolute, immutable figure. And volatile market prices and currency exchange rates can play havoc with profit results.  Therefore, what does it really mean to quadruple EBITDA in 5 years?  Or to judge team performance against this quarter’s net income?  What do the profit numbers really say about what has been achieved?

So let’s go beyond profit to the idea of enterprise value.  This is a more encompassing concept as you can read into it the resolve to sustain the enterprise over time, and to grow social, employee and customer value as well as business value.  But once again, how do you define it in concrete, unqualified terms?  Who measures it and how exactly do they do it?

In my mind, the real key to working with financial targets is to recognize that they aren’t so much goals as measures. They measure the monetary results of doing something strategic—satisfying customers, improving operations, aligning resources, developing talent, launching new products, entering new markets.  So why not use them as metrics? But just one set of metrics—naturally with targets in mind. Be clear that there are other measures of success.  None are perfect—but together they are more meaningful than looking through a single, malleable lens.

Recognizing profit as a measure lets your strategy be strategy. Strategy—in the terminology of Roger Martin (Rotman School of Management)—deals with what you aspire to accomplish, where you’re going to play, how you’re going to win and what capabilities and systems you need to make it happen.

Strategy is therefore more instructive than a singular financial target.  It enables an organization to look beyond a pot of gold at the end of the rainbow. It focuses energies on the choice of mountain that the organization wants to climb, and the choice of paths that its people will take to get there.  It has to be compelling enough to warrant engaging the commitment of staff and the loyalty of customers.

A well-articulated strategy is a more powerful call to action than the allure of treasure under a shimmering rainbow, an ephemeral object which doesn’t quite connect to any fixed place on earth.

Ludmila Jagiellicz – Vancouver

See Ludmila’s original post on LinkedIn.

The opinions represented here do not necessarily represent WMC’s views as a whole.