Tuesday, August 08, 2006

Is Profit the only measure that matters?

The short answer is No. Notwithstanding the example we offered at the beginning of our last entry, Profit is not the only measure that matters. And organizations – even business that are nominally “for profit” – may choose, from time to time, to take a path other than the one that will lead to the largest economic profit.

The more important answer to this question, however, is that Profit – along with its economic sister, Loss – is a singularly important issue that should be weighed, calibrated, and addressed in the Strategy process, even by “nonprofit” organizations.

If you are thinking about Strategy in the context of a nonprofit organization, you are perhaps recoiling at this idea and ready to shout, “NO, that’s not why we exist!” To be sure, the issue of Profit is made more complex for organizations that are not driven primarily by economic profits. Nevertheless, we believe it is an issue that must be considered in the development of an effective Strategy for any organization.

What we are really talking about here is the centrality of any organization’s economic infrastructure – the balance of the resources that are used as its “inputs” with the resources that are generated by returns for its “outputs.”

Where an organization buys resources (i.e. supplies and labor) to make something to sell for money, its economics often seem relatively clear and hard to ignore. Where an organization uses donated resources to make or provide something that is given away, the economics are often less apparent and easier to ignore.

Nevertheless, the need for balance remains if the organization is to sustain itself and continue to achieve its goals over time.

This balancing act can feel as chaotic as the juggling clown on a bicycle looks. But, like the clown, it depends on some real discipline – in this case, specificity in identifying costs, articulating desired returns, and examining the ways they interact.

In our next few entries, we will look more closely at the kinds of “costs” and “returns” common to several different types of organizations. We can’t tell you in the abstract what the “right” balances may be for your organization, but we hope to help you frame the questions that will enable you to recognize what may be the pivotal tradeoffs that have to be faced by your organization if you are to keep your pins in the air.