I've learnt in my accounting and finance courses that the primary objective of any organization is to maximize profit. I had no doubts about the statement then and have completely agreed with it untill I recently read what Peter Drucker(The Management Guru) had thought about it. He wrote and I quote "What is the measurement of performance in a business? The bottom line is the standard answer. But how does one truly measure the bottom line? Everyone talks of profit, but what is profit really? How does any business, its executives, its investors, its employees, know whether the company's reported profit is good or inadequate?"
So the question arises, what profit is actually good or adequate to say that the company is de-facto performing well? He says that profit does not measure such unquantifiable factors as the failure to identify and implement new opportunities, the development of human assets, and the recognition of negative externalities threatening the firm. Thus Drucker concluded that the fundamental interpretation of corporate profit was too internally focused.
It is quite amusing to imagine a world where every company is making profit gains without a single loss making organization. Capital will be directed towards the defense of yesterday's products rather than encouragement of tomorrow's opportunities. So basically the world will miss out on a lot of interesting opportunities.
Drucker beautifully explains that profit should be optimized(as in, a good ratio of risk and opportunity) and it should be viewed as future cost. But modern day accounting's time frame is the past and it would measure only past business costs - which fundamentally sounds flawed to me!!!
We can conclude that since organizations are externally focused and profit which is internally focused is not its primary motive, it is the creation and satisfaction of a customer which is the primary objective of a company in this society. Doesn't this make marketing the bottomline for all companies??
6 comments:
You hit the nail in the head with the last line. Marketing IS the bottomline for every company! How well you understand your customer, how well you serve their needs and how well you make them identify with you is what makes companies. Profits will follow later! I always believe there are two types of companies 'doing good'. One type that does well for itself, these have profits as bottomlines. Two, companies that go 4m strength to strength and often stretch themselves to appeal to and satisfy more and more customers. We can observe that the latter type of companies need not sweat for profits, they just happen!
So, the bottomline is what do the companies want? Huge numbers to gratify themselves and bury their risks that failed or sustainable yield in the long run that would encourage them to innovate better!
One wise thing you have done is made it unanonymous. :P
n second thing, i am amazed u still remember accounting n finance, but I quite dont agree with the word 'courses' that followd ;)
Dud dud dud ... lets look at things one-by-one ... and one thingz fr sure ... am not talkin either for Finance/ against marketting ... lets not make a debate here coz i too think marketing is t most imp n interesting part for t success of any firm ... am just supporting t likes of Brealy Myers, Robert Kiyosaki here ...
First of all ... The objective of every organization is not profit ... its maximising shareholder's wealth ... so any activity tat maximises SHW is a bottomline ... n any deviation frm this goal causes the agency problem ... talkin abt marketing/finance ... its nt t vertical tat matters ... its t individual activity that need be considered as to if its gonna maximize SHW or not ...
Second of all ... in judging performance of a firm ... even Brealy Myers says that we shud look at P/E ratio ... and that too not the past earnings ... its the expected future earnings that must be lookd at ... even in making investment decisions (as Robert says) ...
@naresh ... in todays world of growin competition n raising globalization ... u cant really do well for urself and expect profits can u???
@naresh.. yup if there was one place i got stuck while typing was when i was typing courses which in reality is supposed to be singular.. but never the less.. the public shudn't kno that rite.. :P
profit had no more to do with corporate promotion than breathing air had to do with goals of human life.. so no use sweating over it..!
@ vijay.. there is but a fine line of difference between the terms profit and share holder's wealth(or reward for risk or watver u call it) and what I am saying is none of that matters(unless u include customer's also in the share holder's category) as far as the existence and purpose of the company is concerned.. to acrue profit/SHW all the functions(may it be HR, marketing, fin..) are to work in synergy!
profit is not the cause but the result of the organization's functioning.. the cause is to contribute to society.. and only marketing produced such results.. everything else was jus pure COST!
machan ... am never denying that ... bt 'll tell you somethin ... for a long time(i guess this was even till late 70s) the term shareholder's wealth was nt tat prominently usd ... it was profits ...
bt t equations changed ... there came in more customer-focus ... there came more focus on long-term customer rln... there shrunk t space for t mgrs to look fr their wealth at t cost of t SHW ... ... n tat was t reason behind changing t obj to SHW frm profits ... of course today u lose a customer ... u can c a quota of ur profits goin wit him ...
thus t term SHW takes care of all that you have told ... ya profit is a symptom n the synergy is t cause ... bt it is tat sympton tat tells u where u stand ... t cmpany needs to expand ... t company is plannin to diversify ... t company wants to raise sme money ... this is when t symptoms become t driver ...
of course customer focus is imp ... bt wat will u do with customer focus wen therez no customer ...
who will do marketing wen therez nothin to market?/? marketing itself needs money and where do u get it??
comin to contributing to t society ... well that cant happen unless t cmpany knws tat its safe ... and can sustain ... well who tells tat???
profit is nt t cause of organizations functioning ... ya ... bt its t very reason fr t existence of t organization itself ... my frd ... ppl cme to earn money ... n finance tells how much of tat u have
I don't know much abt marketing but CP and I are happy that we are not as GAY as you..........(cp's words comming out of my mouth).
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