Thursday, August 16, 2007
A company's bottomline...
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??