Friday, December 17, 2010

It’s rarely about profit and loss

I have been screaming that the loss of manufacturing in the US is not caused by the difference between profit an loss, it’s caused by the difference between profit and more profit. Finally an article in Fast Company supports my “gut check”. The following quote from the article illustrates my point quite well.

"The authors offer a scenario in which Apple suddenly decides not to pursue profit maximization, dumps the oft-criticized Foxconn, and decides to pursue a model of corporate responsibility and patriotic we're-in-it-togetherness. It's true that U.S. workers fetch about 10 times as much as Chinese workers, and the manufacturing costs would rise to $68 per phone from about $6.50 per phone. But if Apple sold the phones at an average of $500 (already the asking price for some models), they say, it would still clear a 50% profit margin."

Thank god someone a lot smarter than I am gathered the statistics to prove my pattern recognition opinion. I’ve been saying for years that the choices most companies are making to manufacture their products overseas are rarely about profit and loss, they are about percent of profit.

Now don’t get me wrong there is nothing wrong with making a profit or making as much profit as you can. What’s wrong is making that profit while killing your customer base!

When I lived in Seattle I watched a major company kill their customer base by off-shoring a lot of their production from small local vendors. Now the major customers for their products are American companies and the customers to those American companies are the American people. So, every job lost is a customer lost since without a well paying job, those Americans can’t afford to buy from that mega companies customers – the mega company looses sales since their direct customers don’t need to buy more.

Our current economic problems are completely driven by short-term thinking; buy focusing on profit rather than realizing that profit is a by-product of building a good product and supporting customer’s who buy your product. What I see from the bottom of the pile is tactical thinking.

The cure of course is to start thinking strategically. Start planning for a long run and not putting too much effort into next quarter’s stock price. Better to give up 10% profit this year or for the next two years but to ensure not only future profits but also existence for the next 10 years.

Back when I was in the Army I was taught that the troops do what the commander checks. In this case, the moneymen are the commanders and they are checking the tactical stuff (profit this quarter or this year) and at their level they should be checking the strategic (profit for the year after next and the next 5 years).

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