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1 May 2015

Is Profit a Dirty Word?

Tag(s): Business, Marketing

“It is the socialist idea that making profits is a vice; I consider the real vice is making losses”  Winston Spencer Churchill
 
In the past few months I have written a series of blogs about the General Election. This is not intended to be another one but I have found this Election campaign particularly dispiriting because nearly all the debate is about the taxation and redistribution of wealth and almost none is about its creation. It is extraordinary that after the total world-wide failure of socialism and the extraordinary success of capitalism in raising living standards in many parts of the world that we are still having this debate. The Labour Party started the process of privatising the National Health Service when they set it up. Most GPs are in the private sector! Aneurin Bevan famously “stuffed their mouths with gold” to get the British Medical Association, the doctors’ trade union, to agree to a National Health Service.
 
The key to capitalism is that the investor makes a return on his investment. To do this the business must run at a profit. I am quite happy to see profits or wealth shared but it must be earned or created first.
 
Even inside businesses there can be tension over how this is done and typically this tension arises between those in Marketing and those in Finance. I wrote on this subject in my book The 20 Ps of Marketing.
 
“The relationship between Marketing and Finance

 In this process the Marketing Manager will inevitably engage with his opposite numbers in the Finance Department. The relationship between Marketing and Finance Professionals is not always an harmonious one. Marketing looks at Finance and sees a bunch of ‘bean-counters’ only concerned with numbers and restricting efforts to grow the business by taking a short term and negative outlook.  Finance looks at Marketing and sees a crowd of unqualified romantics who like to swan around having expensive lunches with their chums in advertising agencies and have little grip on the harsh realities of life. Both of these are caricatures but I imagine readers will identify the types. In the best companies a close relationship is fostered and I understand that in Procter & Gamble the Marketing and Finance people now sit close together to maximise their mutual approach to making Profits.
 
Early on in my time with Sony I was privileged to hear Akio Morita, the charismatic founder of Sony, give the inaugural Innovation Lecture at the Royal Society in London. The event was organised by the Department for Trade and Industry. There were many leading scientists in the audience including several Nobel Prize winners but Morita-san soon had them eating out of his hand. He started by saying how much he admired the British. We were the nation that gave the world Newton and Faraday and so much more. However, he had one question. Why did we allow our accountants to run our public companies? The audience roared with laughter and even the few accountants in the room had to smile because of the charming way in which Mr. Morita made his point. This does seem to be a particular issue in the UK because, for example, Britain has 13 times as many chartered accountants per capita as Germany.
 
 My own relationship with the Finance Department at Sony was excellent. We worked together to achieve a set of steady results with annual increases in sales while also achieving corporate Profit targets. In fact when I asked my Finance Director what was the Profit he countered by asking me what I wanted it to be! However, overall corporate Profits at Sony were probably not commensurate with the world class reputation of the brand. Professor Hugh Davidson is one of the Marketing academics I admire most, not least for his long track record in a successful brand management career before he turned his hand to writing a series of iconic and iconoclastic books on Marketing. He interviewed me for one of these, The Committed Enterprise, which is about Vision and Values and how to make them work. But I recall his pointed criticism of Sony’s low Profitability. Hugh’s first book was the best-selling Offensive Marketing and then in the sequel, Even More Offensive Marketing he proposed a new acronym for Marketers to remember, POISE, which stands for:
 
Profitable
Offensive
Integrated
Strategy                                                              
Effectively Executed.
 
In his emphasis on Profit Professor Davidson shows that there needs to be a proper balance between a firm’s need for Profit and the customer’s need for value. Those who define Marketing as meeting customer needs at a Profit, are nearly right but they need to recognise that there may be a very real conflict between meeting consumer needs and making a Profit. Every company has to do both in order to survive but how should it strike a balance between the two? He shows how Offensive Marketers maximise Profitability by matching their assets and competencies to the most appropriate opportunities for their companies or brands. Efficient matching of the two enables companies both to provide superior customer value and to generate superior Profits.
 
 Another leading Marketing academic is Professor Tim Ambler of the London Business School who also passes my test of a good Marketing academic because he enjoyed a distinguished business career at IDV, part of Grand Metropolitan, predecessor of Diageo, where he founded and fostered many of the famous drinks brands in its portfolio. I was also interviewed by Tim when he was Joint Managing Director of IDV but I didn’t get the job! Nevertheless he has done invaluable research on the measurement of Marketing performance and brand equity. With this behind him he has done more to throw light on the problem that Boards routinely devote 90% of their time to spending and counting cash flow without wondering where it comes from and how it could be increased. Some years ago leading Marketing figures in the UK formed the Marketing Council with the view that good Marketing underpins shareholder value creation. I contributed in a modest way to their investigations and Tim Ambler articulated their findings in a book called Marketing and the Bottom Line in which he set out the metrics of corporate wealth, not just Profit, but the contributors to Profit. Professor Ambler summarises his key metrics as follows:
 
Standard P&L metrics
Actual metric % compared with plan % compared with competition Board review frequency
Sales Volume/value Market share Monthly
Marketing investment Period costs Share of voice Quarterly
Bottom line e.g. profit Share of profit Half-yearly
 
General brand equity metrics
Consumer metric Measured by
Relative satisfaction Consumer preference or satisfaction as per cent average for markets/ competitor(s). The competitive benchmark should be stated
Commitment Index of switchability (or some similar measure of retention, loyalty, purchase intent, or bonding)
Relative perceived quality Perceived quality satisfaction as per cent average for market/competitor(s). The competitive benchmark should be stated
Relative price Market share (value)/Market share(volume)
Availability Distribution, e.g. weighted per cent of retail outlets carrying the brand
 
That was taken from Chapter Eleven on Profit in my book The 20 Ps of Marketing which you can order direct on the home page of this website. Of course, for the politicians to understand all this they have to be able to add up. It is reported that most of the MPs in the last Parliament could not answer this simple question: “What are the chances of getting two consecutive ‘heads’ if you toss a coin?[i]” While in his ridiculous interview with Russell Brand (net worth £15m) Ed Miliband agreed that it wasn’t right that Amazon only paid 0.5% of turnover in tax, apparently forgetting that corporations are charged tax on their profits not their turnover and Amazon makes very little profit if any.
 

[i] 25%
 
Copyright David C Pearson 2015 All rights reserved
 



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