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Why companies can stumble when they put profit first.

Why companies can stumble when they put profit first

For around 40 years from the 1960s, US aircraft-maker Boeing's performance was sky-high. The world's airlines were clamouring for such market-leading passenger jets as the short-haul Boeing 737 and the long-haul Boeing 747 Jumbo jet. The company's leaders, who would 'eat, breathe and sleep the world of aeronautics', could apparently do no wrong. But when, in 1998, they shifted their focus to shareholder return and return on investment, the company took a dive.

Citigroup, ICI and General Electric similarly began to stumble when they overtly made shareholder value their principal objective. Kay explores the reasons for this 'profit-seeking paradox' in the March 2010 issue of Management Today.

He argues that some of the most successful (and profitable) businesses in the world concentrate mainly on something other than profit - for example, a philosophy of excellent customer service or the desire to tackle technological challenges.

Kay coins the term 'obliquity' for the principle that complex goals are often best achieved indirectly. This, he explains, is because the modern world is so full of uncertainty and complexity that the problems we encounter are not always clear. Goals can be difficult to pinpoint; people and circumstances often change. Decision-making is therefore seldom scientific, although decision-makers sometimes try to make it seem so after they have made up their minds.

Kay argues that, just as the happiest individuals are not necessarily those who put the pursuit of happiness first, a less direct approach to achieving business objectives can offer the opportunity to adapt strategies in response to events.

Companies can gain a competitive edge when they have a carefully developed management model that is strategically tailored to reflect the values and objectives of the organization. In Volume 21, Issue 1 of Business Strategy Review, Julian Birkinshaw, professor of strategic and international management at London Business School, examines how to choose the best management model for a given situation. He highlights the importance of four linked steps - understanding, evaluating, envisioning and experimenting.

The key to understanding, he explains, is being explicit about the management principles being used to run the company. Evaluating means deciding whether the company's management principles are suited to the environment in which the business is working. Taking a creative approach to management, meanwhile, involves envisioning new ways of working and experimenting with them.

Professor Birkinshaw claims that companies frequently adopt the same management models as their competitors. 'We need to develop a more comprehensive understanding of what management is really about to make better choices,' he explains.

In Financial World's March 2010 issue, Witzel highlights how making the right choices helped some firms - notably HSBC, Santander and the John Lewis Partnership - to emerge from the credit crunch in a healthier state than others. Witzel reflects on the thinking of Paul Laudicina, chairman of AT Kearney, who identifies four characteristics that the winners had and the losers lacked: strong leadership; a powerful and well articulated vision; a flexible organization and culture; and the ability to look outside their own markets.

'Top-performing companies do not wait to see what the future holds and then respond to it,' Witzel concludes. 'They begin by preparing not just for one future but for a variety of possible futures.'