All Posts Tagged With: "profitability"
The Remedy for ROA Flatlining
TThe average return on assets of U.S. companies has steadily fallen to almost one quarter of what it was in 1965, and the trend line approaches zero in 2020. ROA is a measure of how profitable a company is and how efficient management is at using its assets to generate income.
The decline in ROA has occurred despite steady improvements in labor productivity, which have occurred despite stagnant wages for the labor. As a result, businesses have been paying no more for an increasingly productive workforce, which pretty much eliminates wage control and productivity as factors in improving ROA.
So how can leaders reverse the trend?
John Hagel III and John Seely Brown address this issue in “Six Fundamental Shifts in the Way We Work” (HBR, August 17, 2010). The six shifts they mention are:
- Management practices and corporate institutions are fundamentally broken. Most have not yet figured out how to compete more successfully.
- The source of value creation is shifting from your stock of knowledge to the flow of knowledge, and most executives lag in understanding what this means for their companies.
- Management innovation is not enough: Institutional innovation, exemplified by China’s open production and design models and India’s open distribution models, are needed.
- A new kind of performance curve is emerging: The collaboration curve, which brings together participants in a carefully designed environment to make rapid leaps in performance improvement.
- Talent development is broader than training programs: People need to learn new skills and behaviors through their involvement in the work of the management system such as…
Engage Employees to Improve Performance
A study of 245 firefighters and their supervisors has shown that job engagement is a significant predictor of task performance and organizational citizenship behavior. The study, which is behind a firewall, is described by Bret L. Simmons on his blog.
The researchers measured job engagement through 18 questions organized by physical engagement, emotional engagement, and cognitive engagement. According to the article abstract, they found that “engagement, conceptualized as the investment of an individual’s complete self to a role, provides a more comprehensive explanation of relationships with performance relative to well-known concepts that reflect narrower aspects of the individual’s self.” The researchers were able to evaluate the impact of other factors including job involvement, job satisfaction, and intrinsic motivation on performance and behavior; they concluded these factors did not predict performance and behavior while engagement did.
According to Simmons, the researchers identified three antecedents of engagement: value congruence, perceived organizational support, and core self-evaluations. In other words, hire people who share and support your organization’s mission and values and who are self-sufficient and confident, and then provide development opportunities that align with your organizational values and your employees’ developmental needs.
In “Bottom-Line Value of Employee Engagement,” I wrote about a Gallup report that came to similar conclusions. Gallup defined a fully-engaged employee as emotionally attached to the unit and rationally loyal and found that “organizations that employ performance optimization management principles have outperformed their competitors by 26% in gross margin and 85% in sales growth.”
In “Employee Engagement and the Bottom Line,” I pointed to two specific…
20Jul2010 | Steve George | 1 comment | ContinuedA New Bottom Line for Schools – and the Rest of Us
Business thinking has corrupted our schools, according to Anthony Cody, a teacher and teacher-coach in Oakland, California. In an article posted December 3rd on Teacher magazine, Cody notes that business people saw a shocking flaw in our education system: “There was no bottom line. Unlike a business, schools had no balance sheet at the end of the year—no ‘metrics,’ no way to directly compare one school to another. No way to tell which school was a good return on our investment, and which was wasting the public’s money.”
To fix the flaw, a profit-minded accountability movement pushed for clear standards and tests to measure performance on those standards, and No Child Left Behind emerged.
It will not work. “As a culture and a species,” Cody writes, “we have too many problems that cannot be solved by a one-dimensional view of profit and loss.”
The truth is, focusing solely on revenue and profitability as the single bottom line for business doesn’t work, either. It’s why the balanced scorecard was born. It’s why the triple bottom line—giving environmental and social considerations equal weight to financial ones—has gained traction. And it’s a big reason we’re in the mess we’re in today with global warming and a broken healthcare system and greedy financial institutions and income that, for most Americans, hasn’t gotten much better in years. When all that matters is profit, nothing else matters.
Business thinking has corrupted education. It’s corrupted healthcare. It’s even corrupted business. New thinking is needed. “We must not trade our judgment and our…
3Dec2009 | Steve George | 0 comments | ContinuedPurpose-Inspired Growth
It’s only a matter of time before corporate social responsibility (CSR) regularly appears in Baldrige applications as a key success factor that differentiates a company from its competitors. It’s the direction a host of companies are taking not because they are suddenly altruistic, but because it makes good business sense.
In The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits (Pearson Education, 2006), C.K. Prahalad presents case studies of a dozen companies that have been profitable serving the “bottom of the pyramid,” the four billion people who live on less than $2 a day. In Capitalism at the Crossroads: Aligning Business, Earth, and Humanity (Pearson Education, 2007), Stuart L. Hart writes, “Recognizing global sustainability as a catalyst for new business development will prove increasingly important to corporate survival in the twenty-first century—the proverbial crossroads to the future.”
To show how mainstream such thinking has become, consider Procter & Gamble. Its new CEO has been busily promoting the company’s “purpose-inspired growth” strategy. Rosabeth Moss Kanter describes CEO Bob McDonald’s road show in “Inside Procter & Gamble’s New Values-Based Strategy” (Harvard Business Publishing, September 14, 2009). “McDonald calls P&G’s purpose the most consistent factor in a 171-year history of growth,” she writes, describing how the company developed a razor-and-blade innovation to reach lower income shavers in India and basic products for poor markets in Brazil. “The business in Brazil became a profitable global growth model,” Kanter states, “and not just for emerging countries. Tide Basic was recently introduced in the U.S.”
The Brazil…
18Sep2009 | Steve George | 0 comments | ContinuedEmployee Engagement and the Bottom Line
I recently wrote about how Sears correlated increases in employee satisfaction to increases in revenue. A topical BusinessWeek article provides more supporting evidence:
- Best Buy sees a $100,000 annual increase in sales at any location where employee engagement rises 2%.
- According to a 2005 survey, J.C. Penney had only 67% of its employees engaged. This year, its engagement scores climbed to 80%. The company’s earnings per share growth over the last five years is five times the industry average.
The focus of the first Item in Category 5 of the Baldrige Criteria is workforce engagement: How do you engage your workforce to achieve organizational and personal success? It’s a large and complex Item for a large and complex issue that includes how you determine the factors that affect employee engagement, how you assess it, how you create a culture and systems that support it, and how you develop people.
As Sears, Best Buy, J.C. Penney, and others have discovered, it’s also an issue that can boost your bottom line.
20Aug2009 | Steve George | 0 comments | Continued
