Product wise utilization of business resources

A small manufacturer was making machine tool parts and as he was not able to improve productive utilization of resources (His being a small business in the machine tools field) decided to give up the business entirely. But he was a welding consultant, a class by himself and acclaimed as a ‘super expert’ for solutions and welding quality. As long as he kept on manufacturing he used his really productive resource, his welding expertise, at a very low rate of productivity (lower costs) and more than average returns or ‘very good’ returns.

Another illustration also shows a change of business to utilize productively the managerial resources of the business. A successful though still fairly small, manufacturer of patent medicines decided some twenty years ago that he did not get full productivity out of his highly trained and highly paid management group. To attain higher productivity he decided to switch from supplying a certain line of products top managing businesses engaged in the mass distribution of branded packaged and nationally advertised goods. The company stills runs its original business successfully. But its has systematically acquired small branded goods companies that, for lack of management, had not been too successful : a company making dog food, a company making toiletries for men; a company making cosmetics and perfumes, etc. In each case it has supplied a management that raised the business to a substantial and highly profitable position.

Profitability considerations alone should not, however, normally lead to changes in the nature of the business. Of course, a business can become unprofitable as to be abandoned. But almost always market standing, innovation or productivity would have counseled its abandonment much earlier. Certainly profitability considerations limit the businesses an enterprise might go into. In fact, it is one of the main uses of a profitability yardstick to warn against such businesses and to prevent management from pouring money and energy into bolstering the weak, ailing and declining, rather than into strengthening the strong and growing, among its ventures. At the least a good profitability yardstick should block that most dangerous and most deceptive of all alibis for following the line of least resistance: the argument that an otherwise unprofitable venture pays for itself by “absorbing overhead” (the accountant’s translation of “two can live as cheaply as one,” and as irrational and questionable as the original)

But if the decision to go into a business is sound on the basis of market standing, innovation and productivity, if it is sound according to what makes a business it is the responsibility of management to make it produce the needed minimum profit. That, bluntly, is what managements are being paid for. And if a management cannot, over a reasonable period of time, produce the minimum profit needed, it is in duty bound to abdicate so as to let another management try to do the job properly.

Of course, objectives are not a railroad time table. They can be compared to the compass bearing by which a ship navigates. The compass bearing itself is firm, pointing in a straight line toward the desired port. But in actual navigation the ship will veer off its course for many miles to avoid a storm. She will slow down to a walk in a fog and heave to altogether in a hurricane. She may even change destination in mid ocean and set a new compass bearing toward a new port – perhaps because war has broken out, perhaps only because her cargo has been sold in mid passage. Still four-fifths of all voyages end in the intended port at the originally scheduled time, And without a compass bearing the ship would neither be able to find the port nor be able to estimate the time it will take to get there.

This simple way of saying is that a business must be managed by setting objectives for it. These objectives must be set according to what is right and desirable for the enterprise. They must not be based on the expedient or on adaptation to the economic tides. Managing a business cannot, in other words, depend on “intuition.” In fact, in the modern industrial economy with its long time span between a decision and the ripening of its fruits, the intuitive manager is a luxury few companies, large or small, can afford. And profit in a well managed business is not what one happens to make. It is what one sets out to make because one has to make it.

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