6 unwritten rules to create sustainable profitability



Fred Stawitz
06/17/2019

Tree in a field

Most corporate executives devote a good amount of thought toward how to make their operations profitable. While that serves as a laudable goal, it misses an important component. Companies can be profitable right up to the moment they’re not.

BP and Enron were once profitable enterprises. BP was profitably pumping oil from the floor of the Gulf of Mexico up until April 19, 2010. On the 20th of April, the Deep Water Horizon explosion killed 11 crew members and cost the company $65 billion. BP lost 55% shareholder value nearly overnight.
In 2000, Enron reported $979 million in profit. Then, December 2, 2001, it filed for bankruptcy with estimated losses of $74 billion and top executives headed to jail due to corrupt practices.

The point is that profitability today is not enough. A business operation must be sustainably profitable to provide some assurance that the profits will continue to accrue tomorrow.

Some definitions of sustainable profitability point to environmental sustainability. As employed in this context, sustainable profitability means profits are reasonably expected to be maintained at the same or higher level in the future.

The question then surfaces: How do we create Sustainable Profitability?
Consider that every result that is generated in a business setting starts with a management action. These can include creating a new position, hiring additional staff, building a new facility, delegating signature authority, and more. The list is nearly endless but there are some constraints—corporate management only has full control over what happens inside the organization. Therefore, the focus of this discussion will be limited to activities within the organization that are under management control and possible to achieve within the current spectrum of operations.

Business operations rely on a plethora of rules typically known as policies and procedures. Those rules are constructed by management to help guide employees in serving the function for which they have been hired. The rules that guide executive management in the pursuit of profitability are more abstract and tenuous, especially when concerned with producing sustainable profitability. They were unwritten, until now. Here are the 6 Unwritten Rules to Create Sustainable Profitability:

Rule 1: management acton creates workplace environment

Of any entity associated with a business operation, management leverages the most control over shaping the workplace environment which is defined by all the things that employees encounter in the performance of their duties. Management sets up the facilities, hires employees, configures the schedules, assigns or delegates the work, approves policies and procedures, provides access to resources, purchases equipment and systems, and much more.

Collectively, these components comprise the workplace environment as these are the things that employees encounter and which shape their daily experience on the job. Employees are simply an extension of management and take no actions that have not been approved by management either directly or through implication.

As important as the workplace environment is there is no easy way to characterize the various types of environments that employees might encounter. That changed with the publication of the book Don’t Run Naked Through The Office which defined workplace environments into 4 easy to remember categories related to the employee experience and exemplified with a weather metaphor: Supportive (sunny), Benign (windy), Contentious (rainy), and Antagonist (stormy).

These categories range from Supportive where employees are provided the means to be successful in their role to Antagonistic where the message from management is, we’ll fire you as soon as we can find a reason!

These 4 categories allow business managers to determine which type of workplace environment their employees experience and to determine if it makes sense to guide any alterations through their actions. They also provide employees a way to understand the types of challenges they face and consider how best to confront those challenges or whether to seek employment elsewhere.

Rule 2: workplace environment drives behaviour

The ease or difficulty of performing the work is a factor of conditions in the workplace environment. Obviously, the 4 different types of workplace environments discussed under Rule 1 each drive different behaviors. If resources are scarce, equipment unreliable, workers untrained, communication channels problematic then it can be difficult for employees to accomplish even the simplest tasks. Some employees are going to lose interest in fighting the system to produce positive results. In these environments, employee engagement may be low and turnover may be high.

Results can be significantly different when conditions in the workplace environment are supportive of employees successfully performing their jobs. For this reason, the workplace environment has a direct impact on how much work is accomplished and how well it is accomplished. In other words, the workplace environment drives behavior.

Try an experiment. Take a room full of people who are busy doing their jobs. Without notice, lock the doors. Shutdown the lights and cut off the air conditioning. Then watch how long it takes for behaviors to begin to change. Some people will become very disturbed immediately. Others may take a few hours, days or (if you're brave enough to leave it this long) weeks. But over time behaviors will change. They will default toward survival mode which may be entirely different for each individual in the room. Heritage, past experiences, training, traits, physical abilities, and a whole host of other factors contribute to how an individual’s behavior will change in stressful circumstances.

As stress in the environment increases, behavior will begin to shift. Some people may keep working as if nothing happened. Some may become chatty while others become quiet. Some may demonstrate fear of the unknown and seek a path of escape. And others may try to exert dominance. The bottom line is that how the behaviors will shift for any given individual is unpredictable but in all likelihood that shift will be disruptive of continuing to generate work product at the previous rate.

Rule 3: behaviour equals culture

Culture is a rather nebulous term which is often conflated with the workplace environment. It is useful to clearly differentiate culture and workplace environment which was defined under Rule 1. Culture, as it applies to a business setting, is best defined as the collective behavior of a group of people at a given point in time. Culture can be conceptualized as a snapshot of group behavior.

The overall organization will have a culture formed by the collective behaviors of the entire workforce. Each management unit may have a different subculture determined by the collective behaviors of the members of that unit. Every group of people exhibit a culture relative to their collective behavior that will evolve for better or worse as conditions in the environment they inhabit change.

Certainly culture is influenced by much more than behavior but in a business setting, the only component of culture that is visible and measureable is behavior. And, therefore, the only component of culture that can be influenced effectively by management action is behavior. So, focusing on anything other than behavior represents a rather useless pursuit.

Rule 4: functional culture always beats aspirational culture

A distinction needs to be drawn between two types of cultures that are represented in an organization: aspirational culture and functional culture.

Aspirational culture represents the culture or collective behaviors that executive management would like the workforce to exhibit. It is often represented by banners on the walls of facilities to remind employees of the desired behaviors. It may also appear as messages posted on the website to attract candidates to job listings. Often it is confused with corporate values and too often does not accurately represent the actual culture of the organization.
Only functional culture accurately represents the culture of the organization. Think of functional culture as an untouched photo of the collective behaviors of the organization—a snapshot. Aspirational culture is a photo that’s been altered to look the way management would like it to look. But having been altered, it doesn’t represent the real culture of the organization.

The difference between aspirational culture and functional culture—the culture gap—matters. A problem exists if management promotes a supportive, team-spirited culture when all the employees experience is cutthroat hostility.

Generally, the wider the culture gap; the more dysfunctional the organization.

Effective management will be constantly working to close the culture gap. Ineffective management will often exacerbate it, ignoring the fact that sustainable profitability may be an overwhelming challenge to achieve in a dysfunctional organization as various elements of the operation are working against each other.

Rule 5: culture determines productivity safety and customer service

As Rule 3 indicates Behavior equals Culture. Consider a culture where the collective behavior of the workforce demonstrates that employees are fully engaged with the work process and are motivated to produce quality goods and services for the customer. To have a fully engaged workforce is the substance of every management executive’s dreams. Unfortunately, too many executives don’t pay enough attention to the connection between their actions and culture and are, therefore, seduced into trying to manipulate employee motivation. This may produce short term results but over time it often has the reverse effect of demotivating employees as they discover that they have been duped.

Productivity, safety, and customer service have common roots. They all source from engaged employees. Low morale, distractions and low motivation are all signs of disengaged employees. And disengagement tracks to a culture where behaviors do not support productivity, safety or customer service.

Improvements do not come from mandating improved behavior. Remember the problem with aspirational culture? It is only aspirational. Genuine improvements come from changing the functional culture and that is a product of the workplace environment. Improve the workplace environment as experienced by employees on the job and behaviors they exhibit will begin to change which in turn improves the culture and improves performance, safety, and customer service.

Rule 6: productivity safety and customer service determmine sustainable profitability

While it may be obvious that productivity, safety, and customer service promote profitability, we’re looking for sustainable profitability. As defined previously, sustainable profitability means profits are reasonably expected to be maintained at the same or higher level in the future.

To see why we need all 3 contributors to sustainable profitability, we can try removing one. What if we have productivity and customer service? We’re providing lots of quality goods and services to customers who appreciate them. Profits are flowing but without safe operations, one serious incident can shut down production, alienate customers or wipe out profits.

What about productivity and safety? Lots of quality goods and services produced in a safe environment but no customers. No business can stay in business for long without customers.

What about safety and customer service but no productivity? The quality and the delivery of goods and services are both unreliable. Even great customer service cannot clear that hurdle for long.

Sustainable profitability requires productivity, safety, and customer service at the highest levels. Any deficit in this supply chain and either profitability or sustainability or both will suffer.

The Sustainable Profitability supply chain begins with management action which creates the workplace environment. The workplace environment drives behavior which equals culture. While there are two kinds of culture: functional and aspirational, the functional culture always prevails. Culture, or the collective behavior of the workforce, determines productivity, safety, and customer service which promotes sustainable profitability. And so, completes the connection between management action and sustainable profitability.

The 6 Unwritten Rules to Create Sustainable Profitability may be simple but they are certainly not easy as they involve the complexities of human behavior. This may explain why so many business executives tolerate a high level of risk in terms of being able to sustain business profitability. One would hope that it is not because they are pursuing an agenda that conflicts with the best interests of the organization and its shareholders.

But consider the benefits that could be gleaned in terms of profitability with an improvement in productivity, safety or customer service alone, even without the full effort to create sustainable results. These 6 rules delineate the path to innumerable improvements in corporate operations all the way from the team or project level to enterprise-wide activities. Anyone with an interest in process excellence or successful business operations would be well advised to write them down, learn them, and put them to use.

 

Notes: 

[1] RonBousso, “BP Deepwater Horizon costs balloon to $65 billion” (Reuters, Jan 16, 2018), https://www.reuters.com/article/us-bp-deepwaterhorizon/bp-deepwater-horizon-costs-balloon-to-65-billion-idUSKBN1F50NL

[2] Alex Chamberlin, “BP lost 55% shareholder value after the Deepwater Horizon incident” (Market Realist), https://marketrealist.com/2014/09/bp-lost-55-shareholder-value-deepwater-horizon-incident/

[3] Dan Ackman, “Enron The Incredible” (Forbes Magazine, January 15, 2002), https://www.forbes.com/2002/01/15/0115enron.html#264d11f73c9c

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