How does a business make good profit? When we read the book title “Good Profit” we asked ourselves, is there such a thing as bad profit? Then we read about concepts like:
• Empowering people enables them to generate more value
• Empower people by giving them clarity on what you’re trying to accomplish
• Hire for values first, then skill and knowledge
• Humility and integrity are important values
• Pay people for the value they create vs their job title or years of service
These concepts resonated with us when we read Charles Koch’s Good Profit: How Creating Value for Others Built One of the World’s Most Successful Companies.
How to make good profit
The book contains fascinating foundational philosophies but it’s difficult to quickly extrapolate a list of actionable items. Rather than summarize the book here, we pull concepts out and elaborate on them so that business leaders can implement them.
A little background
Koch is the CEO of Koch Industries, Inc, the 2nd largest private company in the US, valued at over $100 billion. He guided his multinational firm to great success outpacing competitors, attributing that success to his “Market-Based Management” framework.
MBM is a scientific approach to management that applies the principles that allow free markets to prosper. It harnesses the power of markets inside a firm, hence the name Market-Based Management. Koch details these free market philosophies and their origins in economic, political, and sociological frameworks. He stresses that if you’re going to be successful implementing MBM, you need to grasp and apply them holistically.
To summarize, to make good profit, you create an entrepreneurial culture inside your company by creating clear direction, empowering, measuring, and incenting the right behaviors.
We definitely recommend reading the book. Here’s a book summary including the 5 dimensions of MBM and the 10 guiding principles/values. In the meantime, here are the basic concepts of the system you can put into practice to make good profit in your business.
Five ways a business leader can make good profit
Create a vision that is good not only for your company but for all. The difference between profit and good profit is that profit benefits your company; good profit also benefits your employees, the customer, because your offering products and services that consumers really want and need, and society as a whole. As always, it’s important to be extremely clear about what you’re trying to accomplish. Create your vision, values, and mission and communicate it often.
Give authority to pursue the vision. If you give employees the opportunity to think and behave like entrepreneurs, they’re more fulfilled. If their talents are used and they’re part of doing something worthwhile, they’ll generate more value. This matches research we did in 2016 called What Your Employees Look for in Their Work. At that time, we culled through the top thinking on the subject and summarized it into these things that all employees want:
1. Challenging, engaging, and meaningful work—to make a difference
2. Discretion and control over their work—input into when, where, and how the work is done.
3. Managers who respect them and appreciate their contributions
Hire for compatible values first, then skills. You can’t train for values but you can for skills and knowledge. Generally, a job candidate has your values or not. An employee is more likely to be successful and stay at your company if her values match the company’s. Especially important are values like integrity, honesty, and humbleness.
Pay for the value a team member creates. Koch cites the difference between rewarding sales volume vs profitable sales. He also points out that it’s OK for employees to make more than supervisors when you pay for value created.
Train and incent managers to be coaches vs order-givers. MBM allows workers more access to the decision-making process which means supervisors can coach workers in decision-making and problem-solving vs making all the decisions and solving all the problems themselves. You’re harnessing the dispersed knowledge of everyone instead of a handful of people at the top.
While we think Koch’s MBM is a great approach, and in fact, have been using much of it in our coaching practice, it may not be for everyone. It puts a lot of responsibility on individuals which increases their accountability. There’s more opportunity for action but with that, more opportunity for failure. However, we believe it’s hard to make profit, let alone make good profit, if employees feel stuck in jobs where they have no real say in how the job is done.
If you want to learn more, we’re giving an hour-long presentation of the book at our next quarterly business planning session.
Our quarterly Growth Plan Workshop is where you create (or refine) your company’s 1-Page Strategic Plan. You also walk away with a 1-page detailed action plan for the next 90 days. The workshop is designed for small business owners and their managers and has been running quarterly in central Indiana since 2010. Read more about it or register here.
Thur., June 28, 2018, 9 – 3 pm
Holiday Inn Indianapolis Airport, 8555 Stansted Dr., Indianapolis 46241
Here’s what one Growth Plan Workshop attendee said, “… 1 million details transformed into clear and focused priorities.” Publishing Company Owner, Bloomington, IN
Whether you join us or not, we hope you enjoy and reap the great benefits that are possible from the book Good Profit and we hope you make good profit!