- - Tuesday, October 13, 2015

It was page 243 that really summed it up for me – the point that brings it all together.

Of course, what am I talking about? I recently read a book that anyone in business, non-profits or any type of organization for that matter should consider reading. While the book takes experiences from one of the largest and most successful companies in the world, the principles behind that business can be used anywhere.

Back to page 243.

“It turned out we were going to make more profit than usual from a particular deal, and a few employees at the table started joking and laughing about how they had outsmarted our customer.

“Sterling … was livid. ‘Stop it! You boys are way out of line! Our customers are our friends. They are the ones that keep us in business. And we don’t make fun of or laugh at friends. It’s not right. And if we continue doing it, we won’t have any friends and we won’t have any business. If we’re going to have friends and business we have to build trust by treating them with respect.’

“At that point, anything I said would have been anticlimactic. So I kept my mouth shut in silent admiration, cheering in my head, ‘Go on, Big Guy!’ Sterling, as usual had said exactly what needed to be said when it needed to be said.”

Something that gets misrepresented in our country is that big businesses – and small businesses – only care about profit. However, the head of one of the largest private companies in the world points out it is not just about profit. It is about good profit.

Good profit is not only about making money. While this is important to any business that would like to continue being a business, the author of this book argues that pursuing good profit will make any company or organization even more successful.

Of course, what is good profit?

It results from customers freely voting with their dollars. It results from offering products and services that improve peoples’ lives – not products and services that result in the best government incentive. It comes from empowering employees to act as individual entrepreneurs to discover the best way to serve customers.

Good profit can only be created when long-term value is created for everyone. Not everyone that works for a company, but everyone – customers, employees, shareholders and society.

To ensure good profit is pursued, the author of this book suggests implementing something called Market Based Management (MBM).

I’m not going to try to explain MBM in such a short column, because this author has spent nearly 50 years trying to implement it – and even he will tell you that he is still trying to figure some parts of it out.

But, over the past 50 years he determined MBM should be applied through these five dimensions: vision, virtue and talents, knowledge process, decision rights and incentives.

By implementing MBM, the author says any organization can pursue good profit. This means determining where an organization can produce the greatest long-term value. It means finding the right people with the right values and skills. It means putting these people in the right roles and giving them the proper authority.

These people, though, must be held accountable, as well. And when people do create value – again for everyone – they should be properly incentivized.

Sure, this all sounds good and well, but I haven’t yet explained the true benefits of pursuing good profit. Trust me, it works.

The author of the book took over the family company in the 1960s, when his father passed away. At that time, it was worth $21 million. Today, he continues to serve as CEO, and the company is estimated to be worth $100 billion. In fact, over the last five decades, it has exceeded the average S&P 500 growth by 27-fold.

The CEO now expects the company to double its value every six years.

The endless pursuit of good profit has led to such success. Fittingly, the title of the book I read is “Good Profit.”

It highlights the need to consistently create value for all of society. It is unwise to put simple profits ahead of value creation, the author says. And it is especially unwise to avoid pursuing what customers value.

Think Blockbuster. Its leaders didn’t think they should adapt to the times by offering a movie delivery system or streaming online. Instead, they ignored what their customers valued.

The move from in-store movie rental to online streaming is an example of creative destruction. This happens when a new innovative mechanism replaces an outdated one. The author of Good Profit says companies should routinely work at finding the next innovation.

Instead of running from creative destruction, organizational and business heads should pursue it because it is just another way to create more value for society.

And that is the ultimate goal — long-term value creation. But, don’t just take my word for it. Read the book as I did. The author of “Good Profit” is Charles Koch and the book comes out Oct. 13.

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