The Corporate Paradox
In my last article I stated that “In publicly traded organizations, ownership is divided among shareholders, and CEOs are hired by a board elected by shareholders. 71% of whom are institutional investors that are investing on behalf of someone else with promises of returns. Thus, executives prioritize shareholder interests, and their primary customer is the shareholders, not their employees, not the purchasers of their products or services.”
This is why salaries have been stagnant for decades and the prices of products and services are constantly on the rise to promote their agenda of infinite growth. However, in reality, this only contributes to inflation.
The truth is that there is a limited amount of money in the world, and every individual and company is competing for it. Companies expect to make more money every quarter and every year, setting higher targets for profitability. Even if they don’t achieve those targets, it’s still seen as a loss in projected profitability rather than a true loss in profits.
The Illusion of Endless Growth
Yet, with the limitation of available currency, the only way for some to make more money is for others to make less, or for more money to be printed, which further fuels inflation. Therefore, the ultimate goal of a revenue growth organization seems to be to amass all the money for themselves, leaving none for anyone else. However, if this were to become a reality, the company would no longer have customers and would eventually cease to make any money.
Thankfully, according to the CIA, in 2017 the gross world product (combined gross national product of all countries) totaled $127.8 trillion in terms of purchasing power parity. So we have a minute before one person has all the world’s capital, but there is a growing class divide as the wealthy become exponentially more wealthy. This results in economical imbalances and increased disparity.
Differentiating Revenue and Profit
This highlights the fallacy of revenue growth organizations, which becomes even more perplexing when you consider that revenue and profitability are two different things. Revenue refers to the total amount of money received by a company, while profit or earnings represent the revenue after deducting all expenses.
For context, in 2022, Amazon had a total consolidated net sales revenue of $514 billion, but a net income of -$2.72 billion. By comparison, Apple earned $394.3 billion in revenue with a net profit of $99.8 billion. The Fortune 500 annual ranking measures corporations by revenue, not earnings, putting Amazon at #2 and Apple at #4.
Stock Market Obsession
Since the dot-com bubble, many companies have focused primarily on growth, often using vanity metrics that may look impressive on the surface but do not necessarily translate into meaningful business results. Surprisingly, investors and stock traders continue to invest in these high-growth organizations, such as Amazon.
Looking at the stock market, as of the time of writing, Amazon (AMZN) has a price-to-earnings (P/E) ratio of -483, while Apple has a P/E ratio of 31.6. Or if we look at stock price, Berkshire Hathaway has the most expensive stock at $510,000 per share! Apple is at $186.68, and yet Berkshire Hathaway had an annual net income for 2022 of -$22.81B (-148.297 P/E) compared to Apple’s almost $100B from earlier. It’s worth noting then that stock price does not always correlate with profitability. This means that publicly traded organizations are essentially in two separate businesses: generating revenue and increasing stock prices.
The Influence of Board Members
Board members, who are elected by stockholders, become the true heads of organizations. CEOs are hired and fired by these board members who prioritize stock price. As a result, executives focus more on vanity metrics to attract investors rather than ensuring the organization is truly profitable.
To further emphasize this point, in 2022 Jeff Bezos’ net worth was $171B despite Amazon’s billions in profit losses. If we look at another company, Tesla has historically struggled to be truly profitable, yet it doubled its profits from 2021 to 2022, which surpassed the expectations of most analysts and propelled Elon Musk to the richest man in the world at $219B (Tesla earned $12.6B), even after his questionable purchase of social media giant, Twitter, with a leveraged buyout at 3x its worth today.
The Significance of Profitability
Why should employees care about profitability? Because it determines job security, raises, the need for additional hires, and the overall success of products or services. A successful product or service brings in more revenue than its cost, and the only way to achieve that is by creating something that adds enough value that customers are willing to pay for it. Therefore, a profit-focused company should also be product-focused to ensure sustainable profitability.
CEOs, board members, and stockholders should care about profitability because a revenue growth mindset carries a lot of risk. Sure, there is risk that another company will grow faster than yours, but companies that grow too fast risk:
- A higher debt-to-equity ratio that could result in owing more money than your business is worth.
- Increased overhead and cost of ownership due to the need to hire more people and invest more money into supporting the rapid growth that if not balanced appropriately can result in the “cash gap,” where bills are due before the cash comes in to pay them.
- Inefficiencies due to strained staff and processes not designed to scale resulting in slowdowns, bottlenecks, and mistakes, further driving up costs and lowering quality.
- Lower quality products and/or service to your customers resulting in less purchases, increased refunds, lower ratings, increased support costs, etc.
The Era of Disruption
Ninety percent of the companies that were part of the Fortune 500 in 1955 no longer exist today. Even massively successful organizations like Kodak, Polaroid, Blockbuster, Pan Am, and Compaq fell victim to disruptive forces. The general consensus is that these companies failed to innovate sufficiently to keep up with evolving demands and the capabilities of their competitors. According to the Harvard Business School, innovation refers to the creation of novel and useful products, services, business models, or strategies. It doesn’t always require groundbreaking technological advancements or entirely new business models; it can be as simple as improving customer service or adding features to existing products.
Ironically, if an organization neglects to focus on enhancing customer service or products, how can it truly innovate? This internal contradiction poses a significant risk and is the primary pitfall of an obsession with growth. A culture of innovation necessitates motivated employees and a customer-centric approach. Employees are not inherently driven by revenue growth; as Deci posits, they are motivated by autonomy, mastery, and relatedness. Customers likewise are not motivated to purchase from a company to help its bottom-line. Creating an environment that fosters these factors stands in contrast to the mindset of a revenue-focused organization chasing relentless growth. This is the reason why most large corporations just acquire startups and smaller companies in an attempt to buy innovation.
Conclusion
Companies that prioritize revenue over profitability turn revenue into a vanity metric, which can often distort their focus on meaningful business impacts and outcomes. While revenue and productivity are important, they should be considered in the right context alongside true success metrics. If you’re interested in learning more about tracking business outcomes, attend one of my upcoming events of “The Velocity Trap” or reach out to request your own session. You can also gain insights into the values, principles, and tools that promote business outcomes by tuning in to “The Agile For Agilists Podcast.”
