“Profit taking is lazy” -Seth Godin

Great post from Seth Godin:

Once an organization reaches scale, particularly if it feels like a monopoly, it’s tempting to “take profits.”

This means less investment, fewer staff and a lot less care. Those things are expensive. Easier to simply keep the money.

And those things involve emotional effort. Easier to simply point to the bottom line, as if that’s the point.

‘Profit taking’ is a great way to describe what happens to management at mature companies.

In b-school, the famous concrete example of profit taking was Penn Central Railroad collapse. The short version: managers spent so many years taking profits, rather than ‘investing’ in rail maintenance, that their lines got to be in such disrepair they couldn’t afford to fix them.

One reason I like this example is that it challenges what people think is an investment. Maintenance is an investment? Yes. If you don’t maintain your home, it’s value will decline.

Another reason I like it: it serves as a good metaphor to help managers think about their business. What is our cash cow and how are we investing to maintain it?

But, it can also serve to challenge why managers stay inside the imaginary fences of what they think the business is. Are we a railroad company or a transportation company? Or, why can’t we make potato chips?

It is easy for managers to grow nostalgic about the cash cow and think their job is to defend it. As the way people listened to music changed to downloads and then streaming, ten to fifteen years ago, Universal Music Group defended its CD business, as if CD’s was the business.

Music was the business. Eventually UMG managers realized that people still listened to music, but technology was changing how they listened to it in ways that the CD could not compete with. Now they make a bulk of their revenue from streaming.

Profit taking leads managers to breaking my business rule #1: have what people want. It subtly shifts their job from giving people what they want, to keeping people’s choices limited to what the company has.

I call this the, “We’ll give you anything you want, as long it is what I want to give you,” strategy.