Management Kills Profit

Premise A: The primary purpose of business management is to reduce uncertainty about the future – making outcomes more predicable by reducing risk.

Premise B: Profits in business come from taking risks.

I can’t help but wonder if this means that management, in the long run, kills profit.

Help me understand how A is in alignment with B?

4 thoughts on “Management Kills Profit

  1. Ed: I disagree with your premises.

    A) As Drucker used to say, management has two basic purposes: marketing and innovation. If the premise you offer were true, then the “best” management would simply shut the doors and send everyone home: Risk is eliminated and the outcome is 100% predictable.

    B) Is too unqualified to be meaningful: It’s like saying “Profits in Business come from hard work.” It’s true, but not all hard work creates profits – only the RIGHT hard work. Similarly, not all risks create profit – only the RIGHT risks.

    But then, it wouldn’t be as interesting to headline the post, “Bad Management Kills Profit”.

  2. As per Drucker, it’s marketing, not management, that has those two purposes.

    I think management is there to optimise risks and profits. Not to maximise or minimise one, but optimise both.

    Just like driving a car. Optimising speed and fuel consumption.

    Management is also there to make sure that risk-taking doesn’t deteriorating to gambling.

  3. First of all, I love these provocative questions.

    As far as Drucker goes ok I’ll buy the marketing answer. Just look at Betamax. BUT, all business success has elements of risk and reward over time. It is the evaluation of risk vs. reward that is management’s job to manage. It is also a constant monitoring of components and the use of innovation and learned experience to respond to force. It is constantly asking provocative questions or making provocative statements of the team that takes part in this dynamic environment. Like Ed’s question – it ain’t that simple!

    Those that don’t take risk and don’t innovate don’t have to shut their doors. Someone will shut them for them.

    An observation: I am looking for Angel investors right now. And my experience in this is that the vast majority, when I interview them, have a common thread; they have gone through boom and bust cycles. In evaluating me they are evaluating the risk/reward of whether we will make it or not, and most importantly my team’s ability in “making it happen.”

  4. Thanks all for the terrific dialogue on this post! I have purposefully stayed out of it. Thanks for helping to clarify my thinking on this.

    John, I believe our difference lies in the old is/ought dichotomy. My premises are based on my observations of what see “is” versus what “ought” to be as far as how management is typically practiced.

    In my opinion, far too often, management is spending cycles reducing risk rather than stimulating innovative thinking.

    Tom, good to hear from you my friend.

    Jim, I am glad you like the question.

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