Profits at what price?
Pfizer had two choices when it discovered that each vial of its vaccine held six rather than five doses.
One was to push the FDA to declare a vial contains six doses. With this decision, Pfizer would make more money. Because it gets paid for each dose, each vial could now be priced twenty-percent above the agreed-to purchase price. The premium would all drop to Pfizer’s bottom line.
The alternative was to remember the original price met or beat Pfizer’s expected return rate, which would be huge given the quantity of vaccinations involved. Producing a vaccine for an unpredicted global pandemic is a once-in-a-lifetime opportunity for a pharma company. The extra dose could be a contribution, helping nations vaccinate more people than they had planned.
Pfizer’s leadership team decided on the FDA route, choosing higher profits over societal benefits. Many brands do. The leaders will make higher bonuses, and their stock options will be worth more. But at what price to their brand’s reputation?
Walmart and Amazon are two companies that pay their workers poorly relative to the wealth of their owners. They chose profits over workers. So do companies who ship their work to China when domestic production is still profitable.
Most companies set prices that do not account for the adverse effects of their products on others. For example, the prices of fossil-fuel based products do not account for the cost of climate change. Here we witness profits over societal well-being.
Many management teams, to meet quarterly profit expectations, delay needed investments. Or, to keep stock prices high (and, therefore, the value of their options to buy stock shares at a fixed and usually lower price), they use cash to buy back shares rather than invest in people, products, or processes. In this case, they chose profits over company growth, which might have created more jobs and, ultimately, higher stock prices.
Many companies could deploy their resources and capabilities to address critical social and environmental causes. But they keep their focus on the most profitable markets – their push for profits crowds-out more meaningful work.
All these choices are consistent with Milton Friedman’s declaration that a business’s purpose is to make a profit and anything else is bad for society. Let philanthropy help the world.
Friedman believed prices lead markets to generate the best outcomes for society. Given this belief, it was logical to suggest a trade-off between profits and anything that lowers profits. But markets do not work as he assumed because prices rarely reflect all societal costs and benefits. I am not suggesting that this reality should deter us from capitalism, where the pricing mechanism determines what gets produced or not. But the failure of markets to maximize socital well-being should lead us to challenge Friedman’s conclusions that there is always a trade-off between doing well and doing good.
And that is the challenge for managers in this decade. They need to be “both-and” creative thinkers, not “and-or” rigid leaders. They need to find ways to advance company valuations and societal well-being. Indeed, this is the suggested path by The Business Roundtable, CEOs of leading US corporations.
Here are three ways to create “both-and” opportunities.
Communicate your long-term strategy to your investors, Board, and, if a public company, Wall Street, so you are not pushed to maximize quarterly profits. Unicorns like Uber were not profitable, but their vision created valuations of over a billion dollars. Established companies can do the same if there are pivoting their company. IBM successfully did this until its former CEO could not deliver on her pivot’s promises, costing her job.
Identify the leverage opportunities for your core capabilities – the one or two broad skill sets at which you excel. Are there causes that need them? Event companies and corporations such as Amazon, Starbucks, and Microsoft have reached out to Biden to help with vaccine distribution. They will make a buck, excite their workers, and enhance their brands.
Create a deeper purpose for your company that opens commercial opportunities in blue-ocean spaces. Patagonia is an excellent example of a brand built for a worthy pursuit, clothing products better for the earth. A recent new offering to repair old branded items reinforces this purpose.
Yes, Patagonia gives up the near-term profit of selling a replacement product. But the repair service builds a reputation that ultimately leads to more loyal customers, more brand awareness, and more robust financials longer term. Why? Because strong brands create price premiums and defensive moats around a company’s offerings. They also attract and retain employees and build trust with communities where they may want to expand operations.
What’s the opportunity cost of your pursuit of profits? How can you become more profitable with a stronger brand?