Organisation Design And Profit

Ok, let's start with the clichés first. We all know that the profit motive is at the centre of capitalism, the raison d'être of an organisation. So profit is the purpose of an organisation and the shareholder (to serve whom the organisation exists) is the primary stakeholder.The organisation uses various resources to generate a profit. In economic terms, it uses land, labour, organisation and capital (LLOC) i.e. all the resources it uses can be classified in some way or the other into the above heads. If we take the 4 Ms: man, machine, materials and method, they are merely a re-statement of the above LLOC. Yet, most organisations I know tend to confuse this balance, i.e. they tend to focus excessively on one or the other of the above baskets. In some companies I have seen, I notice an excessive and almost myopic focus on labour i.e. doing things. We have customers who tell us what to make from time to time. Through the TQM/ TPM/ six-sigma mindset that flows up and down the auto value chain, we all have this huge focus on the 4 Ms mentioned above. Most of the talk is about machine productivity, labour standards, (material) wastage, overall equipment uptime or line efficiency (OLE), inventory control etc. In other words maximising throughput per unit of capital employed. So either you reduce the capital employed for a given level of output (as in stagnating markets in the developed world where they use outsourcing and innovation to do this), or you maximise throughput for a given level of capital (as in developing countries, where demand is buoyant but capital is expensive and scarce). But the companies are only focused on doing thing

This article was originally published on November 23, 2007.