The secrets of the leading in companies with high profitability

The secrets of the leading in companies with high profitability, author Dorin Bodea, General Manager and Senior Consultant, Result Development

 

In recent years, the economic reality has changed at an accelerated rate, and in developed countries, such as the USA, Germany, France etc., the companies’ profitability is dangerously close to 0%. The German Institute of Public Auditors (IdW) shows that the companies’ profit rarely exceeds 5% of the turnover, only in less developed or emerging economies such as the Romanian economy.

There are many explanations for the sharp decline in profitability: global competition, declining demand and / or with limited opportunities, lower than the supply etc. Typically, the leading in most companies intervenes to stop the decrease in profitability through three measures: cost reduction, innovations development and changing the marketing strategy.

But, beyond these general measures applied both in companies with high profitability, and in those with low and negative profitability, is there a significantly different leading practice which explains the difference in profitability? In other words, what does the leading in high profitability companies do significantly different than the leading in companies with low profitability?

To answer this question, we appeal to the Result Development study from 2012-2013, conducted on 108 managers (27 general managers, 43 top managers and 38 middle managers) from 27 companies (8 multinational companies and 19 national Romanian companies).

According to the study results, the leading in companies with high profitability is distinguished from that of companies with low and negative profitability primarily by two fundamental practices:

1. An entrepreneurial practice aimed at constantly creating added-value for the business through the development of innovative projects, ownership and encouraging risk-taking.
2. A managerial practice aimed at maximizing results in a predictable way, characterized by determining what is effectiveness (doing the right things, which is relevant for the business, focusing on the processes and focusing on results).

In companies significantly more profitable than the others, these two practices go hand in hand, complementing each other, being integrated into an organizational culture with a strong entrepreneurial accent. The leadership model – of creating organizational consensus – in these companies is a predominantly transformational one, differentiating itself by emphasizing the following five practices:

1. Stimulating the imagination and creativity of the employees at all organizational levels;
2. Personal consideration of the employees at an individual level, with motivations, feelings and distinct values​​;
3. Continued and sustained actions of aligning the employees to the company strategy and objectives;
4. Developing a coherent feedback system, absolutely necessary for the building of a shared organizational reality;
5. Encouraging change and continuous improvement at both managerial and operational level.

The secret of leading in companies with reference profitability consists in practicing a model of leadership which maximizes the results obtained by the continuous creation of added-value at a business level.

Knowing what makes the leading in companies with high profitability different compared to the other companies, we could say that this is the formula of significant and sustainable business growth.

But how could such a model, with these practices, be applied by the leading of a company? Let’s take two examples: an Austrian family company, a reference trading house – Schachermayer, with a tradition of over 176 years in business, present in Romania since 2003, and reference company in the tobacco industry – JTI.

In the case of Schachermayer Romania, the 2008 crisis strongly affected the profitability, the company being in a construction related field. After taking measures to halt the decline, the leading assumed a three-year loss plan, but with the prospect of significant growth and profit recovery for 2013. By adopting a mix of entrepreneurial and managerial practices, the plan consisted of developing innovative projects and new business lines, and conquering new segments of customers and a reference market share, enabling the return to healthy profitability. The leading orientation on what is effective for the business, especially on the development of entrepreneurial processes and projects for stimulating and capitalizing the imagination and creativity of the employees, was able to bring annual growths of 30% in turnover in the last three years and determined the business transition on profit.

In the case of JTI, it was not the crisis that caused a change in leading perspective, but the future economic reality of the whole tobacco industry. Today, the global market for tobacco is being compressed by the tough measures states take against smoking. In other words, in a compressed market, the sales are lower, and profit decreases. The only thing we can do in this situation is to propose ourselves to fall less than the market, meaning: to conquer the market share. How? For example, in the case of JTI, the leading chose a radical change in organizational culture, the replacement of old practices with others – entrepreneurial, flexible and innovative practices. The goal is, of course, the stimulating and capitalizing the initiatives and the creativity of the employees, creating business value which enables it the conquest of new market share. Certainly, the competition’s reaction will not fail to show.

Here are two case studies, two reference companies which have addressed the problem of how to achieve a significant and sustainable business performance in a similar manner, seeking to maximize results through the continuous creation of plus-value at all organizational levels and through the practice of a transformational leadership model. So the formula of a leading supporting a true entrepreneurial revolution really works. But let’s not forget that without management and leadership, any entrepreneurial project is likely to dissipate.

Now, we can only wait for the results…