Simplicity is the ultimate sophistication is a phrase often attributed to Leonardo Da Vinci. However, it is hard to believe that someone like the 15th century Italian polymath who created such complex stuff, paintings, sculptures, engineering marvels and so on, would actually talk about simplicity.
We digress and must return to the subject of this blog, which is based on the premise that business, its administration and hence the study of business administration can also be perceived as very simple stuff.
The intention is definitely not to undermine the past or ongoing work of many great minds in this field, but only to highlight the fact that an elegant view helps in making sense of what goes around us in the world of business. Just to clarify, Wikipedia describes elegance as beauty that shows unusual effectiveness and simplicity!
Anyone who has ever attended school would know that much of Physics can be understood by Newton’s three laws of motion. Likewise, it is my opinion that a fundamental equation of business helps us understand much of it. And, no prizes for guessing, here it is: Revenue – Cost = Profit.
At first glance, we can bucket major areas of management studies into either a revenue or a cost focus, though there would be elements in them which would qualify for classifying into the other focus as well.
Incidentally, this is similar to the way faculty are organized at IIM A; they have a primary and secondary area each. For example, strategy and marketing could qualify to be primarily revenue drivers whereas operations management, management of IT and Organizational Behaviour could be the key drivers to sustaining cost competitiveness.
The underlying desire in this experiment of classification is to see whether every business problem could be looked at in terms of understanding which drivers are causing the problem in the first place.
People who are familiar with the practice of consulting firms will also appreciate that the revenue, cost and profit approach is a well-established framework in the case study method.
Another pertinent area of manifestation is in financial analysis of businesses, where we see revenues, costs and profits in the holy trinity; balance sheets, income statements and cash flows.
However, it needs to be stated that activities on the revenue side like strategy and marketing somehow appear to be more glamorous and fields of operations and OB (organisational behaviour) less so.
There is enough research evidence available to prove that companies who have achieved sustainable growth manage all aspects of their business equally well, be it the revenue side or the cost side.
On an individual level, I have observed that many organizations practice a policy of requiring its employees who aspire to reach to senior management positions do a lot of job rotations in seemingly unconnected roles.
Perhaps, these rotations in different divisions which could be revenue making or just cost centres would help in providing the employees with a more holistic view of business.
A suitable metaphor to this theory could be the yin and yang of creativity and discipline which are both essential for a talented artist to achieve and exhibit his true potential.
If you are not interested in profits (for you are part of a not-for- profit organization), there is still no escape from this universal law. It only means that revenues must at least equal cost.
Every other for- profit organization which want to survive, thrive and flourish needs to ensure that they abide by this principle. What separates the great companies from the good and the not-good ones is the level of awareness of this equation and its active pursuits.
Nandan Nilekani, while addressing the students of IIMA last month in a packed out session, explicitly mentioned the fact that, in the early days of Infosys’ existence, its employees used to be mindful of whether they were creating value and hence profits, every single day!
This paranoia is definitely not omnipresent, for there are many examples of companies which do not seem to be running after profits but are in pursuit of other goals like market share and valuation (e-commerce and taxi aggregators, anyone?).
Given the elegance of our beloved equation, does it make any sense to mindfully violate it for long periods of time? Intuition tells me that it is not going to be a sustainable model.
Aniruddha Srinath,is in the PGPX (2016-17) batch at IIM Ahmedabad. He has more than 7 years experience in Manufacturing Strategy and Operations. He has a Master’s Degree in Manufacturing Engineering from the University of Michigan, Ann Arbor, USA. (Featured Image Courtesy : www.flickr.com)