Profits and Ethics: Partners in Success

 

     I am going to start this blog with something I know is not true -- but, since I WANT it to be true, I will make it my postulate.

All companies want to do GOOD in hand with doing WELL.

     Doing good makes a positive impact on the community, society, the environment, and every aspect of life you can think of. Doing well involves making the company a commercial success.

     The way our economic systems are structured, it is easy for a company to turn away from the path of trying to do good in order to do what appears to be the most profitable process. The "bottom line" is the result of adding all kinds of numbers and projections together, subtracting costs, adding income, getting interest from positive cash flow, etc.

     In such a situation, it is easy to say "if I increase my costs, I will decrease my profits". Increase the number in the spreadsheet and it will give you the number you are expecting. So, doesn't that prove that your surmise is correct? Yes -- but only if all the numbers are completely independent of each other. There are usually dependencies among the numbers but they aren't always easy to recognize and companies (and their boards, owners, and stockholders) want stability and projections that they can rely on. Possible, but unproven, dependencies are not given enough weight to override that change of number in the spreadsheet.

     Let's take a number that is in every company's spreadsheet -- salaries. Increase salaries, decrease profits. That's what the numbers say -- once again, assuming independence between the numbers in the spreadsheet.

     The search, for the lowest salaries to be paid, leads to many things. How do you succeed in paying people less? Outsource to other locations that have lower wages. Pay just enough that there are enough desperate people willing to work for the wage. Eliminate safety measures, increase working hours without additional pay, intensify the working hours so the body and/or mind is always working at peak output and left drained and exhausted at the end of the day (crippling their ability to positively interact in any family unit). Lots of ways to wring the sponge.

     Lower wages equals greater profits -- that's what the spreadsheet says.

     But does that mean that higher wages equals fewer profits? You might assume so but here come the interdependencies. How much does attrition and turnover cost? Nothing directly -- but REPLACEMENT of those resources cost something. It costs a lot of something. Lower wages will lead to higher attrition and turnover (not that wages are the only criterion for such events). So, when you decrease that number in your spreadsheet, be sure that you increase the numbers for recruiting and training, and decrease the factors involved with productivity. And the more you decrease the salary number the more the other numbers have to change. A 30% attrition rate will cost more than twice that of a 15% attrition rate because you are not only increasing recruiting/training but constant turnover is a terrible thing for productivity.

     Productivity is related to more than salaries, of course. There are many factors and I won't even attempt to capture a majority of them within this blog. The takeaway is that productivity is a huge factor in profitability of a company and that concentrating on only one number independent of other factors is likely to be a very large mistake.

     Increased salary not only has an effect on productivity numbers but it also is a contribution to sales numbers. The more people who have money to spend on products, the more money enters the economic system so they can buy your products. Ignoring the distribution of people who have how much money -- the greater the number of people who can afford to purchase your product, the more you can sell. "Trickle up" is a real thing.

     Beyond that salary number, there are many other factors that involve treatment of employees, communities, and surrounding world. Some of those "soft" factors include equal treatment, positive purpose, comfortable work environment. good communication, and so forth.

     Profitable businesses recognize that racism, sexism, genderism, Xisms, and anti-Xisms all are counter-productive and hurt profitability. That can be shown easily within the spreadsheet based on productivity and sales. You don't want to turn away potential customers and, since creativity and abilities are well distributed within all of humanity, isms within the company will decrease the ability to produce and to compete.

     Closely related to "isms", harassment also decreases productivity and morale. Different from the "isms", harassment can, and does, occur within various groups and not "just" between groups. Positive treatment -- encouragement, acknowledgement, elimination of obstacles lead to improvement both within the individuals involved but also morale, productivity, and positive interactions with the customer base.

     The bottom line of this blog is that numbers within a spreadsheet are not independent. Doing the "right thing" can increase productivity, morale, positive interactions with the customer base -- which in turn leads to greater profits and dividends.

Going to Waste or Going to Waist: the dilemma of food distribution

     For many in my generation, our parents (usually mothers) implored us to "clean our plates", people were starving (at that time, "in China") and would love to have the food on our plates. Although not inherently a bad thing to not waste food, such requirements often caused problems by teaching us to ignore our body signals as to whether or not we were hungry. And thus, by trying not to waste our food, it often accumulated around our waists.
     Another aspect of this (which occurred to myself and, I am sure, many other children) is how did my finishing up my food help those in other places who did not have enough food? Portion control (especially countering the economics of supersizing) is an excellent goal to achieve -- eating the amount that is best for our health and with the correct composition and nutrition. But portion control only keeps us more likely to have healthy bodies (exercise and general lifestyle still factor in). It does not allocate more food to those who do not have enough.
     Assume that we each eat only what we healthily should. In the U.S., that would mean a net reduction in the average amount of food eaten. Less food eaten means less food purchased and a surplus of food produced. That surplus can be addressed by reducing the amount of food produced or by finding other markets for the food. Reduction of food production hurts the farmers (though many have already been shoved aside by the mass food producers) -- much better to find other markets.
     After correcting our portion sizes, we now have additional (the U.S. is already a net food exporter) food to send out to those who do not have enough. Raw food items, which are globally produced and imported and exported, are considered to be commodities. The price of commodities goes up and down but is about the same all over the world. However, the price of prepared food sold to people varies tremendously around the world.
     On December 31, 2018, the price of wheat in Kansas (in the U.S.) was about $5 per bushel. One bushel of wheat produces about 60 pounds of whole-grain flour or 42 pounds of "white" flour. Each pound of whole-grain flour is about 3 1/2 cups which is about the amount needed to make one loaf. Thus, each bushel of wheat can make about 60 whole-grain loaves and each loaf would have about 8 cents ($0.0833) of flour in it. If you insist on white bread -- it will have about 12 cents ($0.12) of flour in it.
     Eight cents of flour in a whole-grain loaf! Do you pay eight cents for a loaf of bread? Probably not. There are a number of factors that increase that price to what you pay. First, of course, a loaf of bread is not JUST flour. Depending on the recipe, there may be oil (or butter), yeast, salt, sugar, milk solids, and whatever. In addition, there are also equipment, labor, fuel/energy, and time needed to convert the ingredients to the loaf of bread. Second, the price of the raw material is not what you will pay at the market (either used within a product or by itself). There are transportation costs added, profit margins for each person/company which handles it, and storage costs.
     Of these costs, labor is the most variable between countries. Also, the general cost of housing, fuel, and taxes will vary. So, a loaf of white bread in Nigeria will cost about 1/3 the price in the U.S. In France, that loaf of white bread will cost about 40% of that of a loaf in the U.S. In Sweden, the price is about the same as in the U.S.
     Okay -- we have (in possibly overly verbose detail) shown that bread costs different prices around the world. It ranges from 1/3 to the same as in the U.S. We now have to compare world income. Bread costs 1/3 in Nigeria as compared to the U.S. but average household income in Nigeria is 1/28 that of the U.S.. This means that that loaf of bread has an effective cost (amount of household income) of 28/3 (9 1/3) of that of the U.S. In other words, buying a loaf of bread in Nigeria takes the share of average household income as equivalent of those in the U.S. paying $10 to $40 for a loaf of bread (lowest cost white bread is around $1 and higher, fresh-baked, bread may cost $4 for a loaf). On the other hand, average income in Sweden is about 90% of that in the U.S. so the difficulty of buying a loaf of bread in Sweden is fairly close to buying such in the U.S.
     We have now achieved a general knowledge of both cost and affordability of food within the world. How do we transfer that surplus of food from the U.S. to other countries (in particular, to those with low average household incomes)?
     In brief (finally, you may say!), the food must be either sold or given to the people. Selling to people in a higher income country is not a big deal. But those people about whom our parents referred when we were urged to "clean our plates" are much less able to purchase it. Many worldwide charitable organizations donate food to where needed in such cases but the food reaching the people in need usually depends on political stability and honesty.
     So, it is a significant problem. The people most in need have the least capability to purchase and, often, political obstacles to receiving it even if it is given to them freely. Cleaning our plates does not help them. It also does not help us if the portions are not appropriate. The problems and solutions about getting food to those who need it are primarily at the desired receiving end.

Social Media: Still no such thing as a free lunch

    I recently had a friend, who also uses one of the same Social Media sources that I do, complain about the way their contacts list was being used to send out advertisements to her friends under their name. For them, this was an item that made them consider dropping use of that Social Media source (I am deliberately not naming it because the problem is not really specific to that particular source -- call it YYY.) I responded to their message with a brief note about how all of the Social Media sources had to find ways to fund themselves and that if they chose to drop usage that was certainly their right but to recognize that the source had to be able to fund themselves.
    During the past 50 years, we have had a true technical revolution -- meaning that the ways that things interact have dramatically shifted. All change causes discomfort and the need to adapt new methods to work with them. However, as I have talked about in some earlier blogs, money -- which is the representation of labor and other resources -- still needs to be able to be moved around so that people can pay for their needs to live.
     It may be difficult for many people to remember so far back but, once upon a time, everything was paid for in cash of the local economy -- or, possibly, private representations of cash such as personal checks or money orders/traveller's checks. My younger children have never written a check -- and it is quite possible they never will (they also may not learn cursive handwriting to be able to sign a check or contracts -- but that is a different story). The first credit card (or what we would call a credit card) was invented around 1950. For the first couple of decades, a credit card was used more as a guarantee against payment with the card's numbers (sometimes imprinted from a raised surface) associated with an account which was then printed with the purchase/fee amount and sent to the local bank or credit repository. The money was then authorized to be given to the merchant and a bill was later created for the person using the credit card. It was not until the 1980s that the landline phone system began to be used to connect directly to the credit card issuer's accounting system -- an "electronic" credit card. Of late, it is becoming popular to embed "smart chips" to increase security.
     With use of electronic credit cards, the user, the merchants, and the credit system became part of the "big data" pool of information. Privacy was greatly diminished -- laws were created to help protect privacy but certain information could now be accessed unless directly forbidden. If you buy a specific product at a specific store, you may get (in the mail -- or via email) a coupon for a competing product at a competing store (or the same product but at a different store). They know WHAT you get and WHERE get it -- and the purchase is specifically connected to YOU. The advent of even more abstract methods to transfer money such as Paypal means that all info within the capital stream can be matched against each other.
     So, with that general background, here comes the Internet. Others are better qualified to talk about how it evolved than I am -- but it basically started as a network interconnected by the Defense Department to help its contractors better communicate with each other. That expanded into a general connection of universities, colleges, and scientists which then expanded into connections between businesses as well as all the former connections and then the leap occurred for virtually everyone to connect with everyone else. This global interconnection used to be via voice phone, or physical letters and telegrams, or long personal trips.
    The old, physical, methods had a set of costs to provide services and a set of fees and charges to make sure all the people involved could continue to provide the services. The old pre-Internet was paid for by the Defense Department, and then divided between the Defense Department and the various businesses and then private companies started to be formed which helped with interconnection for a fee -- with transmission fees to the private companies paid directly by the end user. That is the way that the fee structure is largely set up now. People pay for connection (cable, DSL, analog phone, broadband ethernet, whatever) and usually have an Internet Service Provider (ISP) -- many times these are now provided by the same company. In some manner, the full amount of fees/charges must pay for the needs of all the people/resources needed to provide the service.
    We (finally, you say) now get to the Social Media. Social Media is a destination -- just like going online to shop is a destination -- or online to get information is a destination. Each destination has an interest in having you go there. But every destination has its own costs needed to provide the services that are attracting you to go there. Online shopping sites are a straight-forward equivalent of a "brick and mortar" store. Their costs are paid for via the profits on items that they sell. Online information access is usually paid for by the people who want you to have the information -- tourist destinations or government entities (taxpayer funded) or whatever. Private information destinations may be paid for by advertisements which exist to redirect you to businesses which have use an online shop finance model.
     But what about the Social Media? Every destination has to get you to decide to visit. Many of the major Social Media (and major "search" groups) decided that the services would be "free" to the user. In other words, people could work with the destination's services without paying any additional money directly. A "free" site can then entice people to come there by providing the services that they want to use without having to precisely decide on a fee structure for the services (which, if they give many types of services, could end up being very complicated). BUT, the Social Media still has people and other resources that are needed to provide the service -- and these people have their own needs to be able to live. So, every destination -- including Social Media -- must eventually bring in money to pay for those services.
     Once a service is provided as "free" it is very difficult to start charging up-front fees without having a mass departure of people from using the service. So, the fees must be charged in a manner that is "optional" -- you are not required to pay/use them in order to get the general services -- but enough people are expected to want to use them such that the money brought in is enough to pay for costs. The first, easiest, avenue is advertisements -- this has a long-time association with use of services and people expect it (even if the service initially starts with no advertisement). It is even a way to get initially "free" services changed to a fee-service without getting rid of users -- ("free" with advertisements but, if you don't want ads, you can pay a fee to get rid of them). The next step is to provide access to other services which, once again, may be "free" but have added inclusions that do cost money (for example games that allow you to purchase "extras"). A following step is to "sell the client list" to other fee-based advertisers (such as my friend complained about).
     There are various methods used to bring in the revenue needed to provide the services and resources -- some are very ingenious. The goal is to make you WANT to pay -- something that you have been persuaded that you NEED -- without ever making you doubt the reasons for which you initially went to the destination. It is a "tightrope" for some companies and they often sway back and forth between not making enough money to starting to lose people because they are unhappy.
     What other methods of bringing in money do you encounter? How do you feel about them?