High profit margin holds an umbrella over the competitor.
Most businesspeople are aware the profit is not the same as profit margin. Profit is profit margin multiplied by the turnover of capital. Maximum profitability and maximum profit flow are thus obtained by the profit margin that produces the optimum market standing and with it the optimum turnover of capital.
Why is the worship of high profit margin likely to damage—if not destroy—the business? It not only holds an umbrella over the competitor; it also makes competing practically risk-free and virtually guarantees that the competitor will take over the market. Xerox invented the copier, and in all of business history very few products have been as successful as the Xerox copy machine. But then Xerox began to chase profit margin. It put more and more gimmicks on the machine, each developed primarily to increase the profit margin. But each of these new accessories also increased the price of the machine, and what was probably even more important, each made it more difficult to service the machine. And the great majority of users didn’t need these additional features. And so a Japanese company, Canon, developed what was not much more than a replica of the original Xerox machine. The Canon model was simple and cheap, and easy to service, and it captured the U.S. market in less than one year.
ACTION POINT: Is your organization guilty of worshiping high profit margins?
Managing in a Time of Great Change
The Five Deadly Business Sins (Corpedia Online Program)
* Source: The Daily Drucker by Peter F. Drucker