Margin Measures Success Best.

For more than 15 years, I have taken every possible opportunity to communicate the fact that foundries are in business to make money, not castings. In point of fact, most of you have, by now, gotten that message--otherwise your foundries probably wouldn't have survived this long.

For the past 15 years, TDC's essential mandate also has been to help clients improve profitability.

But both of these objectives--to make money and to improve profitability--bring to mind an interesting and enjoyable debate that I have been participating in for more than 20 years (my total tenure as a management consultant). The essential question of that debate is: What is a better indicator of success: profit dollars or profit margin?

The Long-Term Answer

Like most of life's important questions, the answer to this one depends on your point of view. For example, most financial types focus on profit dollars as the "true" bottom line. There's no arguing the point that the size of a company's current bank balance is a powerful measure of success. Publicly held companies also tend to focus on profit dollars, most often in terms of quarterly and annual dollars earned per share, as this measure of financial return (and harbinger of a publicly held company's stock price) is what most shareholders and stock analysts watch.

But, in my way of thinking, margins measure success best. Margin seems to be more long-term in nature, as its size is largely independent of short-term demand fluctuations. In other words, while profit dollars may pump up egos, bank accounts, earnings per share and stock prices in the short term, only strong and improving margins can measure the quality of management, the quality of a business as a long-term investment, and an organization's ability to sustain itself through the inevitable ups and downs of life in a basic industry.

Managing for Margins

Quality is an important point here. A profit-dollar focus mostly is a focus on quantity (usually of sales) rather than quality (of customers, facilities and management). Profit dollars as a measure of success, therefore, says much more about economic conditions that are beyond a company's control than it does about management's ability to manage--and that's what we all should consider.

Margins also seem to be increasing in importance as the years pass. Routine annual price increases were common 10 or 15 years ago and were essential aspects of a foundry's profit picture. Those days are long gone. More recently, as the nature and caliber of foundry competition continues to intensify, it's more true than ever that "there is no such thing as a new market for metal castings." Thus, almost every bit of real (i.e. net) sales growth for your foundry must come at someone else's expense. In this environment, it's unwise to expect that a foundry will "grow into profitability." Management must manage for profitability, and that means managing for margin improvement.

The best way to do that is to focus on the cost side of the equation. Foundries moved in this direction in droves during the 1980s by sacrificing short-term profit dollars to invest in programs designed to dramatically improve product and process quality, thereby lowering costs, boosting margins and, ultimately, pumping up the profit dollar picture. That scenario is repeating itself today as foundries invest in cycle time reduction. Again, a short-term cost is incurred to realize a longer-term gain. Companies focused on strengthening margins seem to take this longer-term view and manage accordingly.

Resonating Improvement

Managing for margin enhancement also strikes us as highly sustainable and, well, manageable. It resonates with the continuous improvement philosophy and is almost entirely within management's control. Virtually any foundry can "make profit" (and it never ceases to amaze me how many poor ones continue to do so and stay afloat), but only the well-managed ones can point to a strong and improving margin picture as proof.

Publicly traded companies often have been criticized for a short-term focus on pumping up earnings per share and stock prices. But it's a vicious cycle there--sales growth fuels share price growth, which attracts more investor capital, which must be spent on more growth. That's one measure of success that may or may not translate into a strong profit margin picture.

But for all you CEOs, especially those out there who own or manage privately held companies, seeking margin growth is a better way. Doing so creates businesses that are not just good short-term financial investments but also better employers, suppliers, competitors and corporate citizens in the long-term. Unlike the converse, strong margins also mean a healthy and sustainable bank balance.