As every business owner knows, starting and operating a business successfully requires continual decision making: What type of business to choose and why? Where to get financing to get the company up and running? Whom to hire—or fire—and promote? How to attract customers? How to deliver what you promised, on time and on budget, profitably?
How does one know how to make such decisions? Why not just maximize the bottom line? Maximizing profits is the proper goal, but it does not give any guidance about the means to achieve it. Efforts to maximize profits could entail skipping quality control, shipping defective products, or even using forced labor; all attempted by some companies—with poor long-term outcomes.
Unlike other species that have been programmed by evolution to promote their own survival, we have no automatic knowledge about the goals and the means to aid our survival and flourishing. Tropical fish, for example, instinctively gravitate to warm waters with plentiful food, and grizzly bears instinctively seek habitat where they can find food and mates. But for humans, there is no automatic, instinctual means of survival.
If we want to flourish—or to be profitable in the long run—we must discover the knowledge about the goals and the means to do so. Lasting business success is not achieved by acting on impulse or through shortcuts, as Volkswagen discovered when it tried to cheat on emission controls. We also must adopt a long-term orientation, because human survival and flourishing entail a life span, not just what we do today, or next month. Likewise, business concerns long-term value creation, not just maximizing quarterly profits through whichever means.
Fortunately, we can discover the knowledge required to achieve goals in the long term, through experience or systematic research, by observing and thinking. We hold such knowledge in the form of principles: condensed generalizations that can be applied to countless concrete situations. There are principles in every field, from nutrition to engineering to advertising, that help fallible beings without automatic knowledge to reach goals such as health, sound bridges, and sales. The most fundamental principles to guide human action, including profit seeking, are the principles of ethics.
‘Fundamental’ refers to the root of something, something that gives rise to and shapes everything else. Ethical, or moral, principles shape a person’s character and life course. An honest person is very different from a con artist trying to make a career out of deceiving others; their lives will take very different paths. Similarly, someone who strives to treat people justly will have a very different character and life than someone who manipulates and exploits others. The moral principles of self-sacrifice and self-interest also have opposite outcomes. A person who chooses self-sacrifice as a principle, such as Mother Teresa, will have a very different life from someone who chooses self-interest, such as Steve Jobs or another wealth creator.
Achieving and sustaining long-term profits is only possible by applying moral principles, not self-sacrifice but self-interest. Self-interest, however, is not based on whims but must be objective—as first argued by Ayn Rand. That is the second principle: the objective requirements of human survival and flourishing constitute the standard of value by which self-interest is determined. In other words, only actions that facilitate and benefit the life of a rational human being—such as productive work—advance a person’s self-interest. Therefore, initiation of any physical force or fraud is ruled out. In business, the objective requirements of long-term profitability constitute the standard of value, also ruling out the initiation of force and fraud.
The actions that achieving objective self-interest, and long-term profitability, requires are spelled out in seven principles—also identified by Ayn Rand: rationality, productiveness, honesty, justice, integrity, independence, and pride. Rationality is the primary one—it is the reality principle which guides us always to adhere to facts, by observing and using logic. Rationality is the fundamental requirement of long-term profitability. To build a business and make it succeed, an entrepreneur must adhere to facts to identify and execute an appropriate strategy: mere wishful thinking does not finance the business, get productive employees hired, or attract customers. Nor will mere pretending turn cash flow from negative to positive.
The rest of these action principles elaborate what rational action and long-term profitability require—you can learn more by reading my book or other posts in this blog. For inspiring examples of companies that have achieved long-term profitability by acting on these principles, see BB&T (particularly under John Allison’s leadership until 2009) and Canadian Bank Note company.