"Goal" is Vulgar

The Goal: A Process of Ongoing Improvement is a best-selling business novel about a production plant which is trying to “make money”. Authors Eliyahu Goldratt and Jeff Cox bring great insight about managing everyday business in their easy to read book. To read, people don’t need to know business terminologies; authors explained all the business jargons in layman language. Though the book was written 25 years ago, it incorporated so many contemporary topics on business in the discussion. However, I have a very disappointing memory with this book from my undergraduate studies.

What is the goal of the firm? Goldratt Answers: making money must be the goal. Nothing else work in its place. If the goal is to make money, then, an action that moves us toward making money is productive, and other actions are non-productive (P 40). Authors clarify further, and say: To make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow (Goldratt 49). However, I strongly believe that the goal of “making money” is vulgar. How could we think that making money is the goal of a firm while businesses are also considered as global citizen? Businesses also do interaction with society, and thus have some responsibility towards the society rather than only making money. Today firms also spend billions to fulfill their social responsibility.

Rather than making money, maximizing stockholders wealth should be the goal of a firm because it also maximizes welfare in the society we live in. So, to maximize shareholders wealth, one more element will be in the Goldratt’s matrix, i.e., customer satisfaction. So I would say that the goal of a firm is to maximize shareholders wealth by increasing net profit, return on investment (ROI), and cash flow through providing value to the customers simultaneously.

Another factor was missed by the authors in their novel, i.e., time. In accounting, we treat that firms are also another entity just like a person on this earth. Though a person is not immortal, we assume that a business entity will survive for indefinite period of time. Authors did not define whether the goal of making money is a short term goal or a long term goal. Because if this is a “short-term” goal we would do most harm to the firm. We would do everything to make money for the business. However, if you set that making money is a “long-term” goal then managers will try to be in the business while they will also devote their resources to make money. And if a firm wants to be in business in a competitive market, it would adopt all the good practices that others are following in the marketplace. At this point, I would like to share my personal memory regarding the book, The Goal: A Process of Ongoing Improvement.

While I was doing my undergraduate studies in Ashland in University, Ohio, I had to participate in GLO-BUS business competition as a part of my Business Capstone class in my senior year. GLO-BUS (http://www.glo-bus.com/) is an international business simulation where the focus is on the competitive business strategy. In GLO-BUS, teams of students from all over the world run a digital camera company in head-to-head competition against companies run by other class members. Just as in the real-world, companies compete in a global market arena, selling digital cameras in four geographic regions—Europe-Africa, North America, Asia-Pacific, and Latin America. In the simulation, the challenge is to craft and execute a competitive strategy that results in a respected brand image, keeps your company in contention for global market leadership, and produces good financial performance as measured by earnings per share, return on investment, stock price appreciation, and credit rating.

In the competition in GLO-BUS, I did pretty well, for instance, at the end of the first week, the rate of return for my company was 245 percent while the second group had 25 percent! I was always in the top 5 in the competition. My professor was also surprised because I was the first person in Ashland University that was in the top 5 world-wide from the very beginning. What’s the secret? I have read Eliyahu Goldratt’s The Goal: A Process of Ongoing Improvement earlier, and implemented all the idea from the book. In the competition, I tried to reduce cost as much as possible. The formula to make money on the GLO-BUS was clear: I had charged huge price for a very low quality product. In the short-term, I was able to make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow by providing low quality but high-priced camera to the customers.

However, you can’t continue making money for so long by providing low-quality products for a high price to the customers. Thus, within few day market figured out my trick, and stopped buying my low quality but high priced camera. Within five weeks in the competition, I was thrown away from the “best performance”. After I was discarded from the competition, I followed all the good business practices to get back to the competition but failed to do so. Market did not like my low quality product anymore. I have learned my lesson: Market never forgives, and market never forgets. A business can’t sacrifice its quality in its service or product to do cost reduction. Cost reduction must be done while quality is either increased or at least remain the same. Furthermore, we must understand that price and quality is proportionately related.

Anyone will read the first half of the book in just one breath. However, after the first half, the book lost its flow. From this book, first time I got to know about “bottleneck” and how to manage it not only in the industrial settings but also in everyday life. The goal in the book is seriously flawed: The goal of “making money” is vulgar and misleading too. The goal of a firm should be maximizing shareholders wealth rather than making money. I would give a 4 to Eliyahu Goldratt, and Jeff Cox’s The Goal: A Process of Ongoing Improvement for teaching me a great lesson: Market never forgives, and we must make money through providing value to the customers to be in the business for forever.

Source

Goldratt, Eliyahu, Jeff Cox, The Goal: A Process of Ongoing Improvement. North River Press, Inc., 1992.

GLO-BUS (http://www.glo-bus.com/)