When profits become harmful

Results matter. Numbers count. Margins speak. Bottom line is the topline. Financials are the headlines that occupy the thinking heads of boardrooms. These are the statements that determine the state of company affairs. These are the tenants that occupy the quarterly and annual reports. They impact company decisions.

That is why they become the starting and finishing points of all strategies. Perfectly fine. But equally important is what happens in the middle? What happens before them? What happens after them? The single-minded focus to have a healthy balance-sheet may jeopardize the balance of many other things. Things that are hidden in these numbers are like small benign cysts that if left unattended may become cancerous.

While working with many organizations, especially in Pakistan, it is heartening to see a gradual realization that the numbers need more than just accountants to balance the statements. Many traditional companies in the second-generation owners are exposed to the need to have specialist functional organizations. They have started giving some weight to things like RND and HR. Whether they are strategic in their priorities or not is still debatable. The West is driven by the Nasdaqs and Dows. Stock markets determine the health of the economy. These are the main measurements for investors to know where to put their money into. Having said all, numbers never tell the real story. In fact, many times they hide the reality. They cover the flaws. They colour the judgement. They mislead decisions. Numerical window dressing hides some stark realities. That is the difference between sustainable profits and volatile profits. Un-assessed profits can do more harm than good. Mind you, harmful profits are not fudged. They are profits that have been made at the cost of some important but not urgent elements. When overlooked, these elements become so important that they not only disrupt profitability but credibility of the company. Profits that harm the company repute are based on:

1. Milking the trapped customer— Industries that have few players normally feel unbothered about customer moods. They know that the customer has few choices and will come back to them. Pakistan’s five-star hotels industry is an example of this. There are very few five-star hotels in Lahore, Karachi, and Islamabad. Those that are there are charging “exorbitant prices with mediocre service levels”. Customers are in a trapped relationship with them. They are unhappy but have little choice to switch. That is why the hotels “rake” profits despite a disenchanted customer base. Such profits are “harmful” as they give a false cover to real problems. These customers are looking for alternatives and will not only quit but make many others quit too. As these hotels are not geared to sharp customer service and innovation, they will struggle to get their share back when people have alternatives. Leaders in such industries are content to look at the margins and feel they are doing something right to earn them. But that something will be nothing as soon as the trapped customers escape this forced relationship.

2. Overlooking people development— In many successful Pakistani companies, the mindset is “our people are good enough to bring profits, so why train them”. This mindset is dominant in most of the larger groups in Pakistan. Second generation family businesses realizing the importance of HR have introduced these departments. Unfortunately, their function remains administrative more than strategic. At best, they will occasionally indulge in courses for top tier, but do not have a holistic approach to developing people all through the ranks. This makes them very limited in tapping potential when they have money. Very few of these textiles have developed their top tier to think beyond being a supplier to distributors overseas. The average price of a top quality T-shirt sold to distributor is still USD 3, while it is sold under the brand for anywhere between USD 50 to USD 100. If they spent on their development and made capable of developing their own brand, the possibility, and profitability will multiply. Instead, they treat employees as “workers” with little investment in their intellectual development. The result of this limited vision is that most family businesses start failing in the third-generation era.

3. Underestimating competition— Harmful profits cause market myopia. This means that with the profit margins increasing due to some demand-and-supply market imbalance, companies become full of their own glory. This is not just in Pakistan but in the most developed and successful of companies. The Nokia case study is a classic example of how numbers can be so misleading. Nokia at one time was almost a generic name of the handheld devises. But then it became a victim of its own rise. From nearly 50 percent of the global mobile phone market in 2007 to selling its handset business to Microsoft in 2013, it is a story that shows how profits and revenues blind you to the most glaring of facts. Nokia failed to adapt to the rapid shift from hardware-driven, feature-rich phones to software-driven, ecosystem-based smartphones. As they say, the marketing graveyard is full of brands who thought they were there forever.

4. Greed over need— Another lure of profits is the temptation to get more and more while you can. It is tough to resist a surge in demand. Even the most trusted companies fall for it. Toyota is one name that was called “reliability in motion”. GM Motors had a tough time in the US market in the early part of this century. The lure of overtaking GM and become the number one global car in the world was too much. They expanded at a rattling pace. When quantity becomes important, quality becomes unimportant. Something as minor as the faulty car mats restricting the pedal caused accidents. In 2010, they had to recall 9 million cars. This not only made them revisit the accelerators in the cars, but also put the brakes on their relentless drive to take over the car market.

Businesses are meant to make money. Beware, at what cost? In fact, beware of calling key investments as costs. I remember asking an owner as to why they are so comfortable investing millions in machines but hesitate to spend a few thousands in people. He smiled and said, “because machines will not leave us, people will”. Ultimately, it is this limited mindset that limits the business.

Copyright Business Recorder, 2026