A college business professor once dazzled his class by reducing the world’s myriad businesses to a single sentence: “All companies do one of two things; they make or sell a product or service.”
For years, I thought this guy was a genius, until I started working in the financial sector. I realized right away that services are products, so I could shorten his statement to “All companies do one of two things; they make or sell a product.”
With more experience, I realized he was completely wrong. The statement should read: “All companies sell a product.”
That’s it! Simple language. Companies sell products. Making products costs money. That’s why manufacturing is on the cost side of the balance sheet. Selling products makes money.
So many people around the world are pointing at the US right now, blaming the Americans for causing the world economic tsunami. They are specifically targeting the greed of American consumers, who used credit to by products, and blame the laziness of American workers, who don’t make products anymore.
While many people are saying the Americans are now receiving their due for their greed and laziness, it is important to point out that the allegedly good and hardworking countries are also suffering too. So, producing products is not insulation against economic downturn. Next, it should be noted that those countries that built their economies on manufacturing were largely making products for the US market. The greed and excessive credit use of American consumers produced the demand for those products and created employment in those foreign countries. Finally, if the Americans did go back into the manufacturing sector, this would eliminate the need for overseas factories, which would result in widespread unemployment in the very countries who are pointing their finger at the greedy, lazy Americans who buy too many products which they refuse to make themselves.
America has become the eternal middleman. But this is not necessarily a bad thing. The golden rule of business is: you must sell products to make money. You don’t have to make products to sell them.
When I was working at a large private bank in the US, the senior vice president told me a story about the bank’s first foray into real, brick and mortar, manufacturing business. The bank invested heavily in a soap powder factory in China. The bank sent monthly checks to the local manager, who sent back reports of how soap production was going. This was in the early days of capitalism in China and the ability to earn wages drove the Chinese laborers to work twenty hour shifts, seven days per week, with no bathroom breaks. Soap production in this factory was higher than any similar project the bank had ever undertaken anywhere else in the world. Back in New York, the bankers were congratulating themselves on their great success. After a while, however, they noticed that there was one thing missing from the manager’s reports. There were no sales. So, a representative flew from New York and took a tour of the factory.
Sure enough, there was a huge, factory, which operated like a well-oiled machine. The workers were at their places, running three shifts, twenty-four hours per day, 365 days per year. Everything seemed to be in order. The New York banker noticed there was one massive building, the biggest building in the complex, which they hadn’t toured.
“What is in that building?” he asked.
“That’s where we store the soap after we make it.” Said the factory manager. He went on to explain that every few months they had to build a larger warehouse to accommodate the growing quantity of soap.
“But aren’t you selling the soap?” asked the banker.
“Yes, we want to sell the soap, but no one ever comes here to buy it.” Said the manager.
“What is your marketing plan?” asked the banker.
“We are willing to sell soap to anyone who comes to the factory.” Answered the manager.
An employee believes that his work, his labor, somehow generates an income. This has been his working experience his whole life. Somehow, punching that clock twice each day caused a check to appear at the end of the week. An owner realizes that work, labor, and manufacturing all cost money. Only sales bring money into the company.
My experience has been that the bulk of people are employees and always will be. They do their job because someone tells them to, and they have no idea where or how their salary is generated. This is the mentality that causes factory workers to protest the closure of a factory whose products no longer have a market, or of manufacturing sector employees pointing fingers at the people who bought the products they were producing and calling them greedy.
One of my largest clients in New York was a holocaust survivor. Let’s call him David. David was a Jew, born in Poland. His parents were killed when the Germans marched in and began rounding up Jews. His Christian neighbors took pity on the fourteen year old boy and hid him in a cave in the mountains. He spent a period of years, alone, starving in this cave. When the war ended, he was so weak and malnourished he could hardly walk. He went into the city looking for work, but no one would hire him because he looked so pathetic. He saw some men moving furniture and begged them to let him help. He tried to lift a single chair, but collapsed. The men handed him some bread and sent him on his way. The same thing happened again and again, with people handing him a little food and sending him away. He became slightly stronger and sometimes was able to work for an hour or two before getting fired.
One day when he was fired, the employer handed him a bottle of vodka as payment. Not knowing what to do with the vodka he inadvertently wound up selling it to an allied solider. It was the most money he had ever seen in his life.
He used the money to buy food. Then he worked as a laborer, and used his meager laborer wages to buy vodka, which he sold to soldiers at a profit at the end of each day. Very quickly, he saw that working as a laborer made no sense, as he could sell a single bottle of vodka at a profit in the morning, walk back to the distributor, buy more vodka and sell it again in the evening and make more money than he could laboring.
Still malnourished, he found the back and forth too physically demanding, walking to and from the distributor buying single bottles of vodka. He convinced the distributor to extend him credit, to give him a whole crate of vodka, which he would sell and return that evening to pay for. He used his small vodka profits from the previous day to pay a man with a donkey cart to carry the vodka for him.
When I met David, nearly fifty years later, I asked him to tell me about his assets. We were in his plush office on the twentieth floor of a skyscraper in New York City. He took me to a massive window and began pointing at buildings.
“I own that building. That building. That building…”
“Sorry, for a moment there, I thought you pointed at the Empire State Building.”
“Yes, I did.” He said, and moved on to the really important assets.
He kept pointing. At first I was trying to write the addresses down in his balance sheet, but realized the point of the story was simply that he was really, really rich and that on any given day, his wealth could be estimated in the billions, or maybe hundreds of millions, or zero and none of it mattered. He was alive. He was healthy. His children had attended the best American universities, and he had taught them to make money. His grandchildren were attending university, and they all did their internships in his many companies. And they had learned to make money. His wealth and his knowledge was an insulation: “Never Again!” he seemed to say. Never again, would he or any member of his family suffer the way he had.
That starving little boy in Poland, fifty years earlier, never made a bottle of vodka. He certainly didn’t pick up a hammer or pour cement in the construction of the New York skyline. But he created more jobs for more people than any laborer or craftsman ever did. I could spend a lifetime following the hundreds of thousands or even millions of workers whose wealth and prosperity was derived from working on one of David’s many projects.
And while David may not have been the one who taught me golden rule of business, he was the one who drove the message home. Sales, not manufacturing makes money.
All businesses in the world do one thing. They sell a product.