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same percentage in the
Net profit margin Net
supermarket business
profit as a percentage of
would be considered phe- Critical Performance Factors 107
gross revenue.
nomenal. The value here,
as with so many financial metrics, comes from comparison with
a standard. In this case, the meaningful comparisons would be
(1) with other companies in the same industry and (2) against a
company’s own historical profit margins. Both are valuable to
different groups, but for different reasons.
If you’re part of the management of a publicly owned cor-
poration, you’re likely interested mostly in the comparison with
other companies. For such companies, net profit margin is
published in the financial press and, to some extent, it will
affect the price of the company’s stock. If you hold stock or
options in the company, of course, you may be affected per-
sonally as well as professionally.
By contrast, if your company is privately owned and you
have a management role in delivering profit performance,
you’re probably most interested in current performance com-
pared with past performance, because continuous improvement

The Growth Curve Significantly Affects
Profit Expectations
Note the reference above to a “mature” software or
drug business. Now think back to the company life cycle chart in
Chapter 2, Figure 2-1. It’s important to avoid thinking that start-up or
relatively new companies can deliver the same kind of profit perform-
ance as successful, mature companies with most of their infrastructure
in place, because often they can’t.A new company must spend money
to establish its initial market presence and its branding, to build pro-
duction capacity, and to strengthen its management team.These costs
will often lower its profit margins below those of a more established
company that may be inherently less profitable, but that has already
absorbed those costs in years past.This is why, to understand the real
strength of a company, it’s key to access historical trends that may
show profit improvement and future business plans that may show the
level of profits that are attainable when these costs are over.