Back to economics and making money, even if technically economics isn’t actually concerned with money per se, but rather assets.
Primarily the goal of all firms is to maximise profit, failure to do this either results in the company failing, and going out of business or being purchased and subsumed by a more successful business (which ironically could be a good thing for small retailers and producers). The profit of a company is calculated simply by the total revenue of a company minus the total costs. There are always restraints on the total amount of profit that a company can make, the main three of these are technological constraints, informational constraints and market constraints. As discussed in a previous blog, economist define technology in a general way, as any method which influences the production of a good or service, as such the type of retail outlet chosen by a company is a technological constraint. For example the constraints on Novatech, a technology company, which relies on catalogue sales, differs to the constraints on Best Buy, a large superstore, which in turn differs from Maplins, which relies on many smaller stores, which further differs from the restraints on sellers based on Amazon and eBay. Companies are restrained by their nature as changing requires a large investment, which in turn affects future profits. Informational constraints occur as it is impossible for a firm to have all the information that may impact on its future growth and development, however gathering information costs resources including time. Workers are not robots and also may change productivity unexpectedly, furthermore it is not possible for a company to predict when a new technology, or new competitor may enter the market, all of these are informational restraints. The final constraint that a company faces is market constraint, this is constraints which occurs due to external market factors, for example if the global market suddenly shifts away from a product, increases a resource cost or any other external market factor. All factors influence the uncertainty level of firm.
Firms help to gain profitability by ensuring efficiency, both technological and economic. To ensure technological efficiency, firms need to produce goods or services using the least possible inputs, that is a firm which requires fifty workers and 50 units of capital to produce a good or service is more efficient than a firm which require seventy-five workers and 50 capital to produce the same good. Economic efficiency occurs when the firm can produce a good for the least possible cost. That is a firm that can produce a good for £8 per unit is far more economically efficient than a firm than that can produce the same good for £10 per unit. It is far harder however to predict economic efficiency as it depends far more on the relative cost of resources and is not a fixed number, for example a company which relies on oil rather than synthetic fuels may be efficient when the cost of oil is low however may be inefficient after a price hike in oil. Inefficient firms do not maximise profit.
When dealing with workers, companies help ensure efficiency by the use of two primary systems, command systems and incentive systems. Command systems rely on a company hierarchy to manage the workers, creating many hierarchs and layers in each firm. However managers may still have incomplete information regarding the workforce, and rely on the personal traits of the individual managers. Incentive systems work by offering incentives to workers for increased productivity. In a rather ironic system, incentive systems offer payment for workers who do their jobs! Many incentive schemes rely on share schemes to help motivate workers, however such schemes fail to have much impact if an individual has a negliable impact on the day to day operations of a firm. Alternatively several companies rely on a purely incentive pay system, where a workers pay directly correlates to their performance, despite still used considerably in the sales industry, this type of payment is on the decline due to minimum wage laws. The final action that companies use to try to motivate workers is the use of long term contracts, it is theorised that as the worker will be at a firm a long term it is beneficial to help improve the company and ensure its profitability, I have doubts with this however and can only see this working in a recession and when there is a limited number of job opportunities, in a booming economy workers are likely to be far more mobile and active in seeking an improvement to their current situation.
Most firms employ both systems to help ensure efficiency, as the management provide an easy way to disseminate information through the firm as well as a way to manage workers. Many companies also face a specific principle agent problem, ideally it is best that agents (workers and managers) work in the best interest of the principles (the firm), however agents often have their own agendas which may not benefit the firm as a whole, for example a manager may actively engage in behaviour to cast doubt on a superior to gain a promotion, this action however may not improve the firm as a whole, and may in the long run impede productivity.
It is also important to examine the types of businesses that currently exist in capitalist society. Proprietorships are lone traders, which tend to employ smaller workforces, in which the owner has unlimited liability. Unlimited liability is where the assets of the business and the assets of the owner are considered one and the same, including personal property, this means that if the firm owes a debt to creditors the owners personal assets can be seized to repay the debt, it is also likely that the firm would die when the owner is no longer capable of running the company due to ill health or death. The second main type is partnerships, which is effectively viewed as as coalition between sole traders, were all partners share risk and reward, these can be far more stable than lone traders, however may be slower to react as agreements may be hard to reach between partners. Companies are a mass coalition of share holders, all of which have limited liability, where the assets of the company are distinct from its owners, companies tend to be large, regional, national or global enterprises. Such large companies can however be inefficient in that decisions may be slow to agree on, and even slower to filter through the layers of company hierarchy. The company is however the most stable and long lasting options for investors.
All firms must operate in a marketplace, with different marketplaces being qualitative different trading environments. Some markets are characterised as perfect competitive environments, this is where many retailers compete selling identical products with no trading restrictions, this is often seen in primary industries such as mining and farming. Monopolistic competition exists where large firms compete by selling very similar but slightly different products, such as sports shoe retailers, and is best characterised by large firms, who rely on reputation and product differentiation to gain sales, large firms also actively attempt to block entry to new firms due to their sheer size and market dominance. Oligopolies exists were a limited number of companies compete to gain market share, all selling qualitatively similar goods. Finally monopolies exist where one company dominates a market virtually to the exclusion of all competitors; the most apparent example of this is in computer operating systems where Microsoft dominates by a clear margin (with a market share of over 90%). In order for consumers to gain the most out of a market, perfect competition is desirable as it helps ensure lower prices and increased internal efficiency. Market share has tended in the past to be regionally based, however since the growth of the web buyers are free to purchase globally, allowing smaller retailers into market places, encouraging growth and competition between retailers, as each seeks to offer a better deal than its competitors.
As can be seen the internal operation of a firm are essential in its successful actions in the external business environment.
Until next time.