An Overview

In a society where most people are employees and consumers, it is easy to think of businesses as "them"-as impersonal organizations, whose internal operations are largely unknown and whose sums of money may sometimes be so huge as to be unfathomable. Perhaps the most overlooked fact about industry and commerce is that they are run by people who differ greatly from one another in insight, foresight, leadership, organizational ability, and dedication-just as people do in every other walk of life. According to Forbes business magazine, "other auto makers can't come close to Toyota on how much it costs to build cars" and this shows up on the bottom line.

"Toyota earned $1,800 for very vehicle sold, GM made $300 and Ford lost $240," Forbes reported.

If the economy is to achieve the most efficient use of its scarce resources, there must be some way of weeding out those business owners or managers who do not get the most from those resources. Losses accomplish that.

Bankruptcy shuts down the entire enterprise that is failing to come up to the standards of its competitors or is producing a product that has been superseded by some other product. Before reaching that point, however, losses can force a firm to make internal reassessments of its policies and personnel.

These include the chief executive, who can be replaced by irate stockholders who are not receiving the dividends they expected.

'd he whole management team of a corporation can be replaced when out, e financial interests realize that the business would be worth more if engaged by someone else, and who therefore take over the business, in order to run it better and more profitably with a different set of managers.

Sometimes just a few shifts in key management personnel can turn a company around, as happened at General Motors which, in 1997, required about 10 more hours of labor per car than Toyota but narrowed the gap to less than 3 hours by 2001.

A poorly managed company is more valuable to outside investors, when they convinced that they can improve its performance, than it is to existing owners. These outside investors can therefore offer existing stockholders more for their stock than it is currently worth and still make a profit, if that stock's value later rises to the level expected when existing management is replaced by better managers. For example, if the stock is selling in the market for $50 a share under inefficient management, outside investors can start buying it up at $75 a share until they own a controlling interest in the corporation.

After using that control to fire existing managers and replace them with a more efficient management team, the value of the stock may then rise to $100 a share. While this profit is what motivates the investors, from the standpoint of the economy as a whole what matters is that such a rise in stock prices usually means that either the business is now serving more customers, or offering them better quality or lower prices, or is operating at lower cost-or some combination of these things.

Thus profits and losses work together in a market economy to replace personnel, products and whole companies and industries with better alternatives. The net effect of achieving higher levels of efficiency is a higher standard of living for the consuming public. Moreover, this process is never ending because its problems can never be solved once and for all. Changes in technology, in the company's internal personnel and in the surrounding economy and society present ever-changing challenges to be dealt with, all under the constant threat of losses, as well as opportunities for profit.

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