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Monday, April 30, 2007

It's about 76 years too late..

This amazing article by Advertising Age contains the following paragraph:
While the notion of chasing profit rather than share has been gaining steam in other sectors, it's a realization that's come to share-obsessed Detroit mainly in the past year. It's driven by the fact that GM, Ford Motor Co. and Chrysler Group "have no other choice" than to focus on profitability to survive, said Edmunds.com senior analyst Jesse Toprak.
In other words, the big three's business model was to focus on market share, regardless or in spite of profit. Perhaps at one time pursuing market share coincided with pursuing maximum profit, but there is no universal law in economics that pursuing market share is synonymous with pursuing maximum profit.

We teach students that firms survive and make the best decisions when they do so in the context of maximizing profit while still ensuring that consumers engage in voluntary exchange. It is refreshing that the AdAge article's headline is "GM Finds Profit Religion as Toyota Overtakes It: After 76 years, Will No Longer Focus on Market Share." At the same time, the statement is absolutely terrifying.

As the automobile industry has changed dramatically over the past 20 years it is not immediately clear that GM, Ford, and Chrysler (Diamler-Chrysler, I know) have made good decisions. My take on the Big Three is that GM makes the most cars, Ford makes the best cars, and Chrysler-Dodge make the best looking cars. Perhaps if all of the best of the different three were put together you would get...hmmm, perhaps Toyota.

Profit maximization - it's not just a classroom concept anymore.

I might suggest that more CEO's read Microeconomics Demystified rather than the latest management "guru's" suggestions on how to drive a company into the ground.

Living and working as I do in a major steel producing region, what befalls the auto industry is of interest to me. (Among other things, I do local economic forecasting.) What I've read lately suggests that the problems of US automakers go somewhat deeper than simply chasing market share. It's that they have apparently decided what they want to produce (or are capable of producing), produce it (regardless of what it appears than consumers want), and then discover (oh, the horror) that they have to slash prices in order to move their merchandise.

So (assuming that this analysis is accurate, which it--and the market-share analysis--may well not be) the problem would still appear to be a lack of focus on profit, just a different lack of focus.

(Those of us who must pay attention to the steel indistry have a fund of examples of a lack of focus on profits close at hand.)
We are all taught that profit maximizing is the number one objective of any business. Perhaps Detroit's automobile industry stategically began focusing on share to ensure a long-term profit.

Years have gone by and now focus has turned to short-run (survival) thus focusing on profitability. Economists will always have an answer to a problem; mostly answered by a long-run, short-run goal comparison.
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