The Existence of Badly Run Firms...
I saw this article on management in the Economist, and I was fascinated by it. Yes, management has always been a key topic among economists, and it is not surprising that much work has been done on management-related subjects. Well, the article was talking about the survival of badly run companies, and I was intrigued by it cause it was the first time that I start to think about the relationship between behavior of firms and market structures.
As we all know, a free market economy by encouraging competition among firms will hence result in firms becoming more and more efficient. On paper, that makes a lot of sense, since the emergence of competitors will encourage firms to use more efficient methods of production, as well as eliminate all those firms that are inefficient as well as unproductive. Now, the way a firm is managed is crucial in determining its performance and efficiency. However, management has always been tough to measure so it was always difficult to compare how empirical data compares with theory.
Now, according to the studies of 2 economists based in LSE, they attempted to measure the performance of management in companies through interviews as well as an arbitrary ranking system which they derived based on the managers’ responses. According to their research, the American companies were the best managed, followed by the Germans, the French and the British. However, in all the countries there was a wide range of scores. Apparently, their work shows that the better-managed the company, the better the company’s performance hence proving the fact that management is indeed a key factor of a company’s performance.
However, badly run firms still survived. According to the authors, competition tends to weed out young, badly managed firms, and management practices also tend to be better in those industries in which profit margins are and there are many rivals. Also, government regulation also affects the managerial performance of firms.
Now, this disparity between real life data and paper work suggests that there are still plenty of holes in economic theory. I mean, in the first place, could the difference be due to the fact of how incentives work? I mean we always assumed that all firms are profit maximizing, but am the CEOs and mangers profit oriented? Maybe more work needs to be done on the role of managers in firms. I mean, how do they actually affect a firm’s performance?
Hmm, those are some ideas for pondering. But it does seems that the free market economy is still not at a full stop yet, and that there are still much room for improvement.
As we all know, a free market economy by encouraging competition among firms will hence result in firms becoming more and more efficient. On paper, that makes a lot of sense, since the emergence of competitors will encourage firms to use more efficient methods of production, as well as eliminate all those firms that are inefficient as well as unproductive. Now, the way a firm is managed is crucial in determining its performance and efficiency. However, management has always been tough to measure so it was always difficult to compare how empirical data compares with theory.
Now, according to the studies of 2 economists based in LSE, they attempted to measure the performance of management in companies through interviews as well as an arbitrary ranking system which they derived based on the managers’ responses. According to their research, the American companies were the best managed, followed by the Germans, the French and the British. However, in all the countries there was a wide range of scores. Apparently, their work shows that the better-managed the company, the better the company’s performance hence proving the fact that management is indeed a key factor of a company’s performance.
However, badly run firms still survived. According to the authors, competition tends to weed out young, badly managed firms, and management practices also tend to be better in those industries in which profit margins are and there are many rivals. Also, government regulation also affects the managerial performance of firms.
Now, this disparity between real life data and paper work suggests that there are still plenty of holes in economic theory. I mean, in the first place, could the difference be due to the fact of how incentives work? I mean we always assumed that all firms are profit maximizing, but am the CEOs and mangers profit oriented? Maybe more work needs to be done on the role of managers in firms. I mean, how do they actually affect a firm’s performance?
Hmm, those are some ideas for pondering. But it does seems that the free market economy is still not at a full stop yet, and that there are still much room for improvement.
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