Basic Management Issues Are Critical To Profitability

Most of the differences between the most productive and profitable company and the least, are very basic management issues that people often have difficulty distinguishing from interpersonal and non-business considerations.

In the perfectly competitive model, price is equal to average cost and firms operate efficiently at minimum cost. Yet, Syverson finds that in the typical US industry a firm at the 90th percentile of the productivity distribution makes almost twice as much output with the same inputs as a firm at the 10th percentile. It’s not easy to measure inputs or outputs, of course, but even firms producing very uniform products show big productivity differences. 

How can firms that use inputs so inefficiently survive? In part, competition is imperfect which gives inefficient firms a cushion because they can charge a price higher than cost even as costs are higher than necessary. Another reason is that small firms eat their costs.

. . .  

Concentrate production on high-margin, big sellers. Drop the rest. Simple; but many firms don’t know their numbers. . . .

He cleans the shop floor and gets rid of inventory that isn’t selling. He then arranges the floor to improve process flow (made easier by concentrating production on fewer products). He then creates an inventory system, tracks orders and the inputs needed to create those orders, and takes advantage of costs savings through economies of scale in input purchases. . . .

[W]e now have robust evidence from India and Mexico that better management increases profits and productivity and that such increases can be sustained over the long run. In the studies from India and Mexico, randomly selected firms were given access to a “management intervention” and their productivity and profits improved and stayed higher for years after the intervention ended. . . . 

It’s difficult to run a business like a business. The analytical mindset that can separate business problems from personal problems isn’t natural. Many people cannot separate business decisions from their own preferences and emotional biases, which is one reason why great business leaders are rare.

The "management interventions" were often just as simple as the ones mentioned above.