January 31, 2006

Business is business

I’ve been wrestling with this for a couple days, and I think it may just be a part of my maturation process. Then again, it could just be me becoming more of a disestablishmentarian as the days go by.

Businesses are in place to make a profit, and their success is largely measured by how much profit they can make. That’s great, and I understand that. Businesses exist to make money, and the more you can make the better -- OK. More and more, though, companies are being rewarded for exceeding the previous year’s sales and profits. This I can also understand – it’s important for businesses to grow each year, and the more the better. It’s a lot like calculus – if you plot out your yearly profits on a graph, you want a) the numbers to be high, and b) the slope of the line to be positive (look like this / ) rather than negative (like this \ ). You can take the derivative of the line to see how large the slope, and, as mentioned earlier, the higher the points on THAT graph, the better.

It seems to me, though, that this creates somewhat of a vicious cycle. Let’s say I have to buy raw steel from a large steel manufacturer to make I-beams. Along the thought that businesses need to increase sales dollars and profits each year (and businesses can only make so many expense cuts), I’m probably going to paying more for my steel this year than I did last year. On that same line of thinking, I’m going to need to increase the price of my I-Beams this to compensate for the increased cost as well as to ensure that my own profits can increase this year, essentially creating two separate (but not necessarily equal) price increases. Now the building makers that buy my I-beams have to raise their price in order to compensate for my price increase and for their own profit goals as well, making three price increases passed on to customers that need to buy buildings, one of whom just could be (you guessed it) the steel company who raised their price in the first place. The increased cost in building manufacturing must then be factored in when deciding the next year’s steel price, and we all get back on the ride. (Yes, this is a very, VERY basic example – I know there are deals and contracts that companies can draw up that can circumvent part of this, but you get my jist).

This just strikes me as odd – not quite “the tail wagging the dog”, but more like the dog chasing its tail. Also, when does the analysis end? Should we further scrutinize the numbers and dissect the growth of a company’s profit growth? Or even the growth of that growth? I don’t know if there’s anything to be done – we can’t tell businesses to stop striving to be successful, but the whole process strikes me as odd. I guess spending money to make money seems only to cost more money in the long run....

Am I just crazy, just young, or just liberal?


At 9:22 PM, Blogger Lucas said...

Well, I've got a couple ideas. With competition in place, businesses know that simply raising costs could just mean losing out on sales that go to a competitor. And by that same token, actually lowering costs can make more money because they're taking business away from their competitors.

Now, real competition is not omni-present (ie gas, music, Microsoft), which is [one reason] why we have a government that puts some limits on that sort of thing.

But I guess the basic thing is that business know that there are better ways to make more money than to charge more money. Which gets into what I find most uncomfortable - the drive to create new demand. And they're using creepy new ways to do so too.

Then again, one of the reasons I'm going into nursing is to get as far away from the world of business as I can.


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