Colloquy via Sweden:
To achieve surplus profits participants need to innovate and as a result we are offered better products for the same price.
***How are you defining profits? I follow Drucker: profits are just another business expense.
Innovation brings us new, and therefore price blind. It is after improving iterations that at some point yield enough market to invite a conservator in, that is when they apply economies of scale and bring down the price on what is now a commodity.***
But my question is; is this the same as to say that we can buy same for less?
***When the innovator yields enough market to invite a conservator in, that is when the consevator applies economies of scale and brings down the price on what is now a commodity.***
I would say no. Same product for less, yes, but not necessarily same utility for less (utility being determined by its ability to generate future cash-flows)
***If it is the same product, how can it not be the same utility, whether less or not? And utility to whom? The fish I am having for dinner has a utility that has nothing to do with cash flow...***
This varies with the elasticity of demand for different products.
***Elasticity is effected in innovative products by means of design, in conservator products by means of price.***
Feel free to forward this by email to three of your friends.
To achieve surplus profits participants need to innovate and as a result we are offered better products for the same price.
***How are you defining profits? I follow Drucker: profits are just another business expense.
Innovation brings us new, and therefore price blind. It is after improving iterations that at some point yield enough market to invite a conservator in, that is when they apply economies of scale and bring down the price on what is now a commodity.***
But my question is; is this the same as to say that we can buy same for less?
***When the innovator yields enough market to invite a conservator in, that is when the consevator applies economies of scale and brings down the price on what is now a commodity.***
I would say no. Same product for less, yes, but not necessarily same utility for less (utility being determined by its ability to generate future cash-flows)
***If it is the same product, how can it not be the same utility, whether less or not? And utility to whom? The fish I am having for dinner has a utility that has nothing to do with cash flow...***
This varies with the elasticity of demand for different products.
***Elasticity is effected in innovative products by means of design, in conservator products by means of price.***
Feel free to forward this by email to three of your friends.
4 comments:
"How are you defining profits? I follow Drucker: profits are just another business expense."
How are profits an expense? Isn't profit what we want? (net profit = gross sales revenue - business operating expenses?). Please elaborate on profits as an expense - I read Drucker, but failed to see where he explained this concept - I will reread his book.
No, we do not start a business to make a profit. We start a business to solve a problem. The business is our lifestyle. The costs of the business are things we chose to spend money on, and are largely spent on ourselves.
I understand that in accounting there is something called net profit, but that is designed to benefit the tax collector not the business manager. Corporations still call it "retained earnings" which is a better term than profit. Profit is just that which we have not yet decided to spend, a sort of pre-expense, but expend it we will.
As I understand Drucker, management is to keeps things in balance while achieving the goals, and managing for profits is no more important than managing to keep utilities, rent, payroll or anything else in line.
I think the quote is in Innovation and Entrepreneurship, but Drucker said it several places, and people are still talking about it today.
http://mikenormaneconomics.blogspot.com/2013/03/william-cohen-purpose-of-business-is.html
Drucker's definition is only one of several various economists offer. It is an unsettled term.
In history profit in the sense of money on money was actually forbidden (usury) and profit in the sense of general improvement was the point of business (What does it profit a man to gain the world but lose his soul?)
The idea of profit you learned in school is less than probably 150 years old, and only one of maybe a half dozen competing definitions.
You subscription to that definition is a triumph for the tax collectors.
The swede here again, I am called Jacob. The above comment was not mine.
I really like what I am learning from what you write so I will be reading your posts daily from now on and might drop a comment from time to time.
What you are saying (Drucker is saying) gave me one of those 'aha' moments. I think its an important definition to know when deciding to become a business owner and I can see now how this plays into for example your chapter on finding a product and about the attitude towards business in general.
Drucker was featured in our management units such as strategic management but we never discussed him in any length in our economic unit. In fact I cannot remember any discussions like this at all.
***If it is the same product, how can it not be the same utility, whether less or not? And utility to whom? The fish I am having for dinner has a utility that has nothing to do with cash flow...***
Commodities do not apply but manufactured products do. Like the new Boeing is more fuel efficient and better pleases passengers with a higher degree of comfort. Airlines buy the new Boeing because of cash flow concerns, not because they wish to be the early adopters.
Hey Jacob,
Glad I can help... for about ten years a beginner computer cost around $2000. Every year you got exponentially more computer, at the same price point. So yes, you can have either more for the same price, or the same for a lesser price, but the effect is the same, the price is going down.
And since the original point was deflation, by definition deflation is a monetary event, like inflation. One result of monetary intervention is prices rising or falling. For various reasons those who intervene fear prices falling. But they do not know the difference between prices falling in a free market naturally and prices falling as a monetary event. And it would not matter since they object to falling prices regardless of the reason.
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