Firm-level Profits Research Articles

Rational Organizational Structure: For Brick-and-Mortar Lifestyle Retailers in India to Overcome Diseconomies of Scale and Protect Firm’s Sustainability (ROLS-b)

A majority of organized brick-and-mortar lifestyle retailers in India believe that the brick-and-mortar retailing model ensures economies of scale as they keep opening new stores. Having more stores might help retailers to gain product sourcing advantages in addition to generating additional revenue to the firm but at the same time, it fails to provide any other benefits towards economies of scale as every new store comes with new one-time capital expenditures and recurring fixed expenses. Another misconception is that lifestyle retailing must follow an organizational structure (OS) that is adopted by their parent company and hence a majority of OS adopted by lifestyle retailers in India is dependent on organizational form. This study was not limited to just recommending a rational OS based on exploratory research and existing theories in the OS domain. Once the ROLS-b was designed, we have experimented with the proposed rational OS on one of the ten lifestyle retailers in the study to test the validity and reliability. Experimentation results empirically and qualitatively demonstrate that the existing belief of brick-and-mortar lifestyle retailers in India which assumes economies of scale and long-term firm’s sustainability as the retailer increases the store count is just a misconception and does not hold. On the other hand, when we experimented the ROLS-b for over twelve months at over 25 percent stores of a select retailer, results demonstrate that these stores which have gone through the treatment have shown 5.34 times improvement in the store-level profit and 1.97 times in the firm-level profit in addition to eliminating a majority of gaps found in the existing OS that was leading to dis-economies of scale and deteriorating firm’s performance.

Rational Organizational Structure:For Brick-and-Mortar Lifestyle Retailers in India to Overcome Diseconomies of Scale and Protect Firm’s Sustainability(ROLS-b)

A majority of organized brick-and-mortar lifestyle retailers in India believe that the brick-and-mortar retailing model ensures economies of scale as they keep opening new stores. Having more stores might help retailers to gain product sourcing advantages in addition to generating additional revenue to the firm but at the same time, it fails to provide any other benefits towards economies of scale as every new store comes with new one-time capital expenditures and recurring fixed expenses. Another misconception is that lifestyle retailing must follow an organizational structure (OS) that is adopted by their parent company and hence a majority of OS adopted by lifestyle retailers in India is dependent on organizational form. This study was not limited to just recommending a rational OS based on exploratory research and existing theories in the OS domain. Once the ROLS-b was designed, we have experimented with the proposed rational OS on one of the ten lifestyle retailers in the study to test the validity and reliability. Experimentation results empirically and qualitatively demonstrate that the existing belief of brick-and-mortar lifestyle retailers in India which assumes economies of scale and long-term firm’s sustainability as the retailer increases the store count is just a misconception and does not hold. On the other hand, when we experimented the ROLS-b for over twelve months at over 25 percent stores of a select retailer, results demonstrate that these stores which have gone through the treatment have shown 5.34 times improvement in the store-level profit and 1.97 times in the firm-level profit in addition to eliminating a majority of gaps found in the existing OS that was leading to diseconomies of scale and deteriorating firm’s performance.

The importance of internal alignment in smart city initiatives: An ecosystem approach

Within the growing literature on smart cities, much research has focused on issues related to the formation stage of these initiatives. After initial subsidies expire, however, a number of smart city initiatives face problems with respect to value creation and value capture. To analyse these processes, the paper links value creation (i.e. activities focusing on innovation challenges) to value capture (i.e. activities referring to actual individual firm-level profit generation) in smart city initiatives. Based on an in-depth survey of the literature, the purpose of the paper is to better understand how processes of internal alignment foster value creation and value capture during the growth of smart city initiatives. By focusing on the determinants of internal alignment facilitating value creation and value capture, the paper examines these determinants in the context of four smart city initiatives in the Netherlands in 2016. The paper shows that internal alignment of actors aimed at integrating joint and business objectives is critical for the growth of smart city initiatives. From the theoretical view point, the paper points at challenges concerning internal alignment of different actors in the smart city initiative after the formation stage. From the managerial point of view, it becomes increasingly important to manage expectations of different partners and their learning efforts to account for internal alignment during the growth of the smart city initiative.

EFFECTS OF EXCHANGE RATES ON CORPORATE PROFITS: A TOBIT ANALYSIS

Using a novel dataset on Turkish manufacturing firms covering 22 industries and 45,712 firms, we investigate the impact of real exchange rate fluctuations on firm level corporate profits. Our estimation results do not present strong evidence on the impact of exchange rate variations on firm level profits. The results are not robust to the industry specific exchange rate series constructed using different weighting schemes showing the importance of the choice of the exchange rate series used in the analysis. Moreover, firms with higher productivity and employment as well as older firms have found to be more profitable.

The commercial viability of financial inclusion

Mobile phone penetration, regulatory trends, technological efficiencies and the development of low-value payments infrastructures now make it feasible for financial institutions to deliver financial services to more people in more places. With a few basic prerequisites in place, financial institutions are now able to develop commercially viable approaches to financial inclusion. However, they must first rethink traditional notions of ‘viability’ and approach inclusion as a long-term strategic play rather than a short-term profit play. Moreover, the regulatory and infrastructure hurdles are so significant that achieving scale will require public–private partnership. The financial services industry is characterised by its focus on short-term financial metrics and quarterly reporting. Because financial inclusion efforts are a longer-term play, they are typically relegated to CSR initiatives. The model described here allows for a longer-term, stra­tegic approach to product and service development within a financial institution’s core business functions. Using the example of goMoney, a mobile banking platform launched by Australia and New Zealand Banking Group, this paper makes the case for evaluating financial inclusion efforts through the lens of market-level P&L, rather than firm-level profits. It proposes a model that considers a combination of above-the-line returns, alongside social, relationship and regulatory returns that affect the economic activity of communities and nations.

Managing new and remanufactured products to mitigate environmental damage under emissions regulation

Emissions of greenhouse gases are not as free as they used to be. Under stringent regulations, manufacturers increasingly find that their emissions have a steep monetary, environmental and social price. In manufacturing industry, remanufacturing has an important role to play with its inherent economic, environmental and social opportunities which warrant regulatory action. In this paper, we characterize the optimal emissions taxation policy in order for remanufacturing to deliver those benefits. In particular, using a leader-follower Stackelberg game model, we investigate the impact of emissions taxes on the optimal production and pricing decisions of a manufacturer who could remanufacture its own product. We characterize whether/under what conditions the manufacturer’s decision to remanufacture under emissions regulation reduces its environmental impact (as measured by total greenhouse emissions), whilst increasing its profits (a win-win situation). On the policy side, we delineate how emissions taxes can be instituted to realize the inherent economic, environmental and social benefits of remanufacturing (the triple win of remanufacturing). Two critical components of this analysis are the issue of demand cannibalization from the remanufactured product and the low-emission advantage of remanufacturing. We further investigate the impact of remanufacturing- and society-related factors on the balance among firm-level profits, environmental impact and social welfare, where the collection rate of end-of-use products and the cost to the environment turn out to be decisive in deriving the triple win benefits from remanufacturing. Last, we extend our analyses to an emissions trading setting where emissions are regulated using tradeable permits, and investigate the economic implications of remanufacturing under emissions trading vis-á-vis emissions taxation.

Competition in multi-echelon distributive supply chains with linear demand

We studied competition in multi-echelon supply chains with a distributive structure. Firms in the supply chain are grouped into homogeneous sectors that contain identical firms with identical production capabilities that all produce exactly one undifferentiated product. Each sector may distribute its product to several different downstream sectors, and each sector is only supplied by a single upstream sector. The demand curves in final markets are assumed to be linear, as are the variable costs of production in all sectors. Competition is modelled via the successive Cournot model in which firms choose production quantities for their downstream market so as to maximise their own profits, given prices for the input. Under these assumptions, equilibrium prices, quantities and firm-level profits for any multi-echelon distributive network can be derived. We discuss the network transformation properties, and using these properties, we examine the effect of demand parameter changes and cost changes on any firm’s equilibrium price, quantity and profit. We also explore the effects of entry on the equilibrium solution. While the effects of upstream entry on downstream sectors are as expected, the effect of downstream entry on upstream sectors, and therefore on sectors in parallel (lateral) paths, can be quite counter-intuitive.

The effects of staffing and training on firm productivity and profit growth before, during, and after the Great Recession.

This study integrates research from strategy, economics, and applied psychology to examine how organizations may leverage their human resources to enhance firm performance and competitive advantage. Staffing and training are key human resource management practices used to achieve firm performance through acquiring and developing human capital resources. However, little research has examined whether and why staffing and training influence firm-level financial performance (profit) growth under different environmental (economic) conditions. Using 359 firms with over 12 years of longitudinal firm-level profit data, we suggest that selective staffing and internal training directly and interactively influence firm profit growth through their effects on firm labor productivity, implying that staffing and training contribute to the generation of slack resources that help buffer and then recover from the effects of the Great Recession. Further, internal training that creates specific human capital resources is more beneficial for prerecession profitability, but staffing is more beneficial for postrecession recovery, apparently because staffing creates generic human capital resources that enable firm flexibility and adaptation. Thus, the theory and findings presented in this article have implications for the way staffing and training may be used strategically to weather economic uncertainty (recession effects). They also have important practical implications by demonstrating that firms that more effectively staff and train will outperform competitors throughout all pre- and postrecessionary periods, even after controlling for prior profitability.

Firm and industry level profit efficiency analysis using absolute and uniform shadow prices

We discuss the nonparametric approach to profit efficiency analysis at the firm and industry levels in the absence of complete price information. Two new insights are developed. First, we measure profit inefficiency in monetary terms using absolute shadow prices. Second, we evaluate all firms using the same input-output prices. This allows us to aggregate firm-level profit inefficiencies to the overall industry inefficiency. Besides the measurement of profit losses, the presented approach enables one to recover absolute price information from quantity data. We conduct a series of Monte Carlo simulations to study the performance of the proposed approach in controlled production environments.

Business Power and Tax Reform: Taxing Income and Profits in Chile and Argentina

AbstractThis article examines efforts to increase taxation of highly concentrated, undertapped income and profits in Latin America in the aftermath of structural adjustment. Argentina has advanced further than Chile in two policy areas: corporate taxation, which taps firm-level profits; and tax agency access to bank information, which helps reduce income tax evasion. These outcomes are explained by drawing on the classic concepts of business instrumental power, which entails political actions, and structural power, which arises from investment decisions. In Chile, strong instrumental power removed reforms in both areas from the policy agenda. In Argentina, much weaker instrumental power at the cross-sectoral level facilitated corporate tax increases. Bank information access was expanded after Argentina's 2001 crisis weakened the financial sector's instrumental power and reduced structural power.

Effect of mergers on firm profits with trade liberalization: the role of technology

The objective of this study is to analyse the effects of trade liberalization on the firm-level profit-enhancing effects of mergers and its dependence on whether the technology is labour intensive or capital-intensive, under an oligopolistic competition framework. Mergers, as considered in this article, cause an increase in the firm-level profits. The extent to which they enhance the profits is inversely proportional to the number of firms in the country. With a freer trade, the profit effect of mergers depends on the extent to which the fall in profit due to fall in price outweighs the gain in profit due to increased output. A firm in the capital-intensive country can gain more from a merger than one in the labour-intensive country, if the aggregate output is at sufficiently large scale.

Firm and Industry Level Profit Efficiency Analysis Under Incomplete Price Data: A Nonparametric Approach Based on Absolute and Uniform Shadow Prices

We discuss the nonparametric approach to profit efficiency analysis at the firm and industry levels in the absence of complete price information, and propose two new insights. First, choosing one commodity (whose price is known) as a numeraire good enables us to measure profit inefficiency in absolute monetary terms. Second, imposing a 'Law of One Price' (LoOP) constraint that all firms should be evaluated in terms of the same input-output prices allows us to aggregate firm-level profit inefficiencies to the overall industry inefficiency. Moreover, the LoOP restrictions increase the discriminatory power of the method by better capturing firm-level allocative inefficiencies. Besides the measurement of profit losses, the presented approach enables one to recover absolute price information from quantity data. We conduct a series of Monte Carlo simulations to study the performance of the proposed approach in controlled production environments.

Has liberalization affected profit margins in Indian Industry?

In this article, we analyse the determinants of firm-level profit margins in Indian manufacturing. The model we estimate is rich in its dynamic characterization allowing as it does for lagged terms, trend movements, business cycle effects and a structural break in 1991. We hypothesize that the reforms undertaken by the government in 1991 constitute a structural break that influences a firm's independence to react to other firms as well as the extent of competition faced by these firms. Inserting this into the standard industrial organization model of profits, we obtain a dynamic market model. Estimating this model for 1980-98, we find that the 1991 reforms did have a significant impact on profit margins in Indian industry. The reforms have worked through their impact on a firm's behavioural variables - advertising, Research and Development (R&D), capital-output ratios and managerial remuneration - though the precise variables that were significant varied from sector to sector. We find that relatively inefficient firms make significantly lower profits than others both before and after the liberalization as expected.

Has Import Disciplined Swedish Manufacturing Firms in the 1990s?

This paper analyses how increased integration and the ongoing enlargement of the EU’s internal market affected the performance of Swedish manufacturing firms. The pro-competitive effect of international trade, in term of intensified import competition on domestic firms’ market power, has been investigated extensively at the industry-level. In contrast to previous studies, this analysis is based on detailed firm-level information and import data divided into both an EU member group and a group of recently approved EU member candidates. It focuses on how imports from these groups, together with imports from other non-European trading partners, impact on firm-level profitability, while taking firm-specific efficiency effects into account. The findings are that imports from the new EU-candidates, Japan and Asian newly industrialized countries seem to have a disciplinary effect on firm-level profits, whereas imports from EU-member countries only appear to have an impact on firms with large market shares and in highly concentrated industries.

Interactions Between Technology, Profits, Welfare and Profit Effects of Mergers with Trade Restrictions

The objective of this study is to analyse the effects of trade liberalisation on profits of a capital-intensive exporting country and a labour-intensive one with different cost functions and the welfare of the importing country, as well as the effects of trade liberalisation on the firm-level profit-enhancing effects of mergers, under an oligopolistic competition framework. The results show that output is increasing in the degree of trade liberalisation and price falls with it. However, the effects of freer trade on profits of the exporting countries are ambiguous and depend on the net gains in profit from free trade. Given same level of output for both countries, a sufficiently high output would bring more profits to the capital-intensive country than to the labour-intensive country. Welfare of the importing country, at least within this framework, is increasing in the degree of trade liberalisation, provided that the initial level of restrictions in trade are not too high. Mergers, as considered in this paper, cause an increase in the firm-level profits. The extent to which they enhance the profits is inversely proportional to the number of firms in the country. With a freer trade, the profit effect of mergers depends on the extent to which the fall in profit due to fall in price outweighs the gain in profit due to increased output. A firm in the capital-intensive country can gain more from a merger than one in the labour-intensive country, if the aggregate output is at sufficiently large scale.

Abatement investments and green goodwill

This paper develops and estimates a dynamic model that links profits to green goodwill. Assuming that abatement investments generate green goodwill, and using data from the Swedish pulp industry, we are able to test the effects of green goodwill on firm level output price and profits. The results suggests that Swedish pulp plant output prices and profits may be positively related to changes in green goodwill. Furthermore, no evidence is found to support the existence of adjustment costs due to abatement investments.

Sharing information on computer systems security: An economic analysis

The US federal government has fostered a movement toward sharing information concerning computer security, with particular emphasis on protecting critical infrastructure assets that are largely owned by the private sector. As information security is paramount to accurate financial reporting and the provision of timely and relevant managerial accounting reports for decision-making, the issue of sharing information on computer systems security has direct relevance to accounting, as well as to public policy. This paper presents a model to examine the welfare economic implications of this movement. In the absence of information sharing, each firm independently sets its information security expenditures at a level where the marginal benefits equal the marginal costs. It is shown that when information is shared, each firm reduces the amount spent on information security activities. Nevertheless, information sharing can lead to an increased level of information security. The paper provides necessary and sufficient conditions for information sharing to lead to an increased (decreased) level of information security. The level of information security that would be optimal for a firm in the absence of information sharing can be attained by the firm at a lesser cost when computer security information is shared. Hence, sharing provides benefits to each firm and total welfare also increases. However, in the absence of appropriate incentive mechanisms, each firm will attempt to free ride on the security expenditures of other firms (i.e., renege from the sharing agreement and refuse to share information). This latter situation results in the underinvestment of information security. Thus, appropriate incentive mechanisms are necessary for increases in both firm-level profits and social welfare to be realized from information sharing arrangements.

Competition, Risk, and Managerial Incentives

This paper examines how the degree of competition among firms in an industry affects the optimal incentives that firms provide to their managers. A central assumption is that there is free entry and exit in the industry, which implies that changes in the nature of competition lead to changes in the equilibrium market structure. The main result is that as the intensity of product market competition increases (as a result of greater product substitutability or greater market size), principals unambiguously provide stronger incentives to their agents to reduce costs. At the same time, more intense competition also leads to more volatile firm-level profits. Consequently, managers’ incentives are positively correlated with firm-level risk, consistent with empirical evidence. A decrease in the cost of entering the market has the opposite effect on incentives, but still induces a positive correlation between risk and incentives.

A public choice model of the role of multinational firms in international relations

Multinational firms play a crucial role in the transmission of international policies across sovereign states. The present paper models the international policy equilibrium when conflict arises between two states, in which one state wishes to modify the policy choices of another state, and both the governments and their policy choices are subject to a self-interest maximization process on the part of voters, firms and government agents. Multinational firms are able to engage in lobbying activity in both their home countries and host countries in order to maximize firm-level profits. The analysis examines cases of both democratic and autocratic host countries.

Competition, Risk and Managerial Incentives

This paper examines how the degree of competition among firms in an industry affects the optimal incentives that firms provide to their managers. A central assumption is that there is free entry and exit in the industry, which implies that changes in the nature of competition lead to changes in the equilibrium market structure. The main result is that as the intensity of product market competition increases, principals unambiguously provide stronger incentives to their agents to reduce costs, and hence agents work harder. At the same time, more intense competition also leads to a higher volatility of both firm-level profits and managers' compensation. Consequently, managers' incentives are positively correlated with firm-level risk, consistent with empirical evidence.