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Economics/Economics of Profit & Loss

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Expert: Dr.VSR.Subramaniam - 6/23/2009


Question
How private or government organizations get into a loss situation ? How they can come out of it ?  

Answer

PYRAMID FOR POWER
I thank you for selecting “allexperts” platform and me in particular, to ask an important & eye opening question to all government and private sectors in the world. Economically, more loss organisations,  lower the economic status of the country in the world.
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LEGENDS :
A - Authority. C  - Cost.   D - Decision makers. E  - Expence.   
F - Finance.   I  - Income. M - Material.  P  - People
P1. PYRAMID FOR POWER
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P1. PYRAMID FOR POWER

Pyramid is a structure of 3 or 4 triangles meeting in an apex from a triangular or square base.  It is a top narrow and bottom broad structure, well founded and stable. Any vibration on the tip is expanded at the bottom (Mega phone). Inversely it acts a funnel to send all inflows from the bottom to the apex. That is why any organization (Government or Private) gets the power and functions with a Pyramidal management structure.

01)  THE MANAGEMENT STRUCTURE.   

The Pyramid structure is suitable, stable and result oriented for any Private corporate sector and the Government. The components are,
(a) The top  Authority (A)  is at the tip (Chairman, CEO, Managing Director or the President).  Could be from 1 to 5 in normal cases  
(b) The authority is delegated to the next level of a few Decision makers (D) in one or more echelons, downward. Could be 10 to 25 depending on the type of organization.
(c) These decisions are implemented by many Work personnel (P) at the broad base (The office,  factory, service points. Could be from 30 to 300, depending upon the organisation).
If the number of personnel from top to bottom level are more than what is mentioned above, the organization could be too crowded and smooth functioning could be diturbed,  in that case, the organization is split into a number of tolerable divisions.

(02)  SUPPORTS.

These work infrastructure personnel are supported with Finance (F)  by way of Investments (Plant & machinery) and  Materials (M),  the input  for the Products (Car, Cloth, Soap etc…) or services (Entertainment, Insurance, Maintenace/repair, Transportation etc…).

(03)  THE INPUTS.

(a) The direct inputs (material; personnel time;  work support like use of machinery, power etc..) contribute to the Cost (C) of  the products or services.
(b) The indirect   inputs (over heads like rents, sales promotion, salary of the office and management personnel etc..), applicable to all the products or services, contribute  to the Expense (E) .  

(04)  THE OUTPUT

(a) The sale of items or provision of services, result  in getting an Income (I) from the public Socio-Economic groups (individuals, house holds or organisations).
(b) The arithmetic of {Income (I)  – [Cost (C)+Expence(E)]} or the profits, contributes to the financial return of the corporate or government efforts.
(c) If “I” is more than “C+E” then the result is a financial  Profit.. Otherwise, If “I” is less than “C+E” then the result is a financial  Loss.
(d)  Profit is a surplus and support for growth. Hence the private corporate units aim and function towards a “Profit”.
(e)  Government, with a target to uplift the Socio-Economic groups, function with a “No profit/No loss” concept. But a nominal profit orientation is mandatory to get a positive financial return and protect the government from bankruptcy.
(f)  A Loss, to either a private or government sector is like an injury  to the organisation.

(05) NO-LOSS ORIENTATION

Since the profit or loss is an arithmetic of  {I – (C+E)},  profit direction is to increase I or reduce C + E.
(a)  Say,  a sector (private or government) gets an income I = 1,500 (Quantum of sales/service 10 X Price per unit 150), with the  current Cost (C)  1,200 +  Expense (E)  800 = 2,000. The loss is = (1,500 – 2,000) = -500. To come out of the loss, the options are

Quantity leverage.

Increase the sales quantity from 10 to 20, through sales promotion strategies (advertisements, campaigns, customer incentives, new packing etc.. )

The sales promotions may increase expenses (E) from 800 to 1,000. The cost (C) for the 10 additional products (20 - 10)  may increase from 1200 to 1400.  Then theoretically, I = (20 X 150) = 3,000. The Cost  is 1,400 +  Expense  1,000 = 2,400. Profit = (3,000 – 2,400) = 600. This may sound good.

But practically it is difficult to double the sales, as the customer esponses, reactions and competitor's strategies are un predictable !!. The sales promotion may or may not work.

Price leverage.

a) Increase the unit price to 300.  Then theoretically, I = (10 X 300) = 3,000. The Cost  1,200 +  Expense 8,00 = 2,000. Profit = (3,000 – 2,000) = 1,000.

But  practically, the demand may go down with price increase. The sale could be 4 units instead of 10.  Then  I = (4 X 300) = 1,200, Tne Cost + Expense = 2,000. Resulting loss = 1,200 – 2,000 = -800.   

b)  The reverse strategy is to reduce the unit price to 100. The demand may increase from 10 to  25, due to the price reduction.  Then I = 25 X 100 = 2,500. Cost + Expense = 2,000. Profit = 2,500 – 2,000 = 500.

Cost+Expense leverage.

Keeping the price constant, progressively reduce the (Cost +  Expense).
a) Cost reduction  could be done by a “value analysis” of the input materials / services methods. (replace expensive stainless steel parts with pressure die-casted aluminium alloy), keeping the quality and performance same or better… provide bulk group service instead of individual service etc…).
b) Expense reduction by motivating the work group to produce or service more in a given time. This  could  also be supported by new technology like fast producing machinery, introducing email services etc…  This is a leverage through   efficiency and quantum productivity  optimisation.   
c)  For an income I of 1,500 (10 X 150), if the Cost+Expense is reduced from 2,000 to 1,100, the result will be a profit of 400 (1,500 – 1,100).     
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P2 .  PYRAMID FOR PROFITS  (PUSH - DOWN APPROACH)

Profit  management  with an unilateral financial and quantum rate of return approach,  uses a pyramidal organisational structure with the “Tip on the Top” orientation for “Profits”. The profit generation methodology is the same as in P1 above.  In this approach, the authority A is on the top, management decision group D is in the middle, the work group personnel P are at the broad based bottom, The product/service output are provided to the national Socio-Economic group (Customers) spread below (out of the) pyramid.
The profit or loss is diverted to the top authority A, and subsequent actions are left to them  (applicable to the corporate or government  sector units,  in a narrow and in closed wall apex of the pyramid). The action summary is -

a Investments are made from any source, without any motivation or consideration of the domestic savings from the people within the organisation or the socio-economic infrastructure, below the bottom of the pyramid.
b)  Any technology considered as suitable, is selected and manned by alien personnel (including foreigners) without any attempt to upgrade the domestic manpower capabilities, inside and below the bottom of the pyramid.
c) Productivity and Management decision effectiveness are measured with reference to the financial and quantum returns, and not with reference to  any positive contribution to the socio-economic groups, within and below the bottom of the pyramid.
d) Impact of the intangible components (Psycho-Socio-International-Universal),  on the organisation, nation and the socio-economic groups, within and below the bottom of the pyramid  are never considered in the overall decisions by the authority A on the top ( in a narrow and in closed wall apex) of the pyramid.               
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P3 .  PYRAMID FOR PROSPERITY (PUSH-UP  APPROACH)  

A Prosperity manage-ment with multilateral (Economic, Financial, Social and Technical) rate of returns  approach,  uses an inverted pyramidal organisational structure, with the “Tip at the Bottom” orientation for “Prosperity”. The profit generation methodology is the same as in P1 above.  In this approach, the operating people P  are  on the broad based top, are in  direct contact with the Socio-economic group (with feed backs), management decision group D is in the middle, the authority A is  at the protruding bottom, The product/service demands and their prices/contributions to the society and  national Socio-Economic group (Customers) spread above (out of the pyramid), are directly estimated. The profit or loss, due to the management decisions, made by the group D in the middle,  is diverted to the top authority A at the bottom tip.  Appropriate corrective actions are left to the top authority of the  (corporate or government  sector unit),  with reference to the contribution to the socio-economic group on the top.  The action summary is -
a) Investments are made from the domestic savings from the people within the organization and the socio-economic infrastructure, above the broad based top of the pyramid.
b)  Latest technology, moderated to suit the domestic conditions are selected, domestic manpower capabilities  are upgraded (inside and  above the top base of the pyramid.)
c) Productivity and Management decision effectiveness are measured with  reference to  the  positive contribution to the socio-economic groups, above the broad based top of the pyramid. This is in addition to the measurement of the effectiveness with reference to the Quantum ratios.
d) Rate of return on the production/service operations are worked out with reference to 4 guidelines (Economic, Financial, Social, Technical).
e) Impact of the intangible components (Psycho-Socio-International-Universal), on the nation and the socio-economic groups, above the broad base of the pyramid are considered in the overall decisions by the authority A,  on the bottom tip.
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REFERENCES
1) CONCEPTS at http://www.drvsrs.com/concepts.htm
2) POLITICO FINANCIAL OVERVIEW at http://www.drvsrs.com/polifina.htm
3) SED BY DRVSRS  at http://drvsrs.com/store/page1.html#9  
4) SOMA BY DRVSRS at http://drvsrs.com/store/page1.html#10
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With egards.
DR.VSRS
Store - http://drvsrs.com,/store/page1.html   
Web - http://www.drvsrs.com
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Dr.VSR.Subramaniam

Expertise

Basically a B.Sc (Physics) from the University of Madras, India. Started the career in production engineering under German and Italian experts. MBA in Management from IIM, Ahmedabad (India). Ph.D (Management) from the University of Bomaby (the first ever awarded in this subject). Headed the computer centres of Multi nationals; "Data Processing expert" of the Commonwealth, London (To implement World Bank and UNDP Computer softwares); "Consultant Adviser" to the Caribbean Development Bank (CDB), Barbados. Associated with Nobel Laureate in Economic Science-1979, Arthur Lewis (Past President of CDB) & 4 more on his introduction. Visiting professor to many universities. A Trained ISO 9001:2000 Quality Auditor. Over 40 years of combined experience in Accounts, Computer Software, Economics, Engineering, Management, Science, Technology, Research & Development and Qulaity systems. Author of over 60 Application Research papers. Currently a free-lance consultant in ISO Quality Systems, Socio-Economic development acceleration, Innovative software designs. Can answer any question in Theoritical/Applied-economics with an in-depth and innovative dimension. I DO NOT ANSWER : 1. STATISTICAL data & analysis. 2. PRIVATE questions, as they do not appear for PUBLIC view & search 3. Examination & Project report oriented questions. Website http://www.drvsrs.com

Experience

Experience in the area Over 40 years in Industrial, Service and Economic development sectors. Socio-economic development oriented expertise (1982-86). With Commonwealth Fund for Technical Cooperation, London as a "Data Processing Expert". With Caribbean Development Bank, Barbados (UNDP,World bank set up) as a "Cnsultant Adviser". See "http://www.drvsrs.com/drvsrs.htm" and "http://www.drvsrs.com/publication.htm". National & International awards. R & D Author at http://ideas.repec.org/e/psu50.html and http://www.ssrn.com/author=360079

Organizations
Intellectual Consultants. A proprietory Research and Development unit under the theme "Innovation. Information & New Concepts"

Publications
See at http://www.drvsrs.com/publication.htm & http://dvsrs.com/store/page2.html

Education/Credentials
See full details at http://www.drvsrs.com/drvsrs.htm (1) D.Litt in Computer Science - 1983. World University, USA. (2) Ph.D - 1975. First management doctorate awarded by the University of Bombay, India, after the inception of the subject. (3) MBA – 1966. IIM, Ahmedabad. India. First batch. 4) B.Sc - 1959. Physics. University of Madras, India

Awards and Honors
Biography is listed in International Who is Who of Intellectuals (UK), Men of Achievement ( UK ), Men of Distinguished Contributions (USA). National and International awards and Citations.

Past/Present Clients
See at http://www.drvsrs.com/software.htm

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