1. Unequivocal meanings help to bring out what is in reality obvious.
With:
M / I = (V / I) x (M / V)
Profitability = Productivity x Profitability
When we call profitability only a ratio of the M/I family, productivity only a ratio of the V/I family, profitability only a ratio of the M/V family, the role that the RPP relationship plays in the regulation of the prices at which firms sell becomes indisputable.
2. In the numerical illustration used in this chapter, the direct profitability of child 1 is very different from that of child 2.
Children: ranges or references that produce margins and whose parent is (pastry and bakery are, for example, children of a baker and pastry chef).
| A | B | C | ||
|---|---|---|---|---|
| Child 1 | Child 2 | Parent | ||
| 1 | Direct investment | 100 | 200 | 450 |
| 2 | Turnover | 500 | 400 | 900 |
| 3 | Direct costs | 300 | 240 | {540 |
| 4 | Direct margin | 200 | 160 | {360 |
| 5 | Direct profitability R | 200% | 80% | 20% |
| 6 | Direct productivity P | 5 | 2 | {3 |
| 7 | Direct profitability P' | 40% | 40% | {40% |
The weighted average profitability of child 1 and child 2 is shown in the "Parent" column: 120%. The profitability of child 1 is 1.7 times (200/120) greater than the weighted average. The profitability of child 2 is 1.5 times (120/80) smaller than the weighted average.
In wholesale and retail trade, the
3. direct profitability of two items from the same family in the same department is often identical.
This does not mean that the stock rotations that make up their direct productivity are the same. However, as soon as direct productivity is different while direct profitability is the same, direct profitability is different.
4. At a manufacturer of metal garden tools with universal handles, the different models of handles or metal parts are items from the same family.
Currently, the selling prices of this manufacturer can be such that the direct profitability of these two families is the same. This does not mean that their direct rates of return are the same. The phenomenon is similar to higher and lower levels. It is not because two legal-entity enterprises have the same final profitability (same rate of profit on turnover) that they have the same final profitability (same rate of profit on capital). Nor is it because rakes, hoes and tines that can be mounted on the same universal handles have the same direct profitability that the direct profitability of the sale of these tools is identical.
5. The figures in the previous table describe an initial situation: one in which the direct profitability of children is the same or slightly different.
The equality of direct profitability of the same ownership is often initial because in business management, the easiest ratios to budget for and exploit are profitability and not profitability.
In the numerical illustration, the direct cost multiplier is 1.667 (line 7 below), since a margin on turnover (on sales price) of 40% is 66.7% on cost (on purchase or cost price):
| A | B | C | ||
|---|---|---|---|---|
| Child 1 | Child 2 | Parent | ||
| 1 | Direct investment | 100 | 200 | 450 |
| 2 | Turnover | 500 | 400 | 900 |
| 3 | Direct costs | 300 | 240 | {540 |
| 4 | Direct margin | 200 | 160 | {360 |
| 7 | Direct profitability P'(4/2)(4/3)Multiplier (2/3) | 40%67% 1,667 | 40%67% 1,667 | {40%{67% {1,667 |
6. Suppose mineral waters, fruit juices and soft drinks, beers, everyday wines and fine wines, all sold by the wholesale and retail trade at the same profitability – at the same mark-up rates.
The direct productivity of these items is, at the distribution stage, stock rotations. The quantities sold mean that these rotations, or productivity (capacities of 1 € or $ etc. of stock to be produced, n € or $ etc. of turnover per year), are unequal. The highest are those of mineral waters. The lowest are those of fine wines. The rotations of fruit juices, sodas, beers and common wines are lower than those of mineral waters, but significantly higher than those of fine wines (and spirits). As long as for all these families of items the profitability is initially equal or very close, the profitability is inversely proportional to the productivity, by the mechanical effect of the RPP relationship. Selling mineral water is then much more profitable than selling fine wines, although it is just as profitable.
7. All the more quickly as prices are set and new beverage shops are free, profitability tends to become inversely proportional to productivity.
If, at the wholesale and retail stage, buying and selling mineral water is significantly more profitable compared to another beverage, then sooner or later a merchant increases his sales of mineral water by reducing his margin rate on this family of items. Initially, the stock turnover of this family – the main or sole constituent of its direct productivity – can be increased so much that direct profitability also increases. From this new level, an increase in the quantities sold and the margin generated in absolute value can be attempted by lowering profitability by one notch Profitabilite – the average multiplier coefficient applied to purchase prices. The freedom of supply establishes and maintains by successive attempts the dispersion of direct profitability of the same ownership by making the latter more and more inversely proportional to the corresponding productivity. Of course, some of these trials are always susceptible to poor calibration, but it is those who succeed that make the law. In the numerical illustration used here, as soon as competition influences the evolution of the direct profitability of children 1 and 2, the latter tend to become inversely proportional to their productivity. As a general rule, with the exception of obstacles to entry into competition and the comparability of offers, the highest productivity goes hand in hand with the lowest profitability and the lowest productivity with the highest profitability.
8. By making the profitability P' inversely proportional to the Productivite corresponding productivity P, competition sanctions the refusal to equalize the return on capital of the same systemic level.
Where the comparability of enterprises' offers to their potential customers is not hampered, the market economy is governed by a Rentabilites">natural (logical, systemic) law of a tendency to equalize the direct Rentabilite">profitability of the same membership. From the level of comparison at which legal-entity enterprises of the same nationality or internationality are located (European car manufacturers, North American telecommunications operators, Asian computer manufacturers, for example), this law of trend and sanction is at work. Those of these firms that are the most highly profitable are seeing competition increase in their core business. They then avoid the sanction of too large a loss of market share only by accepting a drop in their Rentabilite">profitability, until their Rentabilite">profitability is brought back to their sufficient level. Selling price decisions that are closer to equalizing Rentabilite">profitability than Rentabilite Rentabilite">profitability lower competitiveness compared to what it would be by taking the opposite side.
9. The result of the statistical checks of the tendency towards the equalization of direct rates of return of the same ownership is not in doubt.
In the manufacturing distribution sector, average margins on sales are very generally lower for products with a high stock turnover than for those that sell more slowly. In industry, these same average rates are very generally lower for the 10 to 20% of products that account for 90 to 80% of sales. The reduction by free entry into the markets of the dispersion of the profitability of legal-entity-enterprises is only one of the effects of the general law of reduction by competition of the return on capital of the same systemic level.