More on profit drivers

How poorly understood the profit drivers are in Germany, and in Europe for that matter, is evident by the current discussion about the steel conglomerate Mittal acquiring Arcelor. Some people publicly insist that decisions like this are not to be made only by company owners or shareholders, who the company actually belongs to, but by all stakeholders including employees. The former French Prime Minister Michel Rocard goes even so far as to demand a change in the law to give employees a vote in these matters. 

Don’t these people understand the mechanisms of the market economy?  

First of all, there is the claim that Arcelor’s shareholders approved the acquisition based only on the short-term profit offered by Mittal. If that’s true and there are no long-term gains from this acquisition, the market will punish the company and its shareholders. Owners and shareholders need to consider short-term and long-term implications from such decisions, otherwise they may lose at the end. 

Second, some believe that the new Mittal will reduce the quality of its offerings. If Mittal does and quality is important to its customers, customers will switch to competitors and the company will lose over time. So here too, quality as a potential driver of customer satisfaction, which in turn is a driver of profits, needs to be addressed by a well-managed company to keep its owners or shareholders satisfied. 

Finally, the biggest complaint about this acquisition, like it’s the case with basically every merger or acquisition, is the impact on employees in terms of lower wages and reduced job security. This is probably the biggest misconception. Employees impact every aspect of a business and their job satisfaction is over long-term a driver of the bottom line. So, if Mittal’s acquisition of Arcelor will lead to lower job satisfaction, it will naturally then lead to reduced productivity, higher operating expenses, and higher employee turnover. These outcomes are not desired by any company since they lead to lower profits. Hence, management needs to keep employees satisfied in order to keep owners or shareholders satisfied. 

It’s of course typical for European politicians to demand even more laws protecting employees, but they clearly don’t understand profit drivers in a market economy. Unfortunately, this lack of knowledge is not common only to European politicians but also to some business owners and management, which leads to poor customer service.

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