Volume 11
Issue 1
Economics
JOURNAL OF
POLISH
AGRICULTURAL
UNIVERSITIES
Available Online: http://www.ejpau.media.pl/volume11/issue1/art-08.html
THE RATIONAL MANAGING PRINCIPLE, PROPOSITION OF EXTENSION
Sławomir Juszczyk
Department of Economics and Enterprise Organization
Warsaw University of Life Sciences, Poland
The aim of this paper is to propose a discussion about the rational managing principle. The foundation for beginning this consideration begs the question – why Professor Oscar Lange used this name, but did not determine that there is a principle of ways to improve the effectiveness of managing in economics. If indeed there is a rational managing principle, also in the meaning ex ante, and we take into consideration such activities which enlarge the financial outcome of a given economic entity, it seems that the rational managing principle, so far, does not exhaust the complexity of this issue. The author suggests an extension of the content of this principle.
Key words: rational activity, ways of enlargement of the financial outcome, so far not exhausting the meaning of the rational managing principle, discussion.
INTRODUCTION
The main reason of taking the rational managing principle into consideration were the author’s own researches into 157 specialized dairy farms located mainly in the Lodz Macro region in Poland. The researches were concentrated on the economic and organisational conditions in milk production profitability, and what is more, were also an occasion to observe four, and in one farm even five, ways of improvement in milk production profitability.
It is obvious that – profitability, effectiveness, the rationalisation of costs – are concepts content-related to each other. It is worth emphasising that in these farms the ways of improvement in milk production profitability used had a dynamic character. They resulted from: milk prices changes, production means price changes and changes in the kinds and size of expenditure.
The existence on the market in the long term demands, from the economic entity, continued rationalisation in the production process, taking actions to maintain the highest production quality and in the same way to guarantee the highest purchase prices while decreasing the average unit cost. To satisfy all the aims is very difficult, because it requires from the producers permanent efforts and using all the tools, not only in technical and technological meaning, but also in organisational and economical – What is more important is connecting scale production optimization with costs structure, production intensity and expenditure substitution.
The base to investigate in the range of production effectiveness in the rational managing principle. O. Lange [21] defined it as general principle “...rational acting in condition of defined the aim and the activity means. This principle states that the maximal degree of the aim realization is achieved by proceeding in those way in a given level of production expenditure to achieve maximal degree of the aim, or proceeding in those way in a given level of the aim using minimum production expenditure. The first variant is called – the principle of maximal effects or the principle of maximal efficiency. The second is called – the principle of minimal expenditure of means or the principle of saving the means”.
This issue with its definition is commonly known and used – Manteuffel [22], Kierul [12], Tomczak [32], Ziętara [34], Wasilewski [33], Juszczyk [10] and others.
Let us come back to the beginning of our consideration – why Professor Oscar Lange used the definition “the rational managing principle” but did not determine that this is the principle of ways to improve the effectiveness of managing in economics. If indeed there is a rational managing principle, also in the meaning ex ante, and we take into consideration such activities, which enlarge the financial outcome of a given economic entity, it seems that the rational managing principle in so far meaning – does not exhaust the complexity of this issue.
THE PROPOSITION OF EXTENSION TO THE RATIONAL MANAGING RULE
In the subject literature in the range of rational acting in production, such concepts as profitability and effectiveness are discussed rather widely, they do not exclude each other and we could say that they complement one another on a different level of detail. In this case we are thinking about criteria, ratios, measures of acting taking in the past to improve financial income (evaluation ex post), and choosing in the future acting (evaluation ex ante). We are not thinking about the rational managing principle because it shows rather the way of acting. Then we could make an evaluation if we have many ways to do it.
It is necessary to emphasise that criteria and effectiveness measures are connected with the specific action or with an evaluation of the results of the action which were taken earlier. Effective action should be considered in dynamic depiction and exhibit a correctness of action at the time, according to the costs and effects. The economic entities and farms make for different changes in borne costs and changes in size and quality of production. They are the results of adjusting to the price changes of production means and of purchase price changes in the producing of agriculture goods and are connected with the long term. It is important that these changes are not one-way. From the author’s observation, it comes out that there are possible different directions of changes and various combinations in rational action in production. They are not limited, like Oscar Lange suggests, to the maximal effect with unchanged expenditure – variant I, or to hold the same production with the minimal expenditure – variant II. So far depiction of this issue does not exhaust all the possibilities of rational action methods. In the author’s opinion – there are five variants of the rational managing principle. Apart from the two mentioned above, there are three more:
increasing the costs with a simultaneously bigger increase of production value (variant III), variant I and II concern so far meaning,
decrease in the production value with simultaneously a bigger decreasing of production costs (variant IV),
increase in the production value with simultaneously a decreasing of production costs (variant V, short-lived, possible as a result of reorganization of neglected units).
Variant III. is convergent with the proposition which was introduced by Halcrow [8] showing that there is a third criteria in the rational managing rule, this is receiving the growth of production through such rising of expenditure in which the rising of the costs is lower then the increase of production value.
It is also important to think, that the relation between margin cost and margin effect, as a result of making a decision, could possibly be evaluated after the ending of a production cycle. In industry this is possible, in a physical sense, in a short period of time. In agriculture this time is in general much longer.
We could introduce these five variants of realization of rational managing principle in figures, where P is production value and C – costs.
| Fig. 1. The rational managing principle, variant I |
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| Source: author’s study |
| Fig. 2. The rational managing principle, variant II |
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| Source: author’s study |
| Fig. 3. The rational managing principle, variant III |
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| Source: author’s study |
| Fig.4. The rational managing principle, variant IV |
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| Source: author’s study |
| Fig. 5. The rational managing principle, variant V |
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| Source: author’s study |
All of the above presented diagrams of the realization of the rational managing principle contain a simplification phenomenon of economic life. They suggest a linear relationship between cost and effect (production value), while this relationship is rarely linear. Apart from that, taking the ceteris paribus principle into consideration, that relationship can be accepted in simplicity if it follows at that moment from a single action and does not cause large cost changes and production value.
Moreover, it could be emphasised that the function course of any individual kind of costs is not straight linear. It confirms that the relationships between costs and production value could be only fragmentarily similar to the straight linear. We can see that variant I. and III. effectiveness improvement may have a character which is a result of technological progress or an improvement in production organization. In that case, basic technological production changes cause the change of all production function courses. So, the nearly linear relationship between costs and production grows longer.
| Fig. 6. Relationship between production functions and metaproduction function |
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| Source:author’s study based on Fig.1/II (In:) Collective work, 1997: Set of exercises in economics organization and accountancy in farms. PWRiL, Warszawa, [28]. |
This situation could appear for example when a farmer replaced hay with hay-silage, then he brought a more efficient breed of cows, then he bought a fodder wagon and introduced a mono diet, e.g. with Soya bean protein. At the high and rising level of intensification different development element, apart from decreasing effectiveness following expenditure, a segment similar relationship to a straight linear between costs and production value could significantly lengthen.
Taking into account that the variant IV realization of rational managing principle is possible, when one of the production means visibly goes up, it is worth resigning or limiting it, because this resignation or limitation causes a lower fall of production value than the value of bought mean. This situation is similar in the case of variant I, II and V (which is connected with neglected units). If we want all costs to remain at the same level and at the same time raise production, it is possible when, e.g. when a competition condition on the market occurs, new production means better quality, giving higher production growth and in which the cost on 1/ha or on 1 cow, the same as so far worse quality mean. This situation is rather rare because better and new means very often have a higher price. But a more common situation is when a farmer notices later production means existing on the market for some period of time, which was bought for the same price as another buying so far and consists, e.g. more pure component and causes a higher increase in production. A similar situation appears when a farmer notices that buying the same amount of urine artificial fertilizer so far is able to use some part of it not only to fertilize the soil, but also use in some part to fertilize directly to the leaves. A farmer could achieve in this way higher fodder production.
The same situation is in variant II (the principle of saving the means). We can suppose that the farmer had a smaller amount of money and bought less urine artificial fertilizer than so far and some part of it for the first time used in correct proportion in silage. As a result, despite the lower costs and lower quantity of producing fodder, the milk production did not decrease.
Sometimes in the seemingly modern farm, and with intensive production or even very intensive, but organizationally neglected, there is the possibility to decrease costs and at the same time increase production, there is chance to use variant V. of the rational managing principle. It sometimes happened that the farm achieved 6000 l milk per cow. A new owner decided to decrease the biggest area in all expenditures, that connected with buying a huge amount of high protein fodder and expensive additions, and simultaneously improving the silage quality and taking care about producing it near the farm. The milk production rose and the costs decreased. It is necessary to emphasise that these solutions result from variant V. do not exist for ever and there is a need to find new possibilities of raising the production effectiveness between the first four mentioned variants.
Summarizing our consideration concerning these five variants, which can be used in the realization of the rational managing principle, we can recognize that they give the base to much better results in the existing economic entity in the time.
The producers use, during production time, all the ways which result from the rational managing principle depending on the internal situation and the production means ‘price changes and producing by themselves goods’ prices. The choice of ways to hold and improve production profitability belongs to the producer. These decisions have a fundamental importance, correct or not, than could result in better or worse production profitability. If the production profitability ex post in the farm is getting worse it means that the producer made the wrong decision when adapting to the economic environment because:
the costs in the farm did not change but production value decreased, or
production value did not change but the costs rose, or
the costs increases were bigger than the production value increase, or
the costs decreased and the production decreased but by a bigger value, or
costs increased and simultaneously the production value decreased.
When the production process is long term and complicated, or is characterized by quick and expensive technological progress, it contains many elements which can change in comparison with a previous period of time. It is important that in these particular situations the farmer can use these introduced earlier five variants of the rational managing principle. After a determined time, e.g. after a year, the individual elements of adjusting changes to the new situation on the market create a general economic production effect, which is the product of individual decisions. The financial effects of single changes could cancel each other out or get stronger depending on positive or negative effects and their absolute value. As a result the producer achieves better or worse profitability, accordingly to the previous period of time, which is generally an effect of correct or incorrect adjustment strategy, as a result of choosing an earlier one of the five variants of the rational managing principle.
Based on five years of detailed research concerned with milk production profitability the author states that a farmers ability to use all those variants of the rational managing rule by the producers is the essence of this issue, and due to it could improve production profitability in several years.
Then “skills of plying all the instruments” of the rational managing principle with the domination of the best instrument (variant) in a given period of time resulted from price changes of production means and goods which are produced in the farm leads to economic success. Undoubtedly, it is still also necessary on the farmer’s side to update knowledge resources and practical skills.
The financial results of individual changes, their continuity or not, in the given variant of the rational managing rule have significant importance, also realization, not only in short or middle term aims, but also the realization of several years strategy of the economic entity (farm). Depending on accepted priorities we could formulate different strategies for given economic entity, which result from one variant domination i.e.:
The strategy of semi intensive production rationalization (variant I). This is realized by changes where the main issue is to optimize the costs structure, without changing their general amount. The result is an increase of production value in quantity and/or quality aspect. The realization of this strategy indicates that so, up until now, the costs structure and/or have been using resources in a short period of time was not optimal, but in a long period of time the adjustment of the costs structure was proper;
The strategy of semi extensive production, rationalization (variant II). This is realized by changes where the main issue is to decrease the costs and to keep the production value at the same level. This strategy is made possible, among other things, by the substitution of turnover means and/or fixed assets or employment;
The strategy of intensive production rationalization (variant III). This is realized by changes where the main issue is to rationally increase the turnover means and fixed assets. It causes intensification of production. The fixed assets increase fixed costs, and give simultaneously the chance of increasing the further production scale. The margin production value has to be bigger then the margin cost.
The strategy of extensive production rationalization (variant IV) or “strategy to last out” (to the retirement, privatization, or better period of time). It is realized by changes, where the main issue is to decrease the costs and the production value, but the value of decreased costs has to be bigger than the production decrease. This strategy could not last too long (according to the author – maximum 2-3 years), because it could lead to bankruptcy. The realization of this kind of strategy suggests that so far the intensification in a specific area of production was too big, and the margin cost was higher than the price or the sold fixed assets were far too expensive (irrational) according to the scale of production.
The strategy of production rationalization by liquidation of the obvious mistakes in the neglected units (variant V). If some mistakes appear, this strategy has to be undertaken as soon as possible. The important thing is that these mistakes should be noticed and the farmer would like to remove them. Also it is important that there is the existence of an objective possibility to remove those mistakes. This kind of situation could appear after a take over of an economic entity or farm by a successor or buyer. If this strategy appeared, it had a short-lived and singular character.
CONCLUSIONS
The author proposes a modification of the rational managing principle and gives it as follows:
The rational managing rule is a general set of economic ways of profitable proceedings in the clear determined aim condition and operation meaning. The improvement of this aim realization could be achieved in the following way by:
keeping the costs at a constant level while simultaneously increasing production value ( way I),
keeping the production value at a constant level while simultaneously decreasing production costs (way II),
increasing the costs while simultaneously making a bigger increase of production value (way III),
decrease the production value while simultaneously making a bigger decrease of production costs (way IV),
increase the production value while simultaneously decreasing production costs (way V, short-lived, possible as a result of reorganization of neglected units).
In the author’s opinion the rational managing principle makes easier, on the one hand, to evaluate the introduced changes, on the other hand planning the production improvement in a short, mid, and long – term depiction. It allows, with an economic point of view, to concentrate on problems from the past and on those at present which have short term, operation and strategic meaning. Furthermore, production improvement is for the entity the base giving the chance to exist during the time. In the contemporary macroeconomic condition the economic entity’s success is to exist on the market and not to worsen the financial condition. With the whole point of view, in the entire calculus, the existance of the economic entity is not only financially profitable but has first of all fundamental social meaning.
The predictable escalation of liberalisation in the EU agricultural policy will cause the necessity for the acceleration of production rationalisation on all farms. In particular it concerns milk farms, because of the relatively high capital needed to intensify this production. Decreasing the unit cost could be a very difficult process, demanding farming which is based on knowledge.
The author is conscious of the importance of this problem, and therefore invites to further discussion.
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Accepted for print: 06.12.2007
Sławomir Juszczyk
Department of Economics and Enterprise Organization
Warsaw University of Life Sciences, Poland
Nowoursynowska 166, 02-787 Warsaw, Poland
Responses to this article, comments are invited and should be submitted within three months of the publication of the article. If accepted for publication, they will be published in the chapter headed 'Discussions' and hyperlinked to the article.