Corporate performance, abnormal profits and sectoral differences - Essay Example

Whereas some people consider the quantity of firms assets as an indicator of its performance, economists use different approaches such the efficiency in which firm or industry utilize its resources to generate income. Firms operating in the same industry exhibit dissimilar performance while even firms operating under different industries have depicted similar performance trends (Rumelt, 1991, p.179). Therefore, it is not clear as to what exactly determines performance of the firms since some people thinks that directors of the company and the environmental conditions play a significant role in firm performance.

One of the key determinants of firm’s performance is the level of resource endowment. Firms are endowed with different resources and this could result to improved performance of the company regardless of the industry in which it operates (Rosenzweig, 2007, p.11). Firms with large resource base enjoy economies of scale to due to large scale production. Therefore, those firms are able to offer their products at a reduced price compared to their competitors who may be experiencing diseconomies of production.

Furthermore such firms are able to use most efficient techniques in their operations as a result of intensive research and innovations. Another determinant of the performance of company is its market position. Firms which have differentiated products are able to enjoy significant market returns by influencing prices of the products as the market leaders. Customer loyalty to specific brand may result to some companies performing better than others in the same industry (Lecture 4, 2012). The market leaders usually set prices for the commodities while others just follow the decisions of the market leaders.

Therefore, if firms are operating in an industry with differentiated products, then their performance will vary significantly depending on their position in the market in terms of market share. Some people use total assets as a measure of performance of the company hence, companies with vast resources are considered most successful. However, in Rumelt (1991, p.181) comparing economic profits of different firms operating in the same industry has shown that different firms with large resource base are not necessarily the best performing.

Even firms with fewer resources have exhibited higher profit ratios to resources used. Economic profits in relation to resource used to generate the profit can better provide a comparison of performances of different firms across the industries (McGahan, and Porter, 1997, p.27). Regardless of the industry in the firm is operating, the level of their performances can be determined in relation to how much benefits can be obtained from the capital employed. The firm managers make probabilistic decisions.

For example, the production activities are all based on the prediction of the market. However, in reality things changes and what was anticipated may never come to pass. Therefore, the performance of firm will depend on extent in which the predicted events match with real occurrences (Lecture 4, 2012). Sometimes, the managers have no control over the events that occur hence they influence much the performance of the firm. According to Hawawini, Subramanian and Verdin (2001, p.30), the Industry in which a firm belongs affects the overall performance of a company.

Some industries are much specialized such as pharmaceuticals and engineering firms. Other