X-Efficiency

 

As we are almost near the finishing line of the #Blogchatter A2Z challenge 2023, I have to deal with writing on the tough last 3 alphabets namely'X' , 'Y' and 'Z". As HR subjects do not come immediately to mind, I am writing on topics relevant from the economic or business point of view. Today for the alphabet 'X' I am writing on X- Efficiency.

Normally, in a competitive market, organizations are compelled to work as efficiently as possible in order to ensure sufficient profits and survival in the long run. However, the situation may not be the same if there is no competition with the operators being a monopoly or a duopoly. Economist Harvey Leibenstein challenged the belief of the traditional neoclassical economists who assumed that even when the markets were not efficient, companies behaved rationally and maximised production & productivity at the lowest possible costs. Leibenstein pointed out that a company that is a monopoly tends to have lower efficiency as they are assured of market even when operating inefficiently. He called the efficiency in such a scenario as 'Unknown' or X- Efficiency which is influenced by human nature.

The theory reminded me of some of the companies in the public sector in India prior to liberalization. As they were monopolies, they did not bother to work efficiently. Price was fixed at the cost of production + profit. As for example Hindustan cables Hyderabad which manufactured telephone cables was a monopoly prior to the entry of other players post liberalization. If the cost of production was Rs100, the price would be fixed at Rs100 + Rs 20 =  Rs 120 (price). If cost of production increased due to more scrap & other poor parameters , then price would be fixed thus: Rs 150 (cost of production) + 20 (profit) =  170 (price). Company is not motivated to work to its maximum potential as profit is assured, no matter how efficiently you work.

In the absence of real competition, companies are more tolerant of inefficiencies in their operations. The concept of x-efficiency is used to estimate how much more efficient a company would be in a more competitive environment. The theory suggests that in the best interests of the organization, an entrepreneur work towards filling the gap between X- Efficiency and the potential efficiency of the company in a competitive environment.

This post is a part of #BlogchatterA2Z 2023