Mount Profit

Revealed by Ford Motor Company Profits-Revenues Data (1990-2011)

10 8

Profits, y [$, billions]

6 4 2 0 -2 -4 -6

-8
-10 0 20 40 60 80 100 120 140 160 180 200

Revenues, x [$, billions]

Figure 1: Mount Profit revealed by the graph of profits-revenues data for Ford Motor Company for the years 1990-2011. The diamonds are the actual data points and the dashed curve has been superimposed to reveal the trend. The data has been compiled by Glenn Mercer in Ford, 1993-2007, Losing its way? See http://www.glennmercer.com/MercerFordChapter.pdf Table 10.1 in the Appendix. We can think of money in economics as being just like energy in physics. The power-exponential law, see equation 1 below, with x being revenues and y being profits, may thus be thought of as a generalization of Plancks blackbody radiation
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law and can be extended from physics to economics with a reinterpretation of the meaning of the various mathematical symbols. y = mxn [ e-ax/(1 + be-ax) ] + c (1)

The existence of a maximum point on the profits-revenue graph of a company was therefore predicted, theoretically, in recent articles by the present author, after the analysis of the financial data for several companies which were shown to agree with several other predictions made on the basis of equation 1; see the links given below for further discussion on this topic. The actual existence of the maximum point is now confirmed eloquently by the graph of the profits-revenues data for Ford Motor Company, for years 1990-2011. The raw data used to prepare this plot may be found in Glenn Mercers analysis, reference cited above.

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Linear law y = hx + c

Mount Profit
Power-law y = mxn

Profits, y

5 4 3 2 1 0 0 5 10 15 20 25

Power-exponential law y= mxnexp(-ax) Maximum point

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Revenues, x Our First Glimpse of Mount Profit

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Table 1: Profits-Revenues data for Ford (1990-2011)

Year Revenues, x $, billions Profits, y $, billions Profit Margin, y/x

98 0.9 0.0092 1990 89 -2.2 -0.0247 1991 101 -0.1 -0.0010 1992 109 2.5 0.0229 1993 129 5.3 0.0411 1994 138 4.1 0.0297 1995 148 4.4 0.0297 1996 155 6.9 0.0445 1997 146 6 0.0411 1998 162 6.5 0.0401 1999 172 5.4 0.0314 2000 163 -5.4 -0.0331 2001 163 0.3 0.0018 2002 165 0.9 0.0055 2003 172 3.6 0.0209 2004 178 2.2 0.0124 2005 -0.0778 2006 162 -12.6 172.5 -2.7 -0.0157 2007 -0.1005 2008 146.3 -14.7 116.28 2.72 0.0234 2009 128.95 6.56 0.0509 2010 0.1483 2011 136.26 20.21 Three data points highlighted here for 2006, 2008, and 2011 are NOT included in the graph since these obviously represent extremes. The data for 1990 to 2006 were obtained from Mercer and the subsequent years from Fords website; see also http://www.glennmercer.com/Ford2007to2012Draft.pdf Ford 2007-2012 Finding its way?

Links to other recent documents on this topic

1. http://www.scribd.com/doc/94647467/Three-Types-of-Companies-FromQuantum-Physics-to-Economics Speculations on Types of Companies: From Quantum Physics to Economics, published May 24, 2012.
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2. http://www.scribd.com/doc/94325593/The-Future-of-Facebook-I The Future of Facebook: From Theoretical Speculations to Better Understanding Based on Simple Mathematical Laws, published May 21, 2012. 3. http://www.scribd.com/doc/94103265/The-FaceBook-Future The FaceBook Future, Revenues-Profits Analysis, published on May 19, 2012.

A Brief Discussion
The maximum point on the profits-revenues data for Ford Motor Company, as revealed here, was suspected based on the discussion of the Ford Motor Company profits-revenues data in Ref. [1]. This is a stunning confirmation of the predictions based on the significance of the power-exponential law. If we consider the special case of b = 0 and c = 0, the power-exponential law takes the simpler form y = mxne-ax and the derivative dy/dx = (n ax)(y/x). It is clear that there is a maximum point on this curve, at x = n/a, since dy/dx = 0 at this point. The derivative has a positive sign (rising portion of the curve) for x < n/a and a negative sign (falling portion of the curve) for x > n/a. The expression for dy/dx for the entire function, for nonzero values of b, can also be deduced readily and is left as an academic exercise. The scatter that we see in the profits-revenue data is due to what we may call the temperature of the system. A blackbody can be held at different temperatures. Hence,we have to deal with a family of curves, not a single curve. Each curve, called the radiation spectrum, applies for a single temperature. For example, all of the data points (nearly 80) for the Cosmic Microwave Background (CMB) radiation spectrum fall nicely on a single curve corresponding to a temperature of T 2.725 Kelvins. (Recall that 0 K = - 273 C.) http://en.wikipedia.org/wiki/Cosmic_microwave_background_radiation
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It appears that the same is going on here. We may indeed be dealing with a profits and revenues data spectrum corresponding to different operating temperatures. The dashed curve (added schematically, not on the basis of any calculations) joins data for a single temperature. The other data points can be envisioned as falling on a different curve(s) that applies (apply) for a different temperature (s). This actually supports what was mentioned in the references cited earlier. We can systematically extend every single idea, like energy, entropy, and temperature from physics to economics. Let us discuss briefly the meaning of temperature T in quantum physics. Actually, it is very different from what we assume. It has nothing to do with the familiar thermometer but is related to two basic concepts called energy U and entropy S. The temperature T of a blackbody is given by the relation T = dU/dS .(2)

This is the definition of temperature used by Planck to develop quantum physics in his famous December 1900 paper. The above is a consequence of the combined statement of the first and the second laws of thermodynamics. The first law is the energy conservation law and is similar to Profits = (Revenues Costs) in the business world or in economics. The second law leads to a mathematical definition of entropy S. The entropy increases by a small amount dS = dQ/T where dQ is the small amount of heat added to the system at the temperature T. If we assume that all of dQ increases the energy of the system, i.e., dQ = dU, then dS = dU/T or rewriting we get T = dU/dS. Planck therefore defines temperature T as the rate of change of energy with entropy. (In general, dQ = dU + work done, since some work is always done by the system with the addition of heat.) The heat added dQ is like a stimulus and the increase in energy dU is the response of the thermodynamic system (in the world of physics). We can thus generalize these notions of heat added and energy increase and apply them outside physics, as proposed. The notion of entropy has already been applied to describe situations well beyond physics. Entropy is often described as a measure of the extent of chaos, or randomness in a system. According to Planck, it is related to the number of ways
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W in which a fixed total amount of energy can be distributed between N elements. The higher the number W, the higher the entropy. Hence, even this notion of entropy too, and thus also the idea of a temperature T, can be extended beyond physics to economics. (Further details may be found in Ref. [1].) The total entropy SN of N elements with total energy UN is given by: SN = k ln W + arbitrary constant (3)

Here ln W is the natural logarithm of W. Planck then applies well-known statistical arguments to determine W, the number of ways of distributing the total energy UN among the N energy elements. Instead of energy distribution, we can envision the distribution of money, which is measured in terms of some elementary monetary unit . Following Planck, we can write P = NU to be the total money that must be distributed and continue to use the symbol U now to denote money instead of energy. The expression for W is: W = (N + P 1)! / (N 1)! P ! (4)

Here P! means the factorial of P and so on. Both N and P are very large integers. With this transition from the terminology of physics to economics and finance, it is now easy to follow the subsequent steps taken by Planck. Firstly, factorials are eliminated by invoking the well-known Stirling approximation, ln P! PP , and so on. From logarithms we arrive at exponentials (upon reversing the process). In subsequent articles we will develop these essentially theoretical ideas further. It is sufficient here to note that the theoretical prediction of a maximum point on the profits-revenue curve for a company is confirmed with the data for Ford Motor Company. The existence of such a maximum point on the profits-revenue curve for a company has not yet been appreciated. This obviously also has a lot of practical implications for Ford Motor Company and its operations and the management strategies to be employed for future success and sustained increase in profitability. Finally, it is interesting to reflect on the different eras at Ford, under the leadership of different CEOs, as discussed by Mercer, and the quiet, unseen, workings of the unheralded mathematical laws envisioned here to explain the same profits-revenue spectrum. As they say, it is not always what it seems to be.

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