Effectiveness of Profit Maximization of a Firm - Essay Example

Effectiveness of Profit Maximization of a Firm of the of the of the Effectiveness of Profit Maximization of a Firm Introduction: The firms should make decisions to maximize the value and profit of the firm by making a strategy that will have a positive effect on the firm and its stakeholders. There are problems regarding the increase of profits because often the financial objectives are not defined and calculated properly and not all the other important factors can be measured properly all the time. Organizations have different objectives and different approaches to reach those objectives. The organizations are using strategic management and various strategies in order to achieve those goals. This paper will examine the positive impact of the firm by applying the profit maximization strategies and perspectives. Different aspects of profit maximization of the firms and their strategies in order to maximize their profit will be studied in this paper. Some firms achieve its profit maximizing objectives by developing and implementing several strategies by motivating its employees and managers, improving returns on investments, and increasing product awareness etc. Competitive strategies that a firm implement to maximize its profits are as follows: A firm can destabilize its competitors by increasing its market share and sell the products or services at the same prices as competitors do to maximize its profit and creating a positive impact on the firm. A firm having the capability to produce the product at low cost can maximize its profit easily and in short time(Business Plan Hut 2012). A firm uses differentiation strategy usually to gain a competitive advantage over the existing workers inside that firm. Profit maximizing firm adopts this strategy when a customer’s desire and wants are so varied that a consistent product do not satisfy their desire. When customers are placing more value on the differentiated products that a firm is providing to them, then they are force to pay high price to that firm which helps it to maximize its profit(Business Plan Hut 2012). To maximize a firm’s profit and creating a positive impact on that firm, a focus or niche strategy must be huge to give away a healthy profit to that firm. The firm that employs this competitive strategy to maximize its profit experiences a loyal customer base. This competitive strategy helps the firm to maximize its profit that has a positive impact on the firm. Focus Strategy tends to be beneficial for the firm to maximize its profit when the following factors are set: When the cost of the product and services a firm is providing is too high for existing competitors to serve the niche market. It is not easy for existing competitors to make available sufficiently to the niche market. A firm does not have sufficient financial resources to complete for a large division of the market.(Business Plan Hut 2012). Oil companies believe in long-term profit maximization and avoid large short-term losses and show their will to forego large short term profits. The argument of various writers show that a lot of firms particularly the large ones do not function on the belief of maximizing profits in terms of marginal expenditure and returns but to a certain extent create standards or objective of reasonable profits. The form of profit standards that is most suitable for that firm will depend upon its utilization(Verhoef, 2003). Factors that affect the Profit Maximization of a firm: A firm’s income and revenue is the essence for its maximization of it profit that depends on the cost and amount of goods sold by that firm. The factors that affect the maximization of profit of a firm are as follows: It is important that level of competition that a firm faces by its competitors is known by the firm in order to maximize its profit. When a firm has monopoly power, then it has less competition and eventually it is easy and convenient for the firm to maximize its profit by increasing the price of products (Walczak, Gregg and Berrenberg 2006). A firm should be aware of market contestability to maximize its profit and maintain its position in the marketplace. If the entrance of a firm in marketplace is easy then it will face threats of competition and that might reduce the maximization of its profit (Walczak, Gregg and Berrenberg 2006). Complimentary goods of a firm can be significant for the profit maximization of the firm. If a firm decreases its costs, such as labor cost, rent cost and costs of raw material then it will help that firm in maximizing its profit. A firm gets capable of increasing its productivity by improved technology, which helps in maximization of its profit. A firm should be dynamically efficient and effective so that the costs of over time decreases and profits are maximizing, that has a positive impact on that firm (Walczak, Gregg and Berrenberg 2006). A firm can maximize its profit by identifying different and diversified business opportunities by recognizing its strengths and the measures it takes to make the most of its strengths. The diversification of a firm’s business can help in maximizing its profit without making big investments and leaves a positive impact on the firm (Anderson 2003). The effective time management of the employees and workers of the firm can help in maximizing the profit of that firm and can make that firm more effective and successful. The greater is the level of the efficiency of the workers of the firm the greater will be the profit of that firm. The efficiency of managers and workers will increase the productivity of the firm, which will maximize its profit (Anderson 2003). Profit Maximization of Oil Companies: Oil companies do extremely well by recognizing where their profit maximization lies. They achieve profit maximization through business intelligence systems. Exxon and Chevron, the largest oil companies in U.S, are known as "incorporated," i.e., they work both the upstream and downstream end of the business. Whereas, Hess and its competitors produce data from surroundings; in addition they factor in wild cards such as war, climate and worldwide politics. Business Intelligence system in oil and gas is not an easy subject of buying a set of investigation tools and feed information into them. Oil companies transfer information through several layers of software, with almost all workers focusing on assembling and store some kind of information. For example, Exxon desires its geophysicists to identify Fortran, C and Java so they can code their own, fast investigation. Each oil company evaluates its expenses and possible returns trying to maximize profit at each step(Robert and Leiberman 2008). Role of Production and Sales in Profit Maximization: Oil companies must have the capacity to develop its production and sales to meet up demand growth in developing economy as well as in developed areas which helps in maximizing its profit. Technological competence in different parts of the supply chain of the firm leads to minimization of cost as well as enhancement in performance of product and ecological integrity that plays vital role in maximizing its profit to create a positive impact. A firm can maximize its profit by evaluating the expenditure it is making and discontinuing its unnecessary expenses and corporate spending to increase the profitability of the firm. A firm should evaluate and determine the expenses of managers and workers that they are making in order to increase the profit making (Robert and Leiberman 2008). A firm, which is seeking for profit maximization, can improve their earning by giving bonuses to its employees who are useful for the long-term growth of the firm and help to survive in bad times. At times, the owner of the firm wants to increase the profitability of the firm while the managers and the employees do not want to take more stress in order to increase the profits. Their main purpose is to make profit, which is enough for their job security, and at the same time, they want to get the benefit for their work(Robert and Leiberman 2008). By increasing the market share of the firm, the managers can have a positive impact on the owner that can make easy for them to get bonuses and improve their designations. The firm should consider the economic and social motivation for the employees because this is the basic gateway of implementing the profit maximization strategy. If firm focus is mainly on the profit maximizing strategy than it will create not sustain on long-term basis because the employees can be dissatisfied with this act of the firm. The managers and workers are not only working for the profit maximization but they have other issues as well that might be not helpful for the firm for profit maximizing (Robert and Leiberman 2008). Large companies consider on giving its customers a discount on products and services that they are interested to purchase with their desire at a certain amount that is fixed by the firm. This helps firm to maximize its profit by encouraging its present customers to purchase at that fixed amount and enable them to save certain amount of money on the product they are purchasing. At the same time, a firm can offer a certain percentage off their very first purchase to the customers in order to make new customers for that firm and maximize the profit(Primeaux and Stieber 1995).Oil traders in Rotterdam and London studied examples of oil trades and found that oil companies extend their credit periods and allow the process and barter dealings. They attract buyers by offering different discounts, which has become widespread even on long term volume deals. This helps the oil firms to maximize its profit at larger scale that has a positive impact on the firm. Five Steps for Profit Maximization: Five proven steps help the firm to maximize the profit and make profitable and smarter profits: Step 1: The focal point of the firm should be those areas and divisions where they believe that they can increase the profitability of the firm and increase the productivity of the firm (Dr Turney 2010). Step 2: The second step is that the management of the firm should be able to identify the gaps and pitfalls that can damage the overall profitability of the firm and they should access the profit making decisions. Step 3: The firm that will explore the opportunities that are never been, should implement Profit management system identified by the firm and help the firm to increase in its profitability(Dr Turney 2010). Step 4: The focus should be given to improve the profitability decisions with the help of profit management system and motivation should be given to the managers to take decisions that will help the firm’s profitability. Step 5: Decision should be taken with the help of the score given by the profit management system used by the firm and implementation of decision will make the firms strategy more strong and give force to the firm to increase the profit (Dr Turney 2010). Conclusion: It is difficult for the firms to consider all the factors in an appropriate way and the auditors who maintain the firm’s financial analysis always have different figures that also create problem for the firm. To solve this problem and established a profit maximization strategy, the firm should perform audits on regular basis and should consider the recommendations of the auditors. The basic focus of the firm should be on the short-term maximization of the profit by investing on long-term period. This can help the firm to get the short-term profit and maintain a good financial position for the firm (Anderson, Fornell and Lehmann 1994). Many firms wanted to increase their profit with the help of the social responsibility and they use Corporate Social Responsibility (CSR) as a tool to maximize the profit. The organization often acts in the public interest and tries to convince the people in order to make them feel that the company is doing welfare for them, but most of the times the companies are actually maximizing their profit (Verhoef 2003). The driving force to do something good for the people is profit and this is the reason that many organizations are constantly seeking for opportunities through which they can invest money for social purpose and gain huge profits indirectly. Profit maximization and social work are opposite to each other and firms cannot afford to create panic to its shareholders because of Corporate Social Responsibility. There are many big organizations performing social activities on regular basis but still these organizations are not fulfilling their duties according to the profit they are earning from the people (Verhoef 2003) Corporate Social Responsibility can maximize a firms profit in different ways; for example, CSR can encourage the value for its firm in the marketplace, which can consequently result in increase sales and increase the loyalty of employees that can maximize the firm’s profit (BHP 2011). A firm can maximize its profit by designing an appealing and eye-catching website to advertise and market its goods and product in a more sophisticated style. The firm’s website helps it in creating its presence and maintaining its existing position in the market place, which is very significant and useful for a firm. Through distinctive and attractive website, a firm can maximize its profit and can have a positive impact on that firm (Katta and Sethuraman 2005). A firm can maximize its profit by developing a complete business plan before starting a firm’s operations by carefully examining its budgets and conducting a break-even analysis on the firm’s activities before launching itself in the marketplace (Tracy 2005). A firm can maximize its profit through better communications with customers who are aware of the firm’s problems and does not worsen the matters when they know where a firm has problem and where it needs to improve and this act of firm would have a positive impact on the customers (Ryals 2005). List of References Anderson, E. W., Fornell, C., and Lehmann, D. R. 1994. Customer satisfaction,market share and profitability:Findings from Sweden. Journal of Marketing, 58 3, 53-66. Anderson, W. 2003. Profit maximizing versus revenue maximizing firms? Only time will tell. MD: Frostburg State University. BHP. 2011. Increasing profitability. London: BHP Information Solutions Ltd. Business Plan Hut. 2012. Competitive Strategies to Increase Sales and Profits. Retrieved 2012 3-March from www.businessplanhut.com: http://businessplanhut.com/competitive-strategies-increase-sales-and-profits Dr Turney, P. 2010. Performance Insights – 5 Steps to Making Profitable Decisions.[Online] Available from [Accessed on 3 March 2012]. Katta, A. K., and Sethuraman, J. 2005. Pricing strategies and service differentiation in queues-A Profit Maximization Perspective. New York: Columbia University. Primeaux, P., and Stieber, J. 1995. Profit maximization:the ethical mandate of business. New York: Austin and Winfield. Robert, E. H., and Leiberman, M. 2008. Microeconomics:Principles and Applications. Mason: Cengage Learning. Ryals, L. 2005. Making CRM Work: The Measurement and Profitable Management of Customer Relationships. Journal of Marketing, 69 4, 252–61. Tabeta, N., and Ruifang, W. 1996. "Relative" Revenue-Maximizing Strategy under Duopolistic Competition:The Case of US-Japan Bilateral Auto-Trade. Nanyang Avenue: Nanyang Technological University. Tracy, B. 2005 йил 19-December. Profit-Increasing Strategies.[Online] Available from [Accessed on 3 March 2012]. Verhoef, P. C. 2003. Understanding the effect of customer relationship management efforts on customer retention and customer share development. Journal of Marketing, 67 4, 30-45. Walczak, S., Gregg, D. G., and Berrenberg, J. L. 2006. Market decision making for online autction sellers profit maximization or sociliazation. Journal of Electronic Commerce Research, 7 4, 199-220. Read More