Contemporary Strategy Analysis - Term Paper Example

‘All firms, in the end, are run to make the most profit they can.’ Introduction The assumption that profit maximization is the ultimate objective of all organizations has been frequently debated by scholars and academics alike partly because it’s accurate analyze would help the economists in understanding the behavior of firms i.e., what factors motivate them to operate, the key driving force of the firms etc. However, the question: whether it is the only objective of all firms, irrespective of their size and structure, is highly controversial. This paper seeks to discuss, analyze and assess various reasons behind the profit maximization motive and support the argument that, it is indeed the ‘ultimate’ goal of all organizations, regardless of their size. A firm is an arrangement of individuals, resources – both physical, as well as financial and a great deal of information. They exist to carry out various constructive tasks in the society, through production and distribution of goods and services. These tasks are accomplished by utilizing society’s resources such as land, labor, capital and providing adequate profits for the work done, in return (Hirschey, 2009). Size of the firm and the Profit motive: Smaller firms are usually managed by a single owner, who is in charge of all the key decisions made and hence are more likely to dominate the decisions in their favor, by taking decisions which are profitable to them. Thus, both the short term as well as long term goals of a smaller firm could be profit maximization alone. Larger firms on the other hand, are owned by the shareholders but managed by "business managers" who are in charge of all key decision making within the company. Thus, as compared to smaller firms, the larger firms may deviate from the conventional profit maximization objective, to pursue other equally important goals such as sustainable development, improving quality of their products, environmental protection etc. which are in the larger interest of the society as a whole. However, such goals are merely short term objectives, as objectives other than profit maximization may serve the community at large, but it does not help the firm in sustaining its competitive positioning in the industry. Furthermore, under the Corporate Social Responsibility agenda, which has recently gained widespread popularity and acceptance, it is considered obligatory for firms, to contribute towards development of the society as a whole rather than pursuing their selfish motives of earning profits. But according to Sternberg (2000, Pp. 41): “The Social Responsibility of any business is to increase its Profits. For any business to pursue any goals other than maximizing profits,0 is to pursue ends different from, and contrary to, the ones approved by business owners. ... Managers who employ business funds for anything other than the legitimate business objective are simply embezzling" He further states that using business resources for accomplishment of non business objectives, is “theft” and a “misappropriation” of the owners (shareholders’) personal property. Hence, the shareholders may replace such managers, who work towards goals other than profit maximization, in the long run (Pindyck, Rubinfeld 2005) thereby further strengthening our basic argument that all firms, ultimately strive to maximize profit. Analysis and Discussion: With regard to strategic management, the key assumption regarding the fundamental objectives of a firm is – profit maximization. This view is for the most part, shared and adopted by a large number of firms. For instance, while describing the competitive strategy of firms, Porter (1980, Pp.34) states that “…taking offensive or defensive actions to create a defendable position in an industry, to cope successfully with the five competitive forces and thereby yield a superior return on investment for the firm” Substantiating the above view, Barney and Arikan (2001) states that: “…resource-based logic adopts the assumption that firms are profit-maximizing entities” (Pp. 141) A large number of articles based on economics or strategic management, reveal similar perspectives, where profit maximization is strongly advocated as being the ultimate, if not the “only”, goal of all firms, irrespective of their size. Grant (2002) suggests that profit maximization is the main objective of all firms, and strategic management, to a large extent, can be defined as a “quest for profitability” (Pp. 38). In terms of strategic management, the profit maximization objective of firms could be inferred from the close association between business strategies and principles of economics. In terms of neo classical economic theories, the firms strive to maximize their profits through production of goods and services. The goods manufactured must be sold in a manner that the marginal revenues derived exceed its marginal costs, for which an optimum quantity of goods must be produced. Thus, the short term goal, here, is shifted from profit maximization to ‘production of optimum quantity of goods’ in a bid to avoid losses and earn cover the firm’s marginal costs. Thus, in terms of strategic management, the primary or short term goal – of producing optimum number of units, is designed to meet the ultimate goal, that of profit maximization. In terms of standard economic theory, on the other hand, the resources are either utilized by individuals or consumed by firms for the purpose of production. Individuals consume goods / resources for household purposes while firms utilize the resources for production purposes. Consumption of goods generates a ‘utility’ for the same, hence it can be said that household consumption is driven by the objective of maximizing the utility. While production is not driven by utility, hence the firms are run by the motive of maximizing profits. Principal – Agent theory and Profit Maximization: The principal agent theory is based on the relationship between the principal i.e. the owner / shareholder of the firm, and the agent i.e., the employee / manager of the firm. There is a significant difference between ownership and management, since the principal's (owner) main objective is to maximize profits, as it yields higher dividends and hence signifies personal gain, while the agent's (manager / employee) main aim is expansion and development of the firm, since it ensures better welfare of the staff (including themselves) through increased salaries (Ricketts, 2002). Profit Maximization and Not for profit Organizations: The sustained survival of a firm within the industry ensures benefits not only to the owners but also to its staff, employees, as well as managers. Members of the firm thus would seek to terminate those who act against the betterment of the firm by pursuing objectives other than profit maximization which may threaten its survival. This is because, profits ensure adequate revenues on hand to sustain competition and secure the firm’s existence. Thus, it can be said that ensuring survival of the firm within the industry is the same as seeking maximization of profits. However, such an objective is faced with a contrasting situation, in terms of not for profit organizations. All organizations, as discussed above, seek profits as a means of continued existence in an industry. Hence, what drives a not for profit organization poses an interesting dilemma. The assumption of similarities between profit maximization and the struggle for survival is thwarted by such firms, whose primary aim is not profit earning. However, there is a similarity between the two. A not for profit organization, despite its title, seeks to attain the same objectives as that of a for profit organization. For instance, the regular firms, seeks to earn profits (which is the excess of revenues over costs) in order to cover its costs by earning marginal revenues which exceeds its marginal costs. This is inevitable for survival. Similarly, a not for profit organization, seeks to provide better quality service or serves the community at large, and incurs expenses in the process. These expenses are then sought to be covered in the form of donations and charity. Thus, both the firms, provide different services, and yet try to cover their costs (a common objective) to survive. The only difference left, is the overt expression of their desires, i.e. a for profit firm, expressly seeks to earn more profits, while the not for profit organization, seeks to cover its revenues, apparently by earning more revenues than its costs, thereby earning profits in the process. Even a not for profit organization, whose main aim does not include maximization of profits, cannot survive, if its costs exceeds its revenues and hence must rely on donations and other charitable means, to ensure its revenues always exceed its costs. Conclusion On the basis of the arguments and discussions presented in the above section, it can be concluded that the primary objective of “all” the firms is to survive in the market, and they can do so only through maximization of profits. Thus, economists often argue that profit maximization has to be the primary motive of all organizations, regardless of their size or structure. The argument that: “All firms, in the end, are run to make the most profit they can”, holds true. The “in the end” part holds immense significance since it denotes the “ultimate” or “long term” motive of all firms. As observed through various discussions presented in the above sections, the short term goals or secondary goals of a firm could be “enhancing the quality of their products”, “protection of environment”, “customer satisfaction” etc., but the “ultimate” goal in the end must be and is, profit maximization. References: Barney, J.B., & Arikan, A.M. 2001. The resource-based view: Origins and implications. In M.E. Hitt, R.E. Freeman, & J.S. Harrison (Eds), The Blackwell handbook of strategic management: 124-188. Oxford, UK: Oxford Grant, R.M. 2002. Contemporary strategy analysis. Fourth edition. Malden, MA: Blackwell Publishers, Inc Hirschey, M., (2009). Fundamentals of Managerial Economics, CENGAGE Learning, Pp. 1 - 6 Pindyck, R. S., Rubinfeld, D. L., (2005). Microeconomics, Prentice Hall, Pp. 263 - 265 Porter, M.E. 1980. Competitive strategy. NY: Free Press Ricketts, M., (2002). The Economics of Business Enterprise: An Introduction to Economic Organization and The Theory of the Firm, Edward Elgar Publishing, Pp. 344 - 346 Sternberg, E., (2000). Just Business: Business Ethics in Action, Oxford University Press, Pp. 41 Read More